Texation and Business Behavior, Spring, 2011
TAXATION AND BUSINESS STRATEGY
Peking University Graduate School of Business
Spring 2011 / Module 2
EE, ME, and FE
Instructor: Dr. Estelle Dauchy
Assistant Professor of Economics
Office: 413 Building C
Email: edauchy@phbs.pku.edu.cn
Office Hours: Monday 12-30-1:45 PM; Thursday 12-30-1:45 PM
Class Times: Lectures on Mondays and Thursdays: 12-30 - 12:20 PM in C-104
Course description:
“Recently, G.E. reported that its tax burden was 7.4 percent of its American profits,
about a third of the average reported by other American multinationals. […] Minimizing taxes is so important at G.E. that Mr. Samuels has placed tax strategists in decision making positions in many major manufacturing facilities and businesses around the globe.” (New York Times, 2011)[1]
Taxes are pervasive. Every business entity, in every country and at any time is a tax entity. Their related party (owners, customers, employees, lenders, investors, partners, suppliers) are also subject to taxes. Every executive, finance and other business professional, policy-maker, or academic researcher, recognizes the importance of taxation as part of decision making. Effective tax planning involves considering the role of taxes in businesses’ maximization of after tax income.
This course is designed for students pursuing MBA, Masters in Management, Finance, or economics students. On the one hand business school students learn about a broad spectrum of factors affecting business decision making in courses such as corporate finance or financial statement analysis, valuation and investment, but no systematic consideration of the pervasive role of taxes. On the other hand, tax accounting courses concentrate on specialized administrative and filing issues but ignore the larger picture in which tax factors influence decisions. Moreover, public finance courses provide students with the role played by governments in maximizing aggregate welfare, the optimal design of tax systems and redistribution mechanisms, with no focus on businesses’ strategic responses to tax systems.
The objective of this course is to fill gap by providing a framework to understand and recognize tax planning opportunities, and applying basic principles of tax strategy. Although it provides significant tax legal knowledge in the American context, this course focuses on the economic consequences of contractual arrangement through their tax implications. It does not focus on the nitty-gritty details of tax law, but provides students with the basic principles of tax strategy that will play a significant role in situations they will very likely encounter many times in their career (e.g., choice of location, Mergers & Acquisitions, choice between debt and equity finance, international taxes) Students in economics will learn how optimal theories of taxation apply in the real world, and the dynamics between a country’s tax design and businesses responses.
Although is essentially applied to the current American tax system, the purpose is to enable students to be skilled with tax planning principles that can be used in other contexts in other countries. Students will be also be able to understand some important impacts of tax reform on business decisions in the future.
The key themes in this conceptual framework of effective tax planning are:
All Parties: The planner needs to consider the tax implications of a transaction for all parties to the transaction.
All Taxes: The planner needs to consider both explicit taxes (taxes paid directly to the government) and implicit taxes (taxes paid indirectly in the form of lower before-tax rates of return on tax-favored investments).
All Costs: The planner needs to recognize that taxes represent only one among many business costs, and all costs must be considered in the planning process.
The course begins with some basic analytical tools of this framework. Then the role that taxes may play in business decisions are presented within the life-cycle of a firm, from the tax issues at start up (e.g., the choice of organizational form), the compensation of workers (e.g., current and deferred compensation, stock options), investment opportunities (e.g., stocks, bonds, annuities), capital structure and dividend policy, multijurisdictional and multinational operations, financial innovations, and mergers and acquisitions.
An ultimate goal of the course is to provide students with an approach to thinking about taxes that will be very valuable even as the tax laws change. A useful by-product of this approach is the ability to think critically about current tax reform proposals.
Prerequisites:
For this class, you are required to have passed “microeconomics” with at least a “C”. They are expected to have good mathematics skills (e.g., they should know how to calculate present and future values of different revenue steams, and understand the notion of discounting or deferring income). Good knowledge of excel or similar software is recommended.
Readings:
Required readings are preceded by a star *. Optional readings are preceded by a #.
· Textbooks / Case Studies
* Scholes, Wolfson, Erickson, Maydew and Shevlin. Taxes and Business Strategy - A Planning Approach. 4th ed. Prentice-Hall, 2009.
This book is available in the curriculum office for consultation only.
* Case studies distributed in class / web dropbox folder
# Other case studie(s) and articles posted in dropbox folder.
Dropbox Folder
After the first class, students will be invited by me to access documents in a private dropbox folder online. This folder will be updated after every class. It will contain course handouts, problem sets and solutions, case studies, and other material.
Recommended websites and online resources
The handout for the session 1 provides a list of sources for information on tax rules, a list of important specialized and academic journals, and relevant web sites that the students will find very useful to further their knowledge of tax rules and their implications, as well as accessing important databases and statistics.
Grading
The final grade will depend on class participation, two graded problem sets, one graded case study, and a final exam.
I expect all students to be prepared for the class based on the schedule and assignments table below. All readings (Read) are required. The preparatory discussion questions (DQ), exercises (E), and tax planning problems (TPP) can be found at the end of each chapter. They do not have to be returned, but they have to be prepared. I will regularly invite students to volunteer and discuss assigned readings or answer assigned questions. If no student volunteer, I will randomly select students.
Additional material for personal study will be provided (problems, case studies).
GRADING | PERCENTAGES |
Contributions to Class Discussion | 10% |
Problem Sets / Case Studies | 45% |
Final Examination | 45% |
Assignments (problem sets, case studies) may be done in groups of two or three unless otherwise stated, and are intended to help you learn and practice the mechanics of the course material. Nevertheless, the work you turn in must be your own and not copied from another. They need to be returned in class. Late assignments will not be accepted.
Lecture Schedule:
LEC # | DATE | TOPICS | ASSIGNMENTS |
1 | Introduction, Overview of the Course and the Role of Taxes in Business | Read: 1, 2 | |
4/25/11 | Prep: Ch. 1: E 2, 4; Ch. 2: E 1 | ||
2 | A Framework For Tax Planning | Read: 3 | |
4/28/11 | Prep: E1-3, TPP 1 | ||
3 | Implicit Taxes, Tax Clienteles, and Tax Arbitrage | Read: 5. | |
5/2/11 | Prep: E 4-8 | ||
4 | Choice of Organizational Form | Read: 4 | |
Prep: E 1-2, 4; TPP 1, 8 | |||
5/5/11 | Turn in Problem Set 1 | ||
5 | Non Tax Costs | Read: 6 | |
5/9/11 | Prep: E 1, 3-4 TPP 1-2 | ||
6 | Marginal Tax Rates | Read: 7 | |
5/12/11 | Prep: E 1, 3 TPP 2-4 | ||
7 | Compensation | Read:8 (skim 9) | |
5/16/11 | Prep: Ch. 8: E 1, 5 TPP 2, 4 | ||
8 | Corporate Formation | Read: 12 (291 - 306) | |
Prep: DQ 4, 5, 7 | |||
5/19/11 | Turn in Problem Set 2 | ||
9 | Capital Structure | Read: 12 | |
Prep: DQ 9, E 5 | |||
5/23/11 | Case Study: Seagram & DuPont | ||
10 | International | Read: 10 | |
5/26/11 | Prep: E 1, 3, TPP 1, 3 | ||
11 | International | Read: 11 | |
5/30/11 | Prep: E 1, TPP 2 | ||
12 | International | Case: Eli Lilly (CP) | |
6/2/11 | Turn in Eli Lilly (CP) | ||
13 | International | Case: Whelan Pharmaceuticals | |
6/6/11 | Read: Global Electronic Commerce (CP) | ||
14 | Taxable Acquisitions | Read: 13 | |
6/9/11 | Prep: DQ 3, 10, 12 | ||
15 | Taxable Acquisitions | Read: 14 | |
6/13/11 | Prep: DQ 2 - 4; TPP 1 | ||
16 | Tax-Free Acquisitions | Read: Read: 16 (471 - 487) | |
Prep: DQ 6-8 | |||
6/16/11 | Practice Problem Set 3 | ||
17 | Tax-Free Acquisitions | Read: 16 | |
6/20/11 | Prep: TP2 | ||
18 | Final Exam | ||
6/23/11 |