Tax Logic
This article explains how tax works in Model Reef.
You will learn:
How tax expense is calculated from earnings.
How Tax Payable is created and unwound over time.
How tax appears in the P&L, Balance Sheet, Cashflow Statement and Cash Waterfall.
How tax affects valuation outputs.
Tax calculation in the P&L
Tax in Model Reef is calculated at the model level from Earnings Before Tax (EBT).
Core rule:
Tax Expense = EBT × Effective Tax RateWhere:
EBT is EBIT minus interest expense.
Effective Tax Rate is set by you as an assumption for the model or scenario.
Tax is calculated each period in line with the model's periodicity.
The Tax Expense line appears below EBT and above Net Income in the P&L.
If the model has multiple branches, Model Reef can apply tax grouping logic at the consolidated level while still showing branch level P&L views for analysis.
Tax Payable on the Balance Sheet
Tax Expense in the P&L is an accrual. The Balance Sheet stores the timing difference between accrual and payment as Tax Payable.
Rules:
When tax is accrued in the P&L, Tax Payable increases if cash has not yet been paid.
When a tax payment occurs, Tax Payable decreases and Cash decreases.
If tax is paid exactly in the period it is accrued, Tax Payable does not build up.
Tax Payable is treated as a short term liability and forms part of working capital.
Tax in the Cashflow Statement and Cash Waterfall
In the Cashflow Statement:
Tax payments appear in the Operating cashflows section as Tax paid.
These are cash outflows based on the tax payment schedule, not on the accrual timing.
In the Cash Waterfall:
Tax paid appears as a separate line after EBITDA and before capex and financing flows.
Tax is treated as a mandatory operating cash item in the cash priority sequence.
This makes it clear how much of the operating profit must be used to pay taxes before other uses of cash.
Tax timing and payment frequency
You can configure tax timing through assumptions such as:
Payment frequency (for example quarterly or annual).
Delay between tax accrual and payment.
Model Reef then:
Accrues tax every period based on EBT and effective tax rate.
Accumulates Tax Payable until a payment period is reached.
Triggers a cash outflow and reduces Tax Payable when tax is paid.
The engine ensures that over time, cumulative tax payments match cumulative tax expense, subject to rounding and any tax loss rules you model.
Tax and valuation
Tax affects valuation in several ways:
It reduces Net Income and retained earnings growth.
It reduces operating cashflows through tax payments.
Free cashflow calculations use post tax measures, so tax assumptions directly change NPV and IRR.
For example, free cashflow to the firm is typically constructed using earnings after tax and adjusting for working capital and capex. Changing tax assumptions can therefore have a significant effect on enterprise and equity value.
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