Financial Management covers every decision that involves money and its flow in or out of the company. Tax payments are a big part of the cash flow for any business, hence, they influence any decision related to the financial decision making of the firm. Tax management is a very critical part of financial management and it has to be managed properly. If tax-related issues are not handled properly then the company will have to make a decision influenced by tax-related issues rather than the company’s prime objectives.
These tax-related issues usually are common with Multinational Companies because of different tax structures in different countries they work in. MNCs have to cope up with the taxes implied by the country they have business in regardless of the nature or size of the operation they have in that particular country.
Types of Taxes
The total tax burden on any particular firm is a combination of taxes payable which can be categorized on a different basis.
There are 3 different tax rates which are implied on the basis of the nature of operations performed by the company.
Progressive tax rate
This has a direct relation to the total income of the firm. The taxes payable will escalate with the increase in income of the company.
Marginal tax rate
This tax rate implies on the next rupee payable meaning that you will have have to pay tax for the amount of money you make over a predefined limit.
Average tax rate
The average tax rate is basically the amount of tax payable divided by the total taxable income.
These tax rates include a number different taxes which are to be paid at the above-mentioned rate of calculation.
Now that we have covered the tax rates imposed on the company, let’s take a look at different taxes paid by a company.
Personal Taxes
The taxes which are payable by the investors also need to be considered while making any financial decisions. The firm must make decisions keeping in mind the tax consequences for the investor’s shares in the company.
Investors have subjected to tax payments for the earnings from dividends and interest as well as any profit made by disposing of their shares. Although they aren’t subjected to tax payments for tax-free securities.
Corporate Tax
The company also have to manage corporate financing to save taxes. Corporate financing is a way to identifies the capital requirement of the firm and raise funds to fulfill them. There are two main sources to acquire the funds
- Equity, and
- Debt
The profits are distributed amongst the equity holders after-tax payments. The other source of financing is through raising debt. The resources from the shareholders and investors are used for the benefit of the firm and they are paid interest for it. This interest paid is taken as a charge against company earnings and they will reduce the profit subjected to tax payments.
Tax Shield
This phenomenon of decreasing the profit subjected to tax payments by using the interest paid on debt is known as Tax Shield. By charging the interest paid on debt, the company reduces the profit as the interest is charged against it, ultimately decreasing the company’s tax liability.
Tax Planning and Avoidance
Tax planning and avoidance are basically just ways to reduce the taxes to be paid by the firm. One method involves using research and statistical analysis to plan the tax structure and minimize it by making changes in financial decisions. While other involves exploiting the loopholes in the taxation system to avoid paying excessive taxes within the legal limits.
It is important for a finance manager to rigorously study the market and make changes or the organization will be forced to make financial decisions based on tax-related issues rather than company’s primary objectives.
