CALCULATING TAX LOSSES WITH AN

EXPIRATION PERIOD
Introduction
It is often the case that certain countries limit the length of
time companies can carry their tax losses on the balance
sheets. This is to restrict the companys ability to minimise
their tax liabilities by carrying tax losses on the balance sheet
indefinitely.

This tutorial shows how to upgrade a standard tax loss
calculation to account for an expiration period.

In this tutorial we will cover the following
1. How to calculate a standard tax loss amount
2. Including an expiration period
How to calculate a standard tax loss amount
without expiry
In the attached case study we have a project that is making a loss
for the first two quarters. In project finance, this may occur at the
start of a project during the ramp up phase.

The calculation is separated into three sections
1. Tax Losses
2. Net Taxable Income
3. Tax Payable
Tax Losses
Carried forward tax losses are used to reduce the current periods
pre-tax profit. Companies want to maximise tax losses in order to
offset future tax liabilities. Subsequent upgrade of this section of the
model is the focus of this tutorial.

Screenshot 1: Modelling a standard tax loss account


In Screenshot 1, an account structure is set up to show a typical tax
loss calculation with opening balance (Balance B/f in row 22) and
closing balance (Balance C/f in row 25). In between we
Add tax loss generated
Deduct tax losses utilised
Tax Loss Generated (row 23) adds to the account when there is a
pre-tax loss.

Tax Loss Utilised (row 24), as the title suggests, is depleted from
the account when the project makes a Pre Tax Profit.







Net Taxable Income
Net Taxable Income is the amount taxed after other income and
deductions have been accounted for. Examples of deductions
include interest expense, royalties and depreciation.

We have kept it simple in our case study where

Net Taxable Income = Pre-Tax Profit (Loss) Tax Losses

Screenshot 2 illustrates the calculation.


Screenshot 2: Modelling Net Taxable Income




Since no tax is payable when Net Taxable Income (row 14) is
negative, a MAX(0,) function is used to ensure only positive values
appear.
Tax Payable
Tax Payable = Net Taxable Income x Corporate Tax Rate


Screenshot 3: Modelling Tax Payable



In Screenshot 3 we make a simple assumption that the corporate
tax rate (cell I18) is applicable during the operations period only by
multiplying by the operations flag (row 5), but it is common to
further add a tax holiday function.





In our popular Project Finance Modelling (B) course we
cover an interactive demonstration of how to model tax losses.
P14 = MAX(0,SUM(P12:P13))
P19 = P18 * P17

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Some countries have tax holidays or the tax rate is effectively 0%
during the beginning stages of the project. This is used by
governments to attract capital investment.
Including an expiration period
In the following section we replicate the standard sections already
covered with one additional line to the Tax Loss Account.

In the Tax Loss Account as laid out in Screenshot 4, we insert an
extra line (row 44) Expired Tax Losses (Net) where we assume tax
losses expire after six months. Conceptually, this line reduces the
balance in the tax loss account by tax losses generated more than
six months ago which have not yet been utilised.

There are two types of Expired Tax Losses, net (row 44) and gross
(row 47). Expired Tax Losses (Gross) captures the tax losses
generated six months prior by using the OFFSET function that refers
to
Tax Loss Generated (row 42)
Counter (row 39) that counts back six months to locate the
applicable tax loss expiring
Screenshot 4 demonstrates how $150 USD m (cell L44) corresponds
to a tax loss of that amount generated two quarters ago (cell J42).

For a demonstration of how to use the OFFSET function refer to our
OFFSET Function in Excel tutorial.

Expired Tax Losses (Net), as the title suggests, is the gross
equivalent net of the Amount Utilised (row 48). Conceptually, how
this works is Expired Tax Losses (Net) in cell M44 is 0 because the
tax losses supposedly expired in that period (cell M47) has already
been fully been utilised (cell M48 & M43).


Screenshot 4: Modelling Tax Losses


















Row 48 signifies the amount of tax losses utilised before they
expired. The formula tries to do a few things

Be less than the Expired Tax Losses (Gross), and return 0
when there are no expired tax losses.
Take the cumulative tax losses utilised (row 43) from
previous periods

Lastly we need to make sure Expired Tax Losses (Net) does not
reduce the account to a negative closing balance.

This is achieved by applying the MIN Function to Expired Tax
Losses (Net) for a particular period to derive the lesser of

Expired Tax Losses (Gross) less Amount Utilised
Balance B/f + Tax Loss Generated - Tax Loss Utilised
Comparing screenshots 1 & 4 we can see the impact an expiration
period has on the tax losses account. Screenshot 4 illustrates that
only $220 USD M (cell I43) of tax loss is utilised versus the full $370
USD M in the standard treatment in Screenshot 1.


Screenshot 5: Tax Payable (With Expiry Applied to Tax Loss)

The most important difference from the companys point of view is
that total tax payable has increased from $294 USD M in Screenshot
3 (cell 19) versus $339 USD M in Screenshot 5 (cell I36)
Final Words
Tax is an area where the various nuances of rules and regulations
can add layers of complexity to any financial model. As a result, it is
particularly important to keep your model as transparent as possible
by focusing on the three pillars of Best Practice Modelling
1. Model Infrastructure
2. Formatting and Presentation
3. Formula Structure
In the attached model we have demonstrated our best practice
approach to this issue of calculating tax losses with an expiration
period. To find out more about our methodology visit our other
tutorials or check out our Project Finance Modelling (A) course.





N44 = -MIN(N48+N47,SUM(N41:N43))
N47 = IF(N39<>$I39,0,OFFSET(N42,,-N39))
N48 = -MIN(-IF(N47=0,0,SUM($J43:N43)-SUM($I48:M48)),N47)