Summary Taxes and Business Strategy

Chapter 1: Introduction to tax strategy

The objective of the book is to provide you with a framework that is useful for thinking about how taxes affect decisions, both at the individual level and within organizations. The book adopts a global planning approach to taxes and business strategy.

A. The three key themes underlying our approach to effective tax planning

1. Effective tax planning requires the planner to consider the tax implications of a proposed transaction for all parties to the transaction.
2. Effective tax planning requires the planner to consider all taxes.
3. Effective tax planning requires the planner to recognize that taxes represent only one amount many business costs and that all costs must be considered in the planning process.

B. Difference between effective tax planning and tax minimization

Effective tax planning (ETP): considering the role of taxes when implementing the decision rule of maximizing after-tax returns, but also consideration of other costs that arise in a world of costly contracting where implementation of tax-minimizing strategies may introduce significant costs along nontax dimensions.

Effective tax planning is part of a larger problem: the efficient design of organizations. Contractual perspective: contracts specify the rights of various parties to make decisions and to receive cash flows in differing circumstances. The tax-related cash flows specified by contracts affect the prices at which assets are traded and the ways in which production is organized by business units.

Tax minimization: involves simply minimizing taxes without consideration of other dimensions of the transaction or business problem. The simplest way to minimize taxes is to earn zero income, which is not considered an effective tax plan. Certain taxpayers are more likely than others to own