The increase in tax rate to 20% led to HUGE LOSSES in Q1 2018 for Asian Pay TV Trust? Myth or Fact?

With the release of Q1 results by Asian Pay TV Trust ("APTT"), I begin to see a lot of weird comments on investment forum from how they interpret the results. Some of the folks on the forum frantically advocated an immediate sell off due to the huge loss incurred for Q1 2018 by APTT. Some remarked that "Taiwan tax is so scary that it makes a profitable company into a loss making company overnight". Others were skeptical on why APTT management only focuses on EBITDA and did not place emphasis on the net losses incurred. 

Myth: The increase in tax rate to 20% led to huge losses in Q1 2018 for APTT. Taiwan tax is so scary that it makes a profitable company into a loss making company.

This is not true. The main reason for the turning of results to loss is due to a one time <S$11Mil> deferred taxation charge to the Profit and Loss statement. Note that a deferred taxation charge represents only a timing difference to smoothen out the accounting profit and loss else it will lead to a skewing of year by year financial results. There is no cashflow impact. Neither does it represents an increase in actual tax expenses to the Taiwanese Tax Authority with the one time deferred taxation charge. The effect gets reversed out over subsequent financial years and is a creature that exists due to the prescription under the International Accounting Standard.  

To better illustrate how this works, let's look at the following simplified scenario. Assuming S$100K of Computer Equipment were purchased and under tax law, it allows for accelerated tax depreciation of 100% within the first year, all S$100K will thus be eligible for tax deduction filing. 

From the accounting perspective, the Computer Equipment purchased has a useful live for 3 years. Hence the annual depreciation rate booked into the Profit and Loss statement will be S$33.3k on a straight line method. 

Next, we assume a business can generate S$150K of revenue every year and the only expenses for the purpose of this theoretical exercise is the depreciation charges for Computer Equipment. Also prevalent income tax rate let's assume is 17%.  

As you all can see, without the Deferred Tax adjustment, the current tax for the first year is only S$8,500 whereas for Yr 2 and Yr 3, the current tax expense payable to the Tax Authority increased significantly to S$25,500 respectively. This will lead to drastic differences in the Net Profit and Loss for Yr 1 relative to Yr 2 and Yr 3. It is only with this creature known as "Deferred Taxation" being created that leads to the same Profit and Loss over the years from the accounting perspective to resolve the timing differences between tax and accounting view.  

There is thus no direct cashflow impact from the application of deferred taxation. Hence one should only consider the impact of the revised increment in current taxation payable to the Taiwan Tax Authority and exclude the impact of the deferred taxation with regard to the assessment of Q1 2018 performance of APTT.

In my next post, I shall do a quick review of the Q1 2018 APTT business results as well as a valuation of the business to compare against the market unit price.