Discuss to what extent the existence of corporate and personal taxes Essay - 1

Discuss to what extent the existence of corporate and personal taxes could affect companies' dividend policy and capital structure decisions - Essay Example Dividends could be said to be the reward for the shareholders' participation in contributions towards the corpus of company and its management. The dividend policy plays a crucial role in the financial operations of corporate in the UK because it is closely dependent on current profits and also future profitability of the entity. As per law, Companies could distribute dividends, only out of earnings or reserves of the Company, since otherwise; it would amount to paying back its own capital to the shareholders. Thus, a Company could only distribute dividends out of its accumulated profits and free reserves available for such distribution: It may choose not to pay any dividend and may retain its earnings for future plans, the Company's decision not to pay dividends may stem from the need for maintaining reserves for market expansions, need to buy back shares at later date, building funds for heavy investments projects, programmes, etc. It may decide to pay minimum dividends out of its retained earnings, keeping the long term prospects of the Company in view, with the optimistic view that in future years, it would be able to maintain or increase, the level of profitability, and thus its rate of dividend. This is because a falling rate of dividend may discourage potential investors and they may become circumspect about investing in such companies. This would have detrimental consequences on the company's market image. The Company's operations are such that it is in a strong position to regularly pay high rates of dividends, even quarterly basis, in terms of a strong market position and market realisations. Moreover, because of reputation and goodwill gained by the Company, it is also able to attract outside investors for future growth plans and expansion, and it need not depend entirely on the present earnings and Capital reserves at its disposal. It would not be wrong to say that dividend policies, besides the tax element, is also dependent upon available of consistent profits and dividend yielding assets Role of Taxation in determination of dividend policies: Taxation plays an important role in the determination of dividends because of the following reasons: Incidence of double taxation, especially in developed countries. Capital gains being subject to a lower rate of taxation than