International Accounting

Discuss the impact of corporate taxation on corporate decision-making, particularly investment and transfer pricing decisions

Taxation has a direct correlation to corporate profits and subsequent earnings per share. Taxes are a necessary aspect of the capital markets. In many instances, taxes are needed to maintain the overall economic system in which corporations operate in. Aspects such as national security, infrastructure, social safety nets, and other firms of government initiatives, are financed through taxes. Corporations benefit as they can now operate in a more efficient, credible, and transparent business environment. Taxes however, when excessive can discourage foreign direct investment within particular countries.

Taxes particularly for equity investors have a profound impact on the overall attractiveness of securities. For one, investors are often taxed twice due to capital gains and dividend income. For instance, investors in equities often receive dividend payments throughout the duration of the year. These payments are often taxed as income for the individual investor. Furthermore, in the event that the investor sales securities within the company, he is also taxed for capital gains. Finally, the investor is also impacted as the company in which he invests in, is also taxed for its own income which indirectly affects the equity investor. In this instance, the equity investor is taxed twice. The first taxation occurs when corporations realize profits. The second taxation is on dividends that are given to investors throughout the year.

These taxation procedure directly impact foreign direct investment in international corporations. First, these taxation procedures discourage investment as equity investors will lose a disproportionate amount of their potential gains in taxes. To compensate for this potential lose of income, investors will demand higher rates of return. Companies must therefore, take on riskier projects to compensate for the higher rates