Taxation: It’s Role In Decision Making
Taxation and the Financial Decision Process
-most significant form of taxation that affects return on investment is income tax, since return is measured as the cashflow remaining after deducting all taxes payable. Thus have an incentive to reduce or postpone taxes to maximize total earnings.
-every decision made by a business has tax consequences, cash flows only exist on an after-tax basis.
-two principles to remember when applying tax to financial decision making are: 1. Taxes should be a controllable cost. 2. Cash flows exists only on an after tax basis.
A). Taxation: A Controllable Cost
-tax should be considered as a cost of doing business, like an expense. Thus tax costs should be controlled. People must analyze the components of tax cost to determine what actions increase or decrease tax.
-things to consider when making business decisions:
->Income tax rates vary across provinces, making the resulting after tax cash flow vary.
-every decision/alternative has a different impact on the amount and timing of tax payments. Tax costs are relevant when alternative marketing strategies are being considered.
-the concept of tax being a controllable cost is true at all levels of management.
B. Cash Flow after Tax
-all cashflows; revenues, expenses, asset acquisition, debt restructuring, should be considered after tax because cash flows before tax provide no value.
->ie: even if you have positive NPV, the tax payment may make it negative.
-decision makers must seek after tax returns, and seek methods to reduce the tax impact. Just as one would try to minimize cost of goods sold.
-after tax cashflows/costs show true benefits or true costs.
-the cost of a 10 ...