CFO MATTERS: TAX PERSPECTIVES SURVEY HIGHLIGHTS ALVAREZ & MARSAL TAXAND
Contents Executive Summary 1 Survey Methodology and Demographics 2 Results and Analysis 3-8 Contact Us 9
EXECUTIVE SUMMARY While the contentious debate over what proper tax reform should look like drags on, there is no question about what is most important to the industry. For companies to plan, to invest, to create jobs and to grow, they must have certainty. In fact, confidence in knowing precisely what the tax code will require has become more important than how much it will cost them. As our research reveals, as long as proposed changes remain up in the air, companies will be forced to continue to burn fuel operating in holding patterns rather than charting productive courses forward. Amidst political, economic and regulatory change, CFOs say certainty in the tax code has become even more important than a reduction in corporate tax rates, according to a new survey conducted by Alvarez & Marsal Taxand (A&M). A&M Taxand directly reached out to more than 800 financial executives across the U.S. to solicit their perspectives and priorities with respect to tax competitiveness and tax reform. While CFOs generally believe tax rates should be reduced to ensure the U.S. remains competitive in an increasingly global economy, when given the opportunity to eliminate or significantly change one aspect of the tax code, most chose to increase certainty in the tax system. The vast majority also said that tax considerations have a direct impact on their business decisions. They named Texas, Florida and Nevada as the most tax competitive states and California, New Jersey and New York as the least competitive states in which to operate. The following survey highlights tax issues that are top of mind to today s U.S. corporate financial leaders. Robert N. Lowe CEO, Alvarez & Marsal Taxand Alvarez & Marsal Taxand would like to thank The Financial Executives Networking Group (FENG) and its members for participating in this survey. CFO MATTERS: TAX PERSPECTIVES SURVEY 1
SURVEY METHODOLOGY AND DEMOGRAPHICS A&M Taxand directly reached out to more than 800 financial executives across the U.S. to understand their perspectives on tax competitiveness, tax department issues and tax reform. A&M Taxand directly reached out to more than 800 financial executives and shared the survey with the members of The Financial Executives Networking Group (FENG). The survey was also promoted in our weekly newsletter (Tax Advisor Weekly), as well as on www.alvarezandmarsal.com. A&M Taxand received 302 responses. For the purposes of classification in this survey, businesses with less than $1 billion in annual revenue are categorized as small, and those with more than $1 billion in annual revenue are categorized as large. The respondents to this survey were privately owned companies (51%), public and private equity owned (49%). Businesses with annual revenues of less than $1 billion comprise 74% of the respondents. Demographics of Respondents 2011 Revenue Percent Industry Percent HQ Location Percent < $1 billion 74.00 > $1 billion 26.00 Grand Total 100.00 Energy 4.71 Financial Services 16.84 Healthcare 6.40 High Tech 12.46 Texas 12 California 11 New York 10 New Jersey 7 Ownership Percent Manufacturing 25.25 Massachusetts 7 Closely Held 51.34 Equity Owned 20.47 Public 28.19 Grand Total 100.00 Tax Professionals Percent < 5 86.94 5-10 8.93 10-25 1.37 > 25 2.75 Grand Total 100.00 Other 20.20 Services 11.78 Transportation 2.36 Grand Total 100.00 Employees Percent < 500 58.84 500-1,000 8.50 1,000-10,000 21.77 > 10,000 10.88 Grand Total 100.00 Illinois 5 Pennsylvania 4 North Carolina 4 Florida 3 Connecticut 3 Georgia 3 Delaware 2 Virginia 2 Minnesota 2 Ohio 2 Other U.S. 14 International 7 2 ALVAREZ & MARSAL TAXAND
RESULTS AND ANALYSIS Q What effective tax rate would make the U.S. Federal corporate rate competitive with foreign income tax rates? Large Business 17% 7% 2% 5% 18% Financial executives from both large and small companies view an effective tax rate of 20%-25% as necessary to make the U.S. federal corporate rate competitive with global tax rates, while a significant percentage of small businesses, with generally a higher percentage of domestic income, view an even lower rate 15%-20% as necessary. 51% 30-35% 25-30% 20-25% 15-20% 10-15% <10% The view among CFOs is that we have sat here for the last 20 years and have watched other countries lower their top corporate tax rates while we have done nothing thus, impacting our ability to compete effectively in a global economy. Aligning our corporate tax system with the rest of the developed world should enable U.S.-based companies to compete effectively on a global scale and create more business opportunities in the United States. Ernesto R. Perez Transaction Tax and International Tax Small Business 28% 15% 7% 34% 16% 30-35% 25-30% 20-25% 15-20% 10-15% 51% of large company CFOs believe a U.S. effective tax rate of between 20%-25% is necessary to allow the U.S. federal tax rate to be competitive with foreign corporate tax rates. Small company CFOs also most often choose the 20%-25% range as the rate required to make the U.S. rate competitive (34%); however, a slightly smaller percentage (28%) believe the rate needs to be even lower, 15%-20%, to make the U.S. competitive. CFO MATTERS: TAX PERSPECTIVES SURVEY 3
RESULTS AND ANALYSIS Large and Small Businesses 9% Q If you could eliminate or significantly change one aspect of the current tax code, what would it be? 34% 20% 37% Eliminate uncertainty Reduce rates and adopt territorial system Reduce rates and eliminate incentives / credits Other While our survey indicates that financial executives believe the U.S. tax rate needs to be reduced to be globally competitive, CFOs would rather have certainty within the tax system as opposed to a reduction in rates. Does this suggest that companies can overcome the complexity and high tax rates of the U.S. tax system and still be competitive? When given the opportunity to eliminate or significantly change one aspect of the current tax code, CFOs most frequently choose to eliminate uncertainty related to tax situations. This response is interesting, given that it tops a reduction in tax rates coupled with an elimination of incentives and credits. It isn t surprising that certainty ranks so high with CFOs. Significant volatility or unexpected bumps in EPS can be traced to the impact of income taxes. This volatility is more pronounced than ever due in large part to the impact of ASC 740. CFOs are also keenly aware that restatements are often caused by material weaknesses in the area of income taxes. I believe that some of our respondents must think that if the U.S. tax code was built on a bedrock of stability and certainty, then weaknesses in tax internal controls would be greatly diminished. James M. Eberle Federal Tax and Research Credits and Incentives 4 ALVAREZ & MARSAL TAXAND
RESULTS AND ANALYSIS Q To what extent do tax considerations influence your global business decisions? Large Business 8% The tax implications of business decisions are consistently considered by businesses of all sizes. As businesses grow in complexity and increase their global reach, tax increasingly impacts decision making as financial executives give tax greater consideration. Companies with greater complexity and global reach have more opportunities to include tax favorable jurisdictions in their operations; generally have greater pressure to reduce their effective tax rates; and have more tax resources to develop and maintain complex tax structures. 44% Small Business 23% 26% 48% Major consideration Minor consideration Not a consideration These results show that it isn t whether companies are influenced by their tax cost, but rather the degree to which taxes impact business choices. Whether it s hiring, relocation, expansion incentives, or the tax implications of improvements in the organization, companies clearly look at all the aspects of tax cost when making decisions on where to do business. These results confirm that larger companies view the impact of tax as a significant or major driver of their business decisions. Carolyn Shantz Sales and Use Tax 51% Major consideration Minor consideration Not a consideration 92% of large companies consider tax implications in global business decisions; 48% give tax major consideration. In contrast, only 77% of small companies consider tax implications, with major consideration given by just 26%. CFO MATTERS: TAX PERSPECTIVES SURVEY 5
RESULTS AND ANALYSIS Q Which states do you view as most competitive from a tax perspective? (Listed in order of most competitive to least competitive) CFOs name Texas, Florida and Nevada among the most competitive states in which to operate from a tax perspective, while California, New York and New Jersey are viewed as the least competitive states. While many factors may play into financial executives perception of state competitiveness, the states generally viewed as having complex tax systems and high tax rates are the three states listed (by a wide margin) as the least competitive states. The states regarded as most competitive generally have some form of tax exclusion or non-income based tax systems. With the states at each end of the spectrum, it will be interesting to see if they modify their tax systems in an aggressive attempt to retain existing contracts and attract new business. When companies look to relocate corporate functions or expand operations, initial credits and incentives may be the most relevant factor from a tax perspective; although, the ongoing tax burden must be considered. Watch for proposals that are positioned as probusiness such as lowering statutory tax rates or modifying state apportionment formulas to favor in-state businesses. Don Roveto State and Local Tax 6 ALVAREZ & MARSAL TAXAND
RESULTS AND ANALYSIS Q Which of the following areas creates the greatest risk for your company? Large Business 18% 2% Financial executives of large, global businesses view compliance efforts as their biggest risk, specifically when it comes to coordination of global compliance and transfer pricing. For small businesses, the compliance function and resultant review by taxing jurisdictions (external tax audits and global compliance) are viewed as the greatest risks. 10% 32% 30% 8% Transfer pricing Tax audits Global compliance ASC 740-10-25 Accounting for income taxes Other Interestingly, tax examinations concern small companies to a much greater degree than large companies. This contrasting view is likely caused by the attention paid to tax and the availability of tax resources. As companies grow, do business in multiple jurisdictions, and leverage both internal and external tax resources to develop more sophisticated tax structures, CFOs gain greater awareness and understanding of the tax positions that their companies are taking. This understanding seems to translate into confidence. Smaller company CFOs don t seem to have this same level of confidence, suggesting that they may need to spend more time talking with their tax resources. Robert Filip Federal Tax Small Business 10% 15% 23% 3% 20% 29% Transfer pricing Tax audits Global compliance ASC 740-10-25 Accounting for income taxes Other Global compliance is viewed as the area of greatest risk by large company CFOs, while tax examinations are viewed as the greatest risk for small companies. CFO MATTERS: TAX PERSPECTIVES SURVEY 7
RESULTS AND ANALYSIS Large Business 17% 30% Small Business 1% 24% 15% 29% Yes No Reform likely, but dependent on 2012 election No Reform unlikely in planning horizon No Other Q In the past two years, members of Congress and the Obama administration have made numerous fundamental corporate tax reform proposals. Do you actively model the effects of these various proposals on your company? The lack of faith in legislative direction and action leads financial executives to slow efforts to determine the impact of potential proposals. Does this response support the view that gridlock is good for business or that greater clarity and leadership by government is required to get business behind tax legislation and reform? 23% 39% 22% Yes No Reform likely, but dependent on 2012 election No Reform unlikely in planning horizon No Other No (blank) This response underscores the value executives place on certainty, and emphasizes the hesitancy to take action in the face of obstacles to legislative reform. Even though the reforms under discussion are by any measure fundamental, the impact of these reforms is clearly judged to be too speculative, especially in the face of other more immediate pressures. Concern about the lack of certainty in the current tax system is visible in the way financial executives respond to proposed tax legislation. Only 29% of large companies model the impact of tax proposals, while just 15% of small companies do. Kent Wisner International Tax 8 ALVAREZ & MARSAL TAXAND
CONTACT US Robert N. Lowe CEO, Alvarez & Marsal Taxand blowe@alvarezandmarsal.com Thomas Aiello Federal Tax and State and Local Tax taiello@alvarezandmarsal.com Brian Cumberland Compensation and Benefits bcumberland@alvarezandmarsal.com James M. Eberle Federal Tax and Research Credits and Incentives jeberle@alvarezandmarsal.com Alan Kirschenbaum Business Development and Operations akirschenbaum@alvarezandmarsal.com Ernesto R. Perez Transaction Tax and International Tax eperez@alvarezandmarsal.com Don Roveto State and Local Tax droveto@alvarezandmarsal.com Laurie Dicker Transfer Pricing ldicker@alvarezandmarsal.com Robert Filip Federal Tax rfilip@alvarezandmarsal.com Kathleen King Research Credits and Incentives kking@alvarezandmarsal.com Carolyn Shantz Sales and Use Tax cshantz@alvarezandmarsal.com Kent Wisner International Tax kwisner@alvarezandmarsal.com For complete survey results, please contact us to arrange a private consultation.
About Alvarez & Marsal Taxand Alvarez & Marsal Taxand, LLC, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M s commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London. Alvarez & Marsal Taxand is a founder of Taxand, the world s largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business. To learn more, visit www.alvarezandmarsal.com or www.taxand.com. ALVAREZ & MARSAL, and A&M are registered trademarks of Alvarez & Marsal Holdings, LLC. Copyright 2012 Alvarez & Marsal Holdings, LLC. All Rights Reserved. www.alvarezandmarsal.com