Tax Arbitrage

Posted in Finance, Accounting and Economics Terms, Total Reads: 358
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Definition: Tax Arbitrage

The technique of making profit from differences between the ways transactions are considered for the tax purposes. The complexity of tax calculation often drives individuals to structure their transactions in the most advantageous way. This will give them incentive of paying the least amount of tax. Some of these forms are legal while others are illegal.


Example

Individual taxpayers invest their saving in tax-preferred investments e.g. Tax-exempt interest or corporate stock on which capital gains could be deferred from taxation. Similarly, corporations make investment in low-tax countries.


Other examples include borrowing to purchase housing, consumer durables, pension assets, and IRAs, state and local bonds, as well as real estate and corporate stock for which special treatment or exclusions are provided for capital gains.


Example of the Businesses who are involved in the tax arbitrage are

• When Businesses borrow to buy a stock

• In case of merger

• When businesses engage in leverage buyout of another company

 

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