Forecasting tax rates for DCF model.

What is the best way to forecast short term (1-5 years) tax rates in a DCF model? The company im valuing states its effective tax rate at around 29% (Multinational). However, after reviewing historical income statements, I’ve noticed that the effective tax rate of 29% is hardly ever used when calculating their “provisions for income tax”. Some years they have extreme tax benefits of 200% of EBT while other years they are reducing EBT by 23%. I assume the benefits and loses are a product of DTA’s and DTL’s but how would I forecast the use of their tax benefits/loses in the short term?

how much does it impact the value?

find a comparable company with a more stable history and use the average

start off with 40% in year 1, and 15% in year 2 and thereafter following prez Trump’s tax reform. you’re welcome!

rofl

Shouldn’t you be using marginal tax rates? I think this is best practice.

Legit question because I’m not very good at financial modeling. Could you take the effective tax rate and slowly increase the rate up to the marginal rate?

What matters the most for your model is the terminal value. And the terminal value is related to the long-term corporate tax rate in the country the company operates/pays levies.

just use 29% - median effective rate for SP500 firms.

yeah yeah the statutory is 39% but very few companies pay 39% rate.

Maybe Trump will lower it to 2% and lower the upper class tax to flat 10% and get rid of luxury tax. You know because P Allen needs his tax break next time he buys a 300 foot Lurssen yacht for $400mm and of course, 90% of AF people make over $1mm so should help you guys save few $$.

Yes. Exactly.