Tax Variables
This article explains Tax variables in Model Reef.
You will learn:
What a Tax variable represents.
How tax expense is calculated from earnings.
How Tax Payable and cash tax movements are handled.
How to think about tax in scenarios and valuations.
Tax variables take the model's profit before tax and apply effective tax rules to produce realistic tax expense and cash tax payments.
What a Tax variable is
A Tax variable represents income tax expense at the model level or entity level.
Key characteristics:
It is driven by earnings before tax (EBT), not directly by drivers.
It uses an effective tax rate which can vary by entity, period or scenario.
It produces both P&L expense and Balance Sheet liabilities.
You can have different Tax variables for different branches if needed, for example per entity in a group.
Tax in the P&L
In the P&L:
Tax Expense is calculated as:
Tax Expense = EBT * EffectiveTaxRate.
EBT is derived from:
Revenue minus COGS.
Minus Opex and Staff.
Minus depreciation, amortisation and interest.
The Tax variable sits below EBT and above Net Profit After Tax (NPAT).
You can model different effective tax rates over time or by scenario to reflect changes in tax regimes or structures.
Tax Payable and the Balance Sheet
In the Balance Sheet:
When tax expense is accrued but not yet paid, Tax Payable increases.
When tax is paid, Tax Payable decreases and cash reduces.
The timing of tax payments is governed by tax payment frequency settings, for example:
Quarterly instalments.
Annual payments.
Custom schedules.
Model Reef does not model complex tax assets or losses in full detail, but it ensures that tax expense, Tax Payable and cash movements are consistent.
Tax in the Cashflow Statement and Cash Waterfall
In the Cashflow Statement:
Tax payments appear under Tax Paid in operating cashflows.
They reflect actual payment dates rather than accrual dates.
In the Cash Waterfall:
Tax appears as a separate line item after EBITDA and working capital movements.
This helps show free cashflow after tax and before financing.
Tax therefore has a visible impact on both earnings and cash available for debt service and equity.
Scenario design with tax variables
Tax assumptions often differ across scenarios, for example:
Different effective tax rates to represent restructuring or use of tax shields.
Different timing of tax payments following changes in profitability.
Policy scenarios with higher or lower statutory rates.
Because scenarios are separate models, you can:
Use the same structure of Tax variables.
Apply different tax rate drivers or settings.
Observe the impact on NPAT, cashflows and valuation.
This keeps tax modelling clear without overcomplicating the core engine.
Limitations and scope
Model Reef focuses on:
Effective tax modelling across entities and groups.
Clean interaction with EBT, Tax Payable and cash.
Support for scenario analysis and valuation.
It does not attempt to fully represent:
Detailed deferred tax assets and liabilities.
Complex tax loss carryforward accounting on the face of the statements.
Jurisdiction specific rules beyond effective rate modelling.
For high level planning and valuation, the Tax variable mechanism is usually sufficient and transparent.
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