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Dear John sir,
In this question am wondering why when calculating the financial side effects did we not take into consideration the parent company’s tax rate of 30%, instead of project’s 20%?
Because if they are in a double tax treaty system, where additional 10% tax would have to be paid(in this case), then essentially tax saving should also be on 30%, shouldn’t it be so the case?
Sincere Regards,
No – it should just be the tax rate in the relevant country.
Had there been no tax at all then as per Modigliani and Miller, we would discount at the relevant ungeared cost of equity because the WACC would be equal to the ungeared cost of equity regardless of how much debt had been used. The only reason that the benefit is higher when there is tax is because the debt in that specific country is cheaper due to the tax saving in that country.
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