A CFOs guide to tax planning for corporates

Next comes the question of how a company can create more value for its stakeholders and save the taxes that it pays in the process. For instance, employees are the most important stakeholder of any company. It is employees who implement the strategies of the company at the ground level. Expenses on employee compensation are tax deductible. So a company can pay its employees more. This will have the effect of lowering the tax that it pays. The company’s profits will also go down because of paying higher compensation and benefits to employees. But it will be able to create happier and more satisfied employees. This in turn may have the impact of increasing the productivity and profits of the company in the long term.

Valuation of intangible assets has now become very important part of tax planning. These intangible assets should be valued fairly so that the company does not end up paying higher taxes at a later date. Similarly, impairment in the value of assets should be done fairly and accurately. Expenses should be recognized clearly between revenue expenses and capital expenses.

The question of capital structure that the company is using should also be looked at from the perspective of tax planning. Capital structure means how much debt and equity a company is using. Interest paid on debt is tax deductible. So use of more debt in the capital structure results in tax savings for the company. But on the flipside, use of more debt increases the risk of insolvency of the company. If the company fails in meeting the interest and principal obligations on the debt, then it will go bankrupt. No such obligation exists in the case of equity. So a balance needs to be struck. A balance that optimizes the interest rate tax savings without increasing the financial risk of the company by too much.

Transfer pricing also relates to tax planning in corporations. Transfer pricing relates to prices that are charged for transactions done between different divisions of the same company. Transfer pricing is coming increasingly under the scrutiny of tax authorities. Tax planning should be done in such a way that statutory requirements are met while ensuring that tax savings from these transactions are optimized.

Double Taxation Avoidance Treaties of India with various countries should also be kept in mind. This is especially necessary for companies that have operations in many different countries. Double taxation can be avoided by taking advantage of these treaties, where they exist.

Before taking the decision of entering any new market, the tax structure in that market should be analyzed in detail. Tax planning in corporations should also understand the profile of its shareholders. The dividend policy should be made keeping in mind the profile of shareholders. If majority of shareholders prefer lower capital gains tax through capital appreciation, then the company may go for not paying dividends or paying a lesser amount of dividends. On the other hand, if the profile of shareholders is such that they prefer a regular stream of income as dividends, over tax savings from capital gains, then dividends should be paid more and frequently.

It is important the cost of tax compliance and tax planning are also optimized. Technology can be used for making the entire tax related reporting and planning more efficient. It is a cardinal sin if a corporation goes on to pay higher taxes than it is obliged to pay.