Chapter 1: Intro to Tax Strategy

Question 1

What are taxes and for what are they designed for?

Answer 1

Taxes- fees charged by the government on income, product or activity.
Designed for:
*financing public projects or goods
*redistribution of wealth (social aim)
*encouraging activities that are in the public interest (ex. to finance R&D…)

Question 2

Why do taxes matter in decision making process?

Answer 2

In finance we analyse the effect of investment/financing decision on firm’s and investor’s wealth.
Aim–>maximise investor’s wealth.
Tax authority is the “uninvited party” and tax payments reduce investor’s wealth.
So:
*ranking investment projects (different before and after taxes)
*neglecting taxes might lead to incorrect investment decisions.
“All taxes, All parties”

Question 3

All taxes

Answer 3

Include all taxes relevant in your decision.
ex. Considering double taxation effect on corporate profit distribution.

Question 4

All parties

Answer 4

same tax can matter for other entities.
ex. event happens-> corporate tax rate cut by 15%.
Price renegotiations because all parties want to take a benefit from this event.

Question 5

All taxes and All parties

Answer 5

*Employees
Tax rates on employees (income tax) affects the cost of employment.
*Consumers
Tax rate on consumption (VAT) affects corporate profits.

ex. Firm’s and Employee’s view for the location decision taking into account wage costs. To maximise profits. <see></see>

Question 6

Tax planning vs. Tax minimisation

Answer 6

*Tax planning- “ex ante”
Considering the role of taxes when implementing the decision rule to maximise after tax returns.
Often called “tax avoidance”

*Tax minimisation- “ex post”
Before implementing the investment and financing strategy–> tax minimisation might contradict after-tax return maximisation.
After implementing the investment and financing strategy–>tax minimisation at the end of the year (legal tax avoidance and illegal tax evasion).

Question 7

Types of tax effects

Answer 7

1. Income shifting over time
   –>same amount of income, but income is realised different part in time.
   ex. difference between short-term capital gains tax and long-term capital gain.
2. Income shifting across bases
   –>same amount of income but realised by another individual or firm.
   a.)Cross-border profit shifting
   example with transfer pricing between business units.
   b.)Income shifting within families
   “employ” children to pay wage–>decr. revenues taxed.
   shift profit to children
3. Real response
   –>Taxes affect the income as the level of investment.
   work more or less because of taxes?
   investment activity- tax effects on NPV?
   location decision?
   risk taking (safe vs risky investment)?