Affect of taxes on corporate investment decisions
There are many taxes implication in the corporate sector, like corporation tax, Sales tax., stamp duty tax. Each country has its own tax legislation and rules. Tax authorities charge taxes according to described tax rules by legislative authorities. Rates and implementation of corporate taxation are different from individual tax.
To maximize profits, financial managers of an entity trying to reduce the Company’s tax liabilities. Tax considerations depend on the Company’s location, Form, timing, and types of transactions. Some tax implications have a significant impact on management’s objectives.
Decision-makers must manage the impact of current tax implications. If they ignore the complexity of taxes and believe statutory tax rates, the decision might not be favorable with respect to taxes and decrease the entity’s profitability. Decision-makers must consider the implication of prior loss, how losses can be offset against current and future profits. Losses might offset against the current period profits and carry forward against future profits.
Income taxes directly impact on some investment opportunities. If previous or current losses are available for carrying forward and Company forecasted profit in the future then these losses can reduce the tax and improve the Company’s cash flows and net profit.
If there are no carry forward losses available, then the decision of potential investors would be considered on profit and loss of that investment, mean new investment is profitable than what would be an increase in tax due to new acquisition?. If the potential investment is loss-making, then how to loss might be offset against the Company’s total corporation tax liability in the current period, carry back and carry forward options. Once the tax is carry forwarded it can’t be carried back in previous years, so it is advisable to go for carrying after when there is no option to carry back and current period’s offsetting. First, try to offset losses in the prior period and current year’s losses, then move toward carrying forward option.
Decision-makers should also consider exemptions and reliefs available against new investments. Often the government offers reliefs to companies to encourage some specified sectors or organizations. The entity should also consider that reliefs and exemptions to save its prior year’s tax.
There might be capital tax implications and stamp duty on new investment. If investors want to make the investment for the short term then these tax implications might affect the decision of investors. Because capital tax should apply to the immediate sale of the investment. If the investment is for a long period then those taxes might not have a significant effect on the decision-maker.
It is essential for decision-makers to make a cost-benefit analysis of potential investment and asses all taxes implication and reliefs before making final decisions.
For candidates that interested to start their career in the tax sector especially in the corporate tax sector, it essential for them to first learn tax rules. Some legislative authorities of each country define the tax rules and often amend tax updates yearly. In Pakistan Federal board of revenue provide tax services to the Pakistan government.