Savant
- 1. SAVANT By: Ms. Surti Asst. prof. ITM-SOB
- 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.
- 4. SAVANT Framework: A Transactions Approach to Tax Management Strategy Anticipation Value- Adding Negotiating Transforming
- 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.