Impact of Advance Payments of Tax on Profit on Effectiveness of Investments

Abstract

Recently Brusov et al. have developed innovative investment models that are very close to investment practice. Investment models with frequent payments of tax on profit and of interest on debt at the ends of periods have been considered. However, in practice, payments of tax on profit as well as of interest on debt could be made in advance. In the current paper, we developed, for the first time, innovative investment models with frequent advance payments of tax on profit and of interest on debt and studied the impact of these types of payments on investment project effectiveness. Numerical calculations carried out for four innovative investment models (without split flows) showed that, in the case of advance frequent payments of income tax and interest on debt, all the results related to the effect of the number of payments of income tax and interest on debt on the investment projects’ effectiveness were opposite to the results in the case of payments at the end of the periods obtained by Brusov et al. in the previous article. Thus, this means that the method of payments of tax on profit and of interest on debt (in advance or at the ends of periods) changes drastically the effect of the number of payments of income tax and interest on debt on the investment effectiveness. The verification developed by us for the new models with frequent advance payments of tax on income helps create a comprehensive system of correct valuation of the investments’ effectiveness for two schemes for payments of income tax (in advance or at the ends of periods). The obtained results help the tax regulator (Finance Ministry) understand the influence of the frequency of payments of tax on income and the credit regulator (Central Bank) understand the influence of the frequency of payments of interest on debt on the investment projects’ effectiveness. This allows them to modify and improve tax legislation and credit policy, respectively.