Ready for Reform

Finance chiefs want taxes to be simpler, and lower.

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.”

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