Inflation-related tax distortions in business valuation models: A clarification

Peer Reviewed
30 April 2023

The North American Journal of Economics and Finance

Nguyen Kim-Duc, Pham Khanh Nam

The current corporate income tax (CIT) expense occupies just one line item on the statement of profit or loss and other comprehensive income. However, it is a unique line item following tax rules and not financial reporting rules. The difference between these rules is that it reflects the effective tax rate (ETR), which can differ from the statutory tax rate (STR). With inflation, this ETR-STR difference can be more significant due to the contribution of tax distortions. In this study, we expand on the standard formulas for the ETR by analyzing the effects of inflation-related tax distortions when computed under the following four cases: (i) Historical-cost-based accounting under a nominal tax basis, (ii) Fair-value-based accounting under a nominal tax basis, (iii) Historical-cost-based accounting under a real tax basis, and (iv) Fair-value-based accounting under a real tax basis. Further, we suggest a modified model for business valuation considering these tax distortions and provide a general formula to independently calculate the value of inflation-related tax distortions.

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Kim-Duc, N., & Nam, P. K. (2023). Inflation-related tax distortions in business valuation models: A clarification. The North American Journal of Economics and Finance, 66, 101907. https://doi.org/10.1016/j.najef.2023.101907
Publication | 11 August 2023