Cash tax rate
AccountingTax actually paid in the period divided by pre tax profit, which can sit well below the book charge for years.
Also written: cash taxes paid, cash tax
The cash rate measures what left the bank account. It differs from the effective rate because tax is computed on taxable profit under tax law, not on accounting profit, and the two follow different rules for depreciation, provisions and revenue recognition.
The usual reasons a cash rate runs below the book rate are accelerated capital allowances on recent investment, losses brought forward being used against current profit, and timing differences on provisions that are only deductible when paid. Every one of those is temporary, and the gap accumulates on the balance sheet as a deferred tax liability or unwinds a deferred tax asset.
That temporary quality is why the cash rate is the wrong default for a perpetual valuation. A rate that exists because of a capital allowance pool or a loss carryforward will revert once the pool is used, and capitalising it into a terminal value assumes a benefit that has a known end date.
It is the right measure for a different question. Near term cash generation, debt capacity and covenant headroom all depend on tax actually paid, which is why a leveraged finance model tracks cash tax carefully while a DCF usually does not.
Worked example
A capital intensive company reports pre tax profit of 200 and a book tax charge of 50, so a 25% effective rate, but pays only 30 in cash because of accelerated allowances on a recent plant.
The 20 difference is recognised as a deferred tax liability. Cash taxes are 15% of pre tax profit this year, and the model would be wrong to assume 15% forever.
As the allowances run out the cash rate rises toward the book rate and the deferred tax liability unwinds. The valuation should reflect the reversion, not the current year.