How Does Effective Tax Management Interact With Strategy?
• First, a firm should not alter the form of a transaction in order to manage taxes, if the change is inconsistent with its strategy. For example: if a firm wants to acquire another business that is unrelated to its core competency, to obtain tax benefits [e.g., net operating loss [NOL] carryovers], it should not do so unless it is clear that the pretax economics make sense. • Second, a firm’s competitive strategy may be shaped, in part, by its tax status. Put simply, if a firm is structured so that it has a more favorable tax status than that of its competitors, this can give the firm an overall cost advantage over its competitors. Effective tax management is an important tool in obtaining this kind of competitive edge. Example-1 Suppose the U.S. government announces a 20% income tax deduction for purchasing new equipment. Both a firm and its biggest competitor are thinking about acquiring new equipment. The firm is in the 35% tax bracket; the competitor will be in an NOL situation fo
