Option 6 (Business Unit): Flat Tax with Tracked Differences

Finally, we can vary add a variation to Option 4 to try to mimic at the business unit level what was proposed in Option 3 for the corporate level, i.e., a flat tax at the marginal rate with differences between cash and flat taxes tracked in a tax deferral account. The problem, here, is we don’t know the cash tax payment incurred by a business unit. Therefore, we need to adapt this adjustment to account for that deficient knowledge.

This treatment would require a schedule of deferrals and pre-payments for certain classes of activity or for certain assets that can create tax shields. For example, foreign sales may be identified as a major category of tax generating benefits for a particular business unit. It is fairly simple to estimate the foreign tax credit associated with foreign sales, and this tax credit can then be applied to the specific business. Or, if a business has significant assets creating tax deferral through temporary differences, i.e., its known EP expenses are lower than its tax-reported expenses, then it might be worthwhile to track those differences for certain major assets or class of assets. Any transactions or amortization outside of those chosen for tracking would be left alone to get taxed at the flat rate. At the extreme, if no assets or transactions were chosen for special tracking, then the business unit tax would be the marginal tax of Option 3.

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