Question

Why is it important to consider the consequences of taxes when financing a new project? Can you think of a situation in your own personal finances where taxes might influence whether you choose to make a purchase?

Answer 1

a)To maximize the firm value, financial managers of both small and medium enterprises as of multinational enterprises will try to optimize their companies tax liabilities. Tax considerations regarding location, organizational form, enhance the risk that financial decisions will be guided by tax purposes rather than the management objectives. Although value maximization is the leading principle in financial management and the use of tax planning strategies has some distorting impact on a company’s financing and investment decisions.

b)Several types of distortion will be identified in this respect, among which the heterogeneity of national tax systems and unequal tax treatment of debt and equity. One distortion is proper to international activities and relates existence in many corporate tax codes as countries.. Being subject at different compliance rules and tax procedures puts heavy administrative burden on companies engaged with cross-border activities, especially as tax changes are frequent. In addition to compliance costs, the diversity of tax rules also gives rise for double taxation. Although some important network of double tax treaties exists, double tax situations still remain common, especially in respect to the computation of transfer pricing and in the restructuring of international groups. Issues related to cross-border reorganizations and in particular the transfer of assets resulting in capital gains also risk to trigger double taxation, as the right to tax is not uniformly settled.So whenever an investment or purchase in domestic or foreign market ,in order to gain profit taxes should matter least.