Why Tax Planning Should Be Melded with Strategy
Integrating tax planning early on in strategic planning can help a company boost its cash flow.
With the increased demand for transparency and more extensive financial reporting from public and private companies, many C-suite executives have paid closer attention to their companies’ tax functions. While attention has shifted to the tax function’s role as an important tool for maintaining regulatory compliance, its ability to create real, quantifiable value for an organization should not be overlooked.
To be sure, tax strategy is often ancillary to a business’ strategic decision-making process. But if it’s incorporated into the earlier stages of corporate decision-making, tax strategy can become a powerful tool for minimizing a company’s effective tax rate, thereby increasing cash flow and creating more opportunities for business investment.
Don’t Let the Tax Tail Wag the Dog
This adage leads many finance chiefs to conclude that attractive tax planning opportunities should not override a company’s basic economic forecasts because tax strategy and economic reality must first align. That is largely true. While tax incentives can drive core business functions, they should, more often than not, form only part of an organization’s overall business plan.
That truth sometimes obscures a larger issue. More often than not, the tax function is brought into the fold to identify issues and manage implementation only after material decisions have been made. A back-end approach to tax planning indeed works well for many companies. But it can fail to capture full tax optimization, especially as it relates to the kind of international structuring many companies with overseas sales are (or should be) engaging in today.
Finance chiefs are indeed aware of the tax savings and corollary benefits that tax planning can produce on the back end. Added capital and better cash flow can help to streamline operations and permit more responsive investments.
Why, then, should the tax function’s power not be harnessed during the initial strategic decision-making process, when its ability to create value often exceeds what’s possible on the back end? Doing so may later reduce the time and expense needed to streamline a company’s structure as it expands. Read more on CFO.