探索金融弹性：NOLs的影响-下行背景下的潜在上行情景

1、Global Research6 April 2020Fundamental AnalyticsGlobalExploring financial resilience: The impact of NOLs: a potential upside scenario in a downside context?An economic shutdown related to COVID-19 is likely to be tax-loss-creating With governments enforcing restrictions around the world in an attemp

2、t to manage the spread of COVID-19 at the same time as trying to keep economic activity ticking over, companies may see their revenue streams curtailed. This loss of revenue, for many companies with a degree of operating leverage, may lead to the creation of taxable losses. These losses may result i

3、n an additional upside consideration, if companies are able to demonstrate their financial resilience and navigate a path through this period.Analysing NOLs: Modelling the potential tax benefits of lossesIn our recent note, Your guide to identify which companies have the resilience to weather the CO

4、VID-19 crisis, we focused on developing a methodology to identify financially resilient companies. Our definition of financial resilience was a condition where an entity can generate sufficient cash flow to meet its full financial obligations given its sources of available liquidity, allowing it to

5、sustain itself and operate as a going concern. Many tax jurisdictions provide net operating loss (NOL) relief if a company generates a taxable loss. This type of legislation often allows companies to carry back taxable profits, off-set them against prior-period taxable income and potentially seek a

6、tax refund. This offers the potential for a much-needed cash inflow injection during times when companies may be seeking additional sources of liquidity to settle their upcoming obligations. Companies are generally permitted to carry forward tax losses. A tax-loss carry-forward can create a cash flo

7、w benefit in the future. The carry-forward option is a viable option only to those companies that can weather the current crisis. The form, structure and timing of the NOL legislation can make the modelling difficult. In this note, we provide detail guidance to better analyse tax losses.NOL forecast

8、ing and modelling: Using the US CARES Act as a case studyOn 27 March, President Trump signed the Coronavirus Aid, Relief and Economics Security Act (CARES Act). A change in the treatment of US NOLs formed part of the$2.2trn package. We use the CARES Act as a model to show how we would recommend reac

9、ting to the potential proliferation of tax losses around the world, in the light of a shifting legislative landscape.Valuation, Modelling & AccountingEquitiesGeoff Robinson, CFM, FCAAnalyst HYPERLINK mailto:geoff.robinson geoff.robinson+44-20-7567 1706Yiding Lu, CFAAnalyst HYPERLINK mailto:yiding.lu

10、 yiding.lu+44-20-7568 9091Courtney Cook, CFAAnalyst HYPERLINK mailto:courtney.cook courtney.cook+44-20-7567 4871Renier Swanepoel, ACA, CA(SA)Analyst HYPERLINK mailto:renier.swanepoel renier.swanepoel+44-20-7568 9025 HYPERLINK /investmentresearch /investmentresearchThis report has been prepared by UB

11、S AG London Branch. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 40. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report

12、. Investors should consider this report as only a single factor in making their investment decision.We would like to thank Richard Pain from our internal Model Analytics team for his help, work and ideas around developing the NOL model that formed the basis of this model. We would also like to expre

13、ss our appreciation for the work of Vishal Kinage, one of the non-publishing analysts in our Fundamental Analytics team. His work collating the various tax loss relief rules from around the world provides an excellent resource for investors.ContentsTOC o 1-2 h z u HYPERLINK l _TOC_250020 Exploring f

14、inancial resilience: The impact of NOLs - an upside scenario in a downside context? 4 HYPERLINK l _TOC_250019 How could NOLs have a positive influence on financial resilience? 4 HYPERLINK l _TOC_250018 What did CARES do to NOLs? 5 HYPERLINK l _TOC_250017 Effective tax rates: The tax modelling tool o

15、f choice 6 HYPERLINK l _TOC_250016 Modelling NOLs 9 HYPERLINK l _TOC_250015 Using effective tax rates 9 HYPERLINK l _TOC_250014 Using tax-loss memorandum: A refined approach 9 HYPERLINK l _TOC_250013 Scope 10 HYPERLINK l _TOC_250012 Taxable income calculation 10 HYPERLINK l _TOC_250011 Build the bas

16、ic structure of a tax-loss carry-forward memorandum 11 HYPERLINK l _TOC_250010 Income subject to taxes and cash taxes paid 14 HYPERLINK l _TOC_250009 Impact summary 15 HYPERLINK l _TOC_250008 Adding: Loss relief limitations 17 HYPERLINK l _TOC_250007 Adding: Flexible carry-forward tax-loss expiry 19

17、 HYPERLINK l _TOC_250006 Adding: Tax-loss carry back 21 HYPERLINK l _TOC_250005 Appendix 26 HYPERLINK l _TOC_250004 The basic tax computation 26 HYPERLINK l _TOC_250003 Why is tax modelling difficult? 27 HYPERLINK l _TOC_250002 OECD tax loss relief summary 30 HYPERLINK l _TOC_250001 A simple take on

18、 deferred taxes 36 HYPERLINK l _TOC_250000 A word on deferred tax: Is it really non-cash? 38Geoff Robinson, CFM, FCAAnalyst HYPERLINK mailto:geoff.robinson geoff.robinson+44-20-7567 1706Yiding Lu, CFAAnalyst HYPERLINK mailto:yiding.lu yiding.lu+44-20-7568 9091Courtney Cook, CFAAnalyst HYPERLINK mail

19、to:courtney.cook courtney.cook+44-20-7567 4871Renier Swanepoel, ACA, CA(SA)Analyst HYPERLINK mailto:renier.swanepoel renier.swanepoel+44-20-7568 9025Exploring financial resilience: The impact of NOLs - an upside scenario in a downside context?How could NOLs have a positive influence on financial res

20、ilience?Current economic restrictions may see a number of companies enter loss-making territory.A working understanding of NOL legislation and how to model the flow of NOLs isnow more important than ever, when viewed through financial resilience and valuation lenses.Most tax jurisdictions around the

21、 world offer loss-making companies some relief to help them navigate periods when trading conditions can be tough. Tax relief on net operating losses, or NOLs, comes in two broad forms:NOL carry-back provisions: Taxable losses (calculated using the relevant jurisdictional tax codes) can be carried b

22、ack and used to reduce prior-period taxable profits. The number of periods over which the tax losses can be carried back varies across jurisdictions, and limitations on the amounts of carry-back can be put in place.A carry-back can result in a tax refund that can provide a welcome source of liquidit

23、y for a company. The carry-back of losses is usually the first of the two tax-loss relief claims actioned by a company (often driven by the structure of the legislation). It is usually better to claim relief on taxes you have already paid, rather than wait to set off against tax profits you might pa

24、y in the future the cash inflow timing is more certain and is likely to be earlier.NOL carry-forward provisions: Usually, any remaining tax losses (losses not used as part of a carry-back) can be carried forward and set off against future taxable profits. The length of time over which these losses c

25、an be carried forward often depends on the jurisdiction. Some tax codes will limit how much of the carry-forward NOL can be used in any one year.More: HYPERLINK l _bookmark16 OECD tax loss relief summaryNOL utilisation could createimmediate and future period cash flow benefitsfor companies and help

26、to enhance their financial resilienceWhat did CARES do to NOLs?On 27 March 2020, President Trump signed the Coronavirus Aid, Relief and Economics Security Act (CARES Act), a $2.2trn package. Part of the CARES Act changed the treatment of US NOLs. We use the CARES Act as a case study to illustrate ho

27、w we would react to the potential proliferation of tax losses around the world, in the light of a shifting legislative landscape.We uses CARES as a benchmark case studyto prepare for potential broader global tax reactions to the COVID-19 pandemic.Old: US NOL rules prior to the CARES Act 2020 (TCJA 2

28、018)The Tax Cuts and Jobs Act (TCJA) introduced new NOL legislation as part of the Trump tax reform in 2018. The TCJA legislated that NOLs could be carried forward indefinitely, with a maximum offset in any one year of 80% of taxable income for NOLs created after 31 December 2017. Any remaining NOLs

29、, in excess of the 80% limit, could be carried forward for future years (indefinitely). The TCJA repealed the ability to carry back tax losses.NOLs created prior to 31 December 2017 would not be subject to the taxable income limitation, and would continue to have a two-year carry-back and a 20- year

30、 carry-forward period.New: US NOL rules post the CARES Act 2020In response to COVID-19, the CARES Act eased the restrictions of the TCJA.The CARES Act repealed the 80% maximum offset requirement for tax years beginning before 1 January 2021, and now allows NOLs in tax years 2018 through to 2020 to b

31、e carried back five years. These changes will reduce tax liabilities and, it is hoped, will release cash in the near term to help businesses weather the COVID-19 outbreak and its medium-term ramifications.More: HYPERLINK l _bookmark16 OECD tax loss relief summaryEffective tax rates: The tax modellin

32、g tool of choiceThe marginal tax rate is the statutory tax rate of a relevant jurisdiction. An effective tax rate is a proxy metric and a tax forecasting tool.Effective tax rates allow tax numbers to be forecast without the need for a detailed knowledge of domestic and international tax legislation.

33、 But taxes are complicated; they are detailed; and they are not internationally consistent. Effective tax rates can lack the sophistication to appreciate more complex tax scenarios and environments.More: HYPERLINK l _bookmark11 The basic tax compMore: HYPERLINK l _bookmark13 Why is tax modelling dif

34、ficult?For the most part, investors adopt what is considered a pragmatic approach to tax modelling, using effective tax rates to model out future taxes. An effective tax rate is a simple concept that determines how much tax is liable, based on a particular earnings or cash-flow metric. The behaviour

35、 of effective tax rates over time should reflect:the behaviour of the operating model;the companys reinvestment decisions;where the company does business;changes in tax legislation; andthe creation and utilisation of tax losses.Investors find effective tax rates a convenient tool as they remove the

36、need for a detailed knowledge of a specific set of tax codes. HYPERLINK l _bookmark0 Figure 1 bellow illustrates a simple effective tax rate calculated from historic reported data using Apples 2019 10K. Similar metrics can be used and applied to our forecasts to derive future tax payment outflows.Fi

37、gure 1: A simple (unadjusted) effective tax rate calculation20152016201720182019Earnings before taxes72,51561,37264,08972,90365,737Provision for income taxes19,12115,68515,73813,37210,481Unadjusted effective tax rate26.4%25.6%24.6%18.34%15.94%The income tax charge is estimated using tax rulesEarning

38、s before taxesis an accountingmetricSource: Apple 10K 2017-2019, UBSThe above calculation can be enhanced by normalising the earnings and tax metrics for non-recurring items to provide a normalised effective tax rate on earnings before taxes.Marginal and effective tax rates: DivergenceMarginal and e

39、ffective tax rates are usually not alignedThe effective tax rate is likely to diverge from the marginal tax rate. There are three main reasons for this:The marginal tax rate is applied to taxable earnings, not accounting earnings; the effective tax rate is mainly driven off accounting numbers;Accoun

40、ting is driven to account for the tax implications relating to the reporting period these tax implications may not be crystallised into a cash payment until sometime in the future; andMore: HYPERLINK l _bookmark15 A simple take on deferred taxesThe effective tax rate is calculated on consolidated nu

41、mbers. The consolidated numbers are composed of multiple taxable entities, possibly spread across many tax jurisdictions with differing marginal tax rates. Therefore, the effective tax rate is implicitly a blended rate. When this blended rate is compared to the marginal tax rate of the parent compan

42、y, differences are likely to arise.Investors also need to be aware of this divergence, from a valuation perspective, since companies do not necessarily pay for what they accrue. HYPERLINK l _bookmark1 Figure 2 below illustrates the difference between Apples effective tax rates when calculated usingi

43、ts income statement (i.e., what is accrued) and its cash flow statement (i.e., what is paid).Figure 2: Effective tax rates taxes paid versus taxes accrued20152016201720182019Earnings before taxes72,51561,37264,08972,90365,737Provision for income taxes19,12115,68515,73813,37210,481Unadjusted effectiv

44、e tax rate26.4%25.6%24.6%18.3%15.9%US marginal tax rateOperating cash flow*81,26665,82464,22577,43469,391Add back taxes13,25210,44411,59110,41715,263Operating cash flow (post-interest)94,51876,26875,81687,85184,654Cash-based effective tax rate14.0%13.7%15.3%11.9%18.0%Source: Apple 10K 2017-2019, UBS

45、 Note: *Post interest and taxesApple is not paying what is accrued in the income statement. The main reason for this is, simply, accounting recognition.Tax divergence: the disconnection between income statement and cash flow taxes.Preparers of financial statements have a reasonable amount of flexibi

46、lity in the preparation of the tax line in the income statement, given the complexity of the uncertainties that are embedded in this number, such as:Forecasting uncertainties inherent in the preparation of deferred tax estimates;Discretion in the recognition and valuation of deferred tax assets;The

47、impact of net operating loss carry-forward;Discretion over the assessment of uncertain tax positions; andChanges in permanently reinvested earnings designation.The reporting requirements around the income statement tax number are more mandated relative to the cash taxes paid number in the cash flow

48、statement. We have much better disclosure on the income statement numbers. The disclosure associated with cash taxes is limited to supplementary disclosure in the cash flow statement. We believe this leads to analysts and investors putting greater weight on the income statement tax number than on th

49、e cash taxes number.Modelling NOLsUsing effective tax ratesEffective tax rates can be a useful cognitive solution, but when applied to uncertain environmentsNOL modelling becomes a morecomplex issue that often requires a more refined approachAt the best of times, NOLs make the application of effecti

50、ve tax rates more difficult. Not only are we having to think about the profile of effective tax rate behaviour in relation to the operating and reinvestment models we are forecasting, but we also need to think about the impact of NOL legislation and the realisation and timing of utilisation of NOL t

51、ax reliefs.Using tax-loss memorandum: A refined approachThe modelling of NOLs with carry-back and carry-forward provisions (with flexibility) is a difficult piece of modelling. It is this difficulty that often pushes analysts towards the effective tax rate route.To simplify the process, we break dow

52、n the modelling process into a number of steps.Steps one to five: We view steps one to five as a minimum build (a carry- forward tax loss model with maximum claim restrictions). This is a basic-level model build.Step six (loss expiry): Adds carry-forward loss expiry to the model (applicable to a lim

53、ited number of tax codes). We would class this model feature as an intermediate model build.Step seven (carry-back loss relief): Carry-back loss relief is a common feature of tax codes. As a general standard, a carry-back of losses is normally completed prior to a carry-forward. We would class this

54、additional model feature as an advanced model build.More: HYPERLINK l _bookmark16 OECD tax loss relief summaryScopeOver the next few pages we run through the process (complicated at times) of how to build a comprehensive NOL model. These models will need to be tailored to individual jurisdictional t

55、ax codes. In building our model, we have applied a set of tax code rules (driven by our assumptions) to the forecasts based on assumptions made today. Other than applying tax-loss carry-backs, we have not focused on restating numbers as a result of tax code repeals.Each tax code is unique.These uniq

56、ue attributes can be codedinto the NOL modelling, using the modelling techniques outlined in the following pages.Taxable income calculationWe outline the structure of a basic corporate tax computation in the Appendix to this note. The detail of this calculation isnt something we are normally in a po

57、sition to reproduce in a modelling situation, as reported numbers are not required to disclose the detail of the corporate tax computation.More: HYPERLINK l _bookmark11 The basic tax compWe therefore simplify the calculation, using EBITDA as the base metric. This assumes that all operating costs (ex

58、cluding D&A) are deemed to be tax-deductible. We would adjust the tax deductibility of operating costs (excluding D&A) insofar as we have available information. Against EBITDA, we then deduct interest and tax- allowable depreciation. Investors may decide to use accounting depreciation as a proxy to

59、tax-allowable depreciation. Alternatively, they can re-perform their depreciation modelling to capture tax depreciation behaviour such as accelerated and bonus depreciation allowances. This is something worth considering for tax codes such as the US, where 100% bonus tax-allowable depreciation allow

60、ances exist.Figure 3: Step 1: Derive pre-loss relief taxable incomeSource: UBSEBITDA less interest and tax-allowable depreciation brings us down to a proxy for a pre-loss relief taxable income. If a company has positive taxable income (assumingno loss reliefs are claimed), this income will taxed at