Talk of taxes has dominated the air-waves for months now, as state and federal budget battles rage on and pundits wag their fingers at General Electric for its nonexistent tax bill. Amid the din, the outlook for genuine reform looks promising (see "Fit to Be Tied," May), or at least possible. Given that corporate taxation is a topic that has long been near — though hardly dear — to CFOs' hearts, this quarter's Deep Dive Survey probes finance chiefs' views on this hot-button issue.
Not surprisingly, almost half of the nearly 200 finance chiefs we surveyed say the corporate tax system in the United States has some flaws and needs some reforms, with another 39% contending that the system is seriously flawed and needs a complete overhaul. Twelve percent say the system works very well.
Finance chiefs take exception both to the overall corporate tax rate and to the complexity of the code. On average, they consider 23% to be a reasonable tax on corporate profits, versus the going rate of 35%.
While many large multinationals, like GE, have the in-house expertise needed to drive their effective rates much lower, smaller and midsize businesses are much more limited in their ability to do so, says Norm Kocol, CFO at Mapes & Sprowl Steel, a steel processor based in Illinois. "Midmarket companies do not have access to the expertise or the resources, or they don't have some of the special joint ventures [abroad] that get established to move product or revenue around," thereby reducing the effective rate, he says.
There is one aspect of the tax code on which there is equal agreement: that taxation is inequitable. Sixty-seven percent of companies with revenues under $50 million, for example, say there is an imbalance in the effective tax rates paid by large companies and small companies. Among respondents with revenue between $50 million and $100 million, that figure rises to 82%. Even among finance chiefs at large companies, with more than $5 billion in revenue, 69% say the playing field is skewed.
A Matter of Influence
Paul Reitz, finance chief at tire-and-wheel manufacturer Titan, says that as a U.S.-based manufacturer, "there's no way we could reduce our rate to anywhere near GE's." He expects Titan's effective tax rate for 2010 to be in the high 30% range. However, Reitz adds, "as we expand globally, we'll be able to reduce our overall corporate rate."
Managing tax not only takes up finance executives' time — about 14% of it on average, according to survey respondents, although some CFOs report spending as much as 50% of their working hours on tax issues — but also affects corporate decision making. While few finance executives say they make decisions solely based on tax considerations, 60% say the tax rate affects decisions somewhat, and 17% say it affects them a lot. For his part, Kocol assigns tax issues a "10% to 20% weight factor in final decisions."
Reitz says tax concerns used to play less of a role at Titan, as the rate was something he and his fellow executives "just accepted" and didn't spend much time thinking about. Now, however, "as we go forward on a global basis, the effective tax rates where we source our product and where we produce our product will impact all of our decisions," he says.
At Consolidated Graphics, finance chief Jon Biro says the company is fortunate in its relative insulation from foreign competitors in lower-tax regimes, given that commercial printing is a fairly local business. Still, like Reitz, Biro says tax issues play a major role in decisions about where the $1.1 billion company will expand overseas. "We definitely think about the tax rate we could have to deal with if we expanded in certain jurisdictions," he says.
Bonus depreciation — the ability to deduct 100% of the firm's capital investments in the United States before 2012 and 50% thereafter — has also been a big issue for Consolidated Graphics, and one that will affect the timing of its capital expenditures. "We may pull forward some investments to take advantage of that [program] as it nears expiration," Biro says.
Don't Forget the States
Finance chiefs struggle with federal and state tax requirements nearly equally — 50% say they find federal tax compliance the most challenging, while 49% say state tax regimes are worse. Kocol, whose employee-owned company is exempt from federal taxes, says franchise tax concerns and nexus issues pose the biggest problems for Mapes & Sprowl at the state level.
With many jurisdictions trying to expand the definition of what constitutes nexus, or a taxable presence in their state, finance chiefs are finding that they need to file in many more places. "The annual return package my accountants prepared used to be a quarter of an inch thick," says Kocol. "Today, because of all the states that are claiming nexus, it's more than two inches thick."
Biro is spearheading an effort to ensure tax compliance in the 27 states where Consolidated Graphics does business, working with outside auditors to carefully document all of the company's tax positions. "Our belief is that the states, as well as local governments, are going to be a lot more aggressive in finding new sources of revenue," he says. "So we are focused on making sure we are doing everything on the straight and narrow" (see "State Insecurity," April).
Biro's fellow finance chiefs are also leaning heavily on outside advisers for help managing their tax obligations; 85% of them rely on external tax assistance. Half of all survey respondents spend more money today on tax help than they did five years ago, while only 6% spend less. And 48% expect to spend more over the next five years.
For now, finance chiefs are waiting to learn whether any of the hotly debated changes to the tax code will materialize. Until then, they need the help. Indeed, says Kocol, "I don't see how anyone can manage tax themselves in today's environment, with the need for current knowledge, the complexity, and the fact that you have to focus on running the business as opposed to filing tax returns."
Kate O'Sullivan is a deputy editor at CFO.