2. Introduction
To increase firm value, managers engage in transactions. Of
course, firm value can increase for other reasons. For example, the
value of the firm’s assets simply can appreciate due to market
factors beyond the control of managers. However, transactions
must have occurred when firms acquire such assets, and it takes
transactions to convert such assets into cash flow. Managers do
things like buy, sell, rent, lease, and recapitalize.
If managers structure transactions such that each is value-
maximizing, then by year-end the sum of such transactions will
have maximized firm value. However, note that each transaction
has an uninvited third party: the government. In strategic tax
management, when a firm chooses transactions, it keeps tax
management in mind. This transactions approach—the SAVANT
framework.
3. SAVANT is an acronym for strategy, anticipation, value-
adding, negotiating, and transforming. For a transaction to
be properly tax managed (and thus best increase firm value),
managers should consider all of these aspects.
5. Strategy
The firm looks to engage in transactions that maximize end-of-
period value. It can chose from a constellation of entities or
transactions, and the choice then is put through the lens of the
firm’s strategic objectives.
If the transaction (including tax effects) is consistent with the
firm’s strategic objectives, it may accept the transaction.
Otherwise, even if the transaction is highly tax-advantaged, the
firm should consider rejecting the transaction. Similarly, the tax
aspects of the transaction can be managed in a strategic manner.
6. Anticipation
Next, the firm anticipates its future tax status and chooses the
timing— this year or a future year—of the transaction.
Because the effects of transactions often span more than one
year, the firm projects tax effects into the future, using current
and expected future tax rates and rules, and factors in
management’s expectations as to the future tax status of the
firm.
As discussed more fully in the section entitled “Anticipation,” if
there is tax advantage to adjusting the timing of a transaction,
the firm should do so provided that the nontax economics still
make sense.
7. value-added
What is left, after taxes, is value-added to the firm. Like taxes, value-
added often inures to the firm over time. Because it is a fundamental
principle that cash inflows are more valuable now than later, tax
management takes into account the time value of a transaction as well.
The time value of a transaction, after taxes and transaction costs, is
what increases firm value in the future. One aspect of a transaction
that affects value-added comprises transaction costs, such as sales
commissions or attorney fees.
As discussed in the section entitled “Value-Adding,” transaction costs
reduce the net value of the transaction to the firm. If the transaction
costs exceed the net value, the transaction should be rejected.
8. Negotiating
Taxes are also negotiated between the firm and the
other entity. As discussed more fully later in the
section entitled “Negotiating,” the firm seeks to shift
more of the tax burden away from itself (and
potentially, onto the other entity) by negotiating the
terms of the transaction.
9. Transforming
The firm attempts to minimize tax costs by transforming
transactions being considered into ones with more favorable tax
treatment.
For example, managers can work to restructure transactions
that might generate non-deductible costs into ones where
costs are deductible ones, or work to transform what would
have been ordinary income into capital gain income.
