Executive Planning Tax Rate Under 3% Says U.S. Code Hurts

The treasurer of a U.S. company that is projecting a global tax rate of less than 3 percent this year said the country’s tax system makes it difficult to compete in overseas markets.

Anthony Smith of Thermo Fisher Scientific Inc. told the Senate Finance Committee on Tuesday that the U.S. needs to lower the 35 percent corporate tax rate and make it easier for U.S. companies to bring profits home.

Thermo Fisher, which makes laboratory equipment, reported a 9.2 percent tax rate for 2014 and hasn’t reported a tax rate above 12 percent since 2008, according to securities filings.

Still, he said, the potential for owing taxes upon repatriation means that having a U.S. headquarters can be a disadvantage in competing with companies around the world.

“Thermo Fisher has been outbid several times in the competition for strategic acquisitions,” Smith said.

For its own planning and for investors, Thermo Fisher doesn’t use the accounting definition of tax rate, which includes both current and deferred taxes. Instead, he said, the company looks more at the taxes it pays in cash each year.

By that measure, he said, Thermo Fisher pays about 30 percent in the U.S. and 15 percent to 20 percent outside the country, with its income about evenly divided between domestic and foreign sources.

Adjusted Rate

The accounting measure that yields the 3 percent rate is affected by acquisitions and other transactions, Ron O’Brien, a company spokesman, said in an e-mail. The company also provides an adjusted tax rate for investors that it says is more meaningful. That rate was 14.5 percent last year and is projected to be about 14 percent this year, O’Brien said.

The gap between the rate that Thermo Fisher reports for accounting purposes and what it uses for investors is an example of the difficulty policy makers face in implementing tax changes, because differences in methodology can make it hard to tell exactly how much tax U.S. companies are paying.

Smith’s testimony came as lawmakers continue debating how to revamp the U.S. international tax system.

Under current law, U.S. companies owe the full 35 percent tax rate on income they earn around the world. They receive tax credits for payments to foreign governments and don’t have to pay the residual U.S. tax until they bring the money home.

That system encourages U.S.-based companies to book profits in low-tax countries and leave them there.

‘Significant Activities’

Thermo Fisher, for example, has “significant activities in Singapore and has received considerable tax incentives,” according to its most recent annual report.

Smith said Thermo Fisher, based in Waltham, Massachusetts, borrows money instead of repatriating its foreign profits.

He said a revamped tax system should lower the corporate tax rate to between 25 and 30 percent and retain breaks for domestic manufacturing and research in the U.S.

Other benefits of being in the U.S., he said, mean that the U.S. doesn’t need to match other countries’ lower rates.

As a trade-off, Smith said the U.S. should eliminate last-in, first-out accounting rules and accelerated depreciation.

Lawmakers are divided on international taxes.

Republicans favor a system that would let companies repatriate foreign income with little or no U.S. taxes.

‘Legal Walls’

“If we want companies to remain in the U.S., or to incorporate here to begin with, we should not build figurative or legal walls around America,” said Senator Orrin Hatch of Utah, chairman of the Finance Committee. “We should fix our broken tax code.”

The Obama administration, by contrast, wants to impose a 19 percent minimum tax on U.S. companies’ foreign income.

Senator Charles Schumer, a New York Democrat, asked whether the U.S. should consider lower taxes on income generated from intellectual property, as other countries have done.

“The rest of the world has already acted; we sit around talking in theory about tax reform,” he said. “It’s a game of Hungry Hungry Hippos and we’re sitting on our hands and other countries are gobbling up the field.”

Before it's here, it's on the Bloomberg Terminal.