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Hello John,
This might be a silly question but when there is a loss (usually in the first year), do we just leave the tax credit as an inflow for that year unless mentioned otherwise?
Some questions do mention that losses can be carried forward and the treatment of deducting the tax credit in the next year makes more sense to me because that’s the amount of cash going out.It depends.
If the project is in the same country as the company, then any ‘loss’ will simply reduce the overall taxable profit of the company and therefore will reduce the overall tax payable. This means that as far as the project is concerned then there is a tax saving (of the cash profit x the tax rate).
If on the other hand the project is in a foreign country then this is not the case because tax is charged in the foreign country. In that case you are told (as will be the case in practice anyway) that any losses are carried forward and reduce the taxable profit in future years.
I do explain this in my free lectures on foreign investment appraisal!
Could you please explain what you mean by “this is not the case because tax is charged in the foreign country” as there still is a tax saving due to them not having to pay the tax ?
I have watched all the lectures and honestly, thank you so much for them. Your explanations are the only reason I can understand the Study text.
If the project is in a foreign country, then the tax charged in that country will only be based on the results of the project (not on the total profits of the company as a whole).
Therefore if there is a tax loss in that country in one year then there is no tax payable in that year and the loss is carried forward to the following year.
If the project is in the same country then they will be paying tax on their total profits and so if the new project makes a profit, their total profits go up and they pay more tax than before – so there is extra tax as a result of the project. If however the project makes a ‘loss’ it simply reduces the total profit of the company which means that the company saves tax as a result of the project.
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