Chapter 8
Integrating Tax and Regulatory Policies with the Pricing Strategy
A fine is a tax for doing something wrong. A tax is a fine for doing something right.
—Unknown
When companies set out to improve their pricing and profitability management, their view often extends to only pre-tax income, even though focusing on after-tax income would enable them to keep more of the profits they generate. These companies fail to investigate the regulatory costs and potential tax consequences, both direct and indirect, tied to prospective sales. Why does this happen? The most obvious reasons include lack of expertise and poorly designed policies; for example, compensatory schemes that reward personnel based on pre-tax calculations (i.e., earnings before taxes [EBT]).
A professional services firm learned how costly it can be to price a consulting engagement without first evaluating the tax implications of the workflows being provided. The firm's Southeast Asian subsidiary provided computer programming support in conjunction with services rendered by a second subsidiary that resided in a nearby country. Ultimately, the second business unit became responsible for making the final deliverable to the client. This is where problems arose. The services firm hadn't realized it was creating a nonrecoverable value-added tax (VAT) liability by the way it structured the delivery of service. The charge assessed to the second subsidiary represented more than 10 percent of the fees earned for the programming ...
