Companies consider tax implications when making investment decisions in order to maximize value. Higher corporate taxes reduce after-tax profits available for investment. As a result, firms cut investments when taxes increase. There are differing views on the relationship between taxes and investment. One view is that using debt financing for investments can provide multiple benefits, including reduced corporate taxes since interest payments lower taxable profits. Managing investments carefully when using borrowed funds can also maximize shareholder value. Taxation strategies influence corporate decisions around investment and financing.

1. Contributed by Mansoor A. Seelro
Published on Medium and LinkedIn
14-Dec-2020

2. Contributed by Mansoor A. Seelro
Taxes and Corporate Investment Decisions
Companies work hard and put their best possible efforts in an attempt to optimize their tax
liabilities. This not only helps them in making safe financial decisions but also maximizes
firm value. Investment decisions have a substantial impact on corporate valuation as they
influence corporate growth. Value enhancement has been central to financial management
though, taxation strategies carry a distorting effect as to corporate investment and financing
decisions.
Investment plans rely on taxation
strategies for the most part. As
corporate taxes apply to the companies’
profits, hence, the after-tax profits
determine the amount and the avenues
of investments and the way investment planning shall be carried out. Another side of the coin
is that investments call for ample cash flows generated internally. While it is sure that internal
cash flows are largely affected by the corporate taxes applied. Clearly, firms cut investments
when they are giving more in taxes. This is particularly true when the capital markets are in
such conditions as they greatly lean on internal investment sources.
There are several independent opinions of experts about the relationship between taxes and
investments. The most worthwhile being the use of debt financing to make any investment.
This has manifold benefits. First, the managers in a particular company tend to invest more
sensibly because the funds have been borrowed and are under the supervision of a financing
institution. Second, the shareholders are also at ease because of the supervision of a third-
party financier. Third, the borrowed funds that are invested more often result in the value
maximization for the shareholders because of prudently choosing what projects to invest in.

3. Contributed by Mansoor A. Seelro
Finally, the most important benefit is that the use of debt results in reduced corporate taxes as
the interest paid on a debt has a trickle-down effect on corporate profits (Princen, 2012).

4. Contributed by Mansoor A. Seelro
Reference
Princen, S. (2012). Determining the impact of taxation on corporate financial decision-
making. Reflets Et Perspectives De La Vie Économique, LI(3), 161.
https://doi.org/10.3917/rpve.513.0161