Taxation is crucial in the operations of any business entity as compliance is one of the key performance indicators in today’s business arena. Every nation has its own tax policies that govern the individuals and businesses involved in trade. In this write up, we will confine our focus to how tax policies affect businesses.
Tax policies are guidelines and principles stipulated by the government on imposition and collection of taxes. Tax policies have a pronounced bearing on corporates’ decision making. Information on tax policies help organisations to make important decisions with regards to business location, type of business, borrowing and investments. This will further impact on the financial and expansion goals of an enterprise.
Tax policies influence entrepreneurs to choose the type of business to optimize tax liability. It would be plausible to deduce that it is through knowledge of obtaining tax policies that one may decide to take a certain area of trade. Businesspeople may choose to venture into provision of goods and services that fall under non-taxable supplies such as educational, medical and fuel supplies as a way of avoiding having to deal with constant tax burdens. In addition, tax policies are also impactful on borrowing behaviour of an organisations, if the interest rates are too high it becomes expensive for organisations to borrow from financial institutions holding other factors constant. However, in a hyper-inflationary environment, some businesses tend to borrow in anticipation that the actual value of the borrowed amounts will be eroded by inflation.
Furthermore, tax policies governing how businesses depreciate capital assets can influence investment behaviors. Businesses depreciate capital assets by deducting part of the purchasing costs over the “class life” of that asset, which varies from several years to several decades, depending on the type of asset. Apart from guiding behaviour on depreciation of capital assets, another investment decision that emanates from tax policies is selecting a location. When businesses carry out feasibility studies before venturing into the business, one of the factors they consider is compliance laws and tax policies in the relevant country most likely in comparison with alternative destinations.
The impact of tax policies on businesses is an important consideration for organisations and the financial goals and objectives are to be met.
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