Excel Models
Estonian Model Impact on CF
We are setting up Executive KPIs in a company, and during the process, the task arose of calculating WACC and assessing its impact on the organization’s value. Typically, the WACC formula includes the tax rate, which is taken as the effective tax rate in the minimal sufficient case and as the operational cash tax rate in the best case. However, what should we consider in the case of Georgia, where tax cash outflow depends not on business risks but on the decision to distribute dividends?
I created a simple model comparing two taxation scenarios: the traditional approach and the Estonian model (as applied in Georgia).
In the first scenario, I assumed that management does not intend to distribute dividends for 10 years. Nevertheless, they still have to pay a 15% profit tax.
If we assume that the (cash) profit in the first year is $1 million, after taxes, management will have only $850,000 left for reinvestment. If we also assume that the annual return on reinvested capital is 15%, then the reinvested capital will gradually increase the taxed annual return (compounding), reaching $2.8 million after 10 years.
In the second scenario, if management does not pay profit tax and reinvests the entire amount, the taxable annual income threshold will reach $4 million. After a 15% tax, it will be $3.4 million, which is about 20% higher than the first case.
What happens in the long run if profit reinvestment continues for 20, 30, or 40 years?
P.S.
Regarding WACC calculation, I decided to use a 0% tax rate but, when valuing Enterprise Value, to assume that the state owns 15% of the equity.