Income Tax Planning as a Tool for Achieving Financial Stability

Abstract

Increasing the efficiency of a company and its financial stability involves reducing costs, including reducing the amount of taxes paid. One of the legal methods of the latter is tax planning. The study aims to demonstrate the dependence of tax planning on financial stability indicators of an enterprise. The study found that the net income indicator is a statistically significant regressor of financial stability indicators - return on net assets and return on equity. The assumption of statistical significance of income tax as a regressor of return on assets, return on net assets, and return on equity was also confirmed. Modelling the use of tax planning has shown that it has a positive and statistically significant impact on financial stability. The study results showed that reducing the income tax to zero increases the profitability of net assets and return on equity. Depending on the income tax rate, pre-tax income, value of assets, equity, and reserves, the effect of tax planning may increase. The methodological limitation of the study consists in the set of financial stability indicators, which are analyzed in the context of profitability. The focus on profitability, which in the study is the core of the proposed tools, is because its high level provides long-term competitive advantages of a company and the formation of its own financial reserves for technical re-equipment, modernization, and technological development. All this ensures a company's attractiveness for creditors and investors, stability, free disposal of financial resources, and permanent solvency, which enhances financial stability. The study considered income tax planning, for this reason the author chose indicators that depend on this tax. The study considers tax planning only for corporate income tax. The effect of tax planning was considered only in the absence of profit tax paid.