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Charan P

@letsuser | Posted on |

Time to Rethink the Corporate Tax System


Is it the correct time to rethink corporate tax system? This is the question which most managers are asking themselves considering the fact that corporations view taxes as a painful but necessary cost of carrying out their business. Most corporations are now coming up with new methods of maximising their profits so as to counter the new changes in corporate tax system. These changes such as global tax-reduction opportunities, sophisticated tax shelters and high-priced finance have now forced corporations to turn their tax function into a profit centre in Forgot UAN Password Reset at EPF UAN website..

There is plenty of evidence showing how tax function within corporations has changed from being a compliance function to a profit centre. Corporations are now disconnecting their income reports to capital markets and tax authorities. This has been made possible thanks to the dual-book system that allows organizations the opportunity of characterizing profits to tax authorities and capital markets separately. Through this system, firms no longer appear worse off to the IRS since they have two points of view on their economic situation.

There are several reasons as to why managers are now changing how they view corporate tax system. First and foremost, financial engineering has tremendously led to cheap re-characterizations of income for book and tax purposes. This action has in turn led to the disappearance of tax obligations in firms without necessarily having to go through a lot.

Secondly, the growing global reach of companies and falling costs of global transactions has made managers to re-consider their tax system. Initially, many firms only worked within the country of operation and hence had no exposure to the outside world. However, globalization has led to low costs of financial transactions meaning profits can be reallocated to lower tax jurisdictions within a short period of time.

Last but not least is the fact that there is change in patterns of incentive compensation. This change has sharpened incentives to the point that they can generate profits out of parts of the firm. This could not be possible considering most firms had to rely on the same incentives while performing their business.

Rethinking the corporate tax system is a good thing for shareholders as it tends to reduce their burden. Actually, if the shareholders are the recipient of all this value, then it would basically mean a transfer from tax authorities to shareholders. However, the extent to which shareholders benefit has not been clearly evaluated.

CEOs and boards of directors have to respond quickly to this changing environment. This is because there is an increase in activities by tax planners within corporations and a shift in focus to tax shelter by regulators. The board of directors should therefore come together and evaluate any potential tax risk that may be borne by shareholders. Organizations can also decide to create the correct incentives thus ensuring transparency in all their activities. It is only through these methods that firms can be able to counter the growing changes in corporate tax system.