DCF tax in international M&A
When performing a DCF analysis for a U.S.-based company planning to acquire a company in another country, what tax rate should be used? Foregin Corporate Income Tax Rate? Should the WHT on the repatriation of profits to the U.S. be factored into the analysis?
When performing a DCF analysis for a U.S.-based company acquiring a foreign company, the tax considerations are critical to ensure accurate valuation. Here's how taxes should be approached:
Foreign Corporate Income Tax Rate:
Withholding Tax (WHT) on Repatriation:
Trapped Cash Consideration:
Effective Tax Rate:
Future Tax Policy Changes:
In summary, both the foreign corporate income tax rate and the withholding tax on repatriation should be factored into the DCF analysis. The decision to repatriate profits or leave them abroad significantly affects the valuation and should be carefully modeled.
Sources: The insanity of the US tax code: Bad Laws and Predictable Consequences, Value and Taxes: Breaking down the Pfizer- Allergan Deal, , Value and Taxes: Breaking down the Pfizer- Allergan Deal, DCF Myth 1: If you have a D(discount rate) and a CF (cash flow), you have a DCF!
The first thing you need to do when taking tax into account in an international setting would be looking at the tax treay between the us and that country, find out who taxes what (interest income, business income, capital gain). See if they allow US based companies to get taxed in the us or if they tax it in their country. What’s your client’s structure like? What kind of income will he generate? Who’s he sending it to? All of these questions will determine what you need to take into account in order to build a valid model.
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