Question

Describe and evaluate some of the economic and tax advantages of business expansion. How do economic and tax implications of expansion influence decisions on whether to expand or not, and if expansion is undertaken, how do these implications shape decisions on the scale and character of expansion? Make sure that you identify and address the specific form(s) of business expansion that you discuss.

Answer 1

How do economic and tax implications of expansion influence decisions on whether to expand or not,?

Economic advantage

Economy of Scale

Economy of scale will be the most important economic advantage from expanding a business. By Expanding increasing level of producion to a certain extend can save a propotionate amount of cost to business.

For example a factor have surplus capacity ustilising this will cause no extra cost but helps to earn extra revenue if increased level of production, that is how economy of scale influence the decision whether to expand or not.

Nearness of Resources

If the business is decided to expand or shift its operation to place nearby the Resources such as raw material,labour,... this will enhance the level of activity or reduce the cost by reduction in transport cost of raw material.

An expansion decision may also consider the proximity of resource as a economic benefical factor.

Potential Customer

A physical expansion to a new location need to consider for the gaining of new potential customers. On such an expansion Demographic factors should have to been considered as dominant age group,purchasing habit such a things to be considered for better customer base.

Tax Advantage

Import Duty

In cases where a company export products from home country to foreign, the forgein country will usually impose an import duty on the value of this product. At this case manufacturing products itself in foreign country will avoid this tax (but has to analyse for cost vs benefit in manufacturing unit there in foreign country).

Import Duty has an influence in deciding whether to expand or not to forgeign market where company have most of customer base.

Tax Treaty Between Home And foreign Country

After setting up subsidiry in foreign country when remmiting money back to country there business will have to bear tax liability on home country as well.

But at the same time if there s a tax treaty between counties company has to pay only if any extra tax appliable in home country. No need to double pay tax. For example:

	Tax rate case1	Tax rate case 2
Foreign-Paid	15%	15%
Home	15%	20%
Extra to pay in home	NIL(no need to pay in home)	5% (pay extra rate)

In considering an expansion to foreign country tax treaty has also have a important role

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