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Corning Feature: How Taxes Impacted Corning’s 2011 Results

April 2012
When Corning released its 2011 earnings summary, many noticed that while revenue was up, earnings were down, in part due to taxes.

In the following Q&A, Corning’s vice president of Tax, Susan Ford, answers some questions about how taxes impacted Corning’s 2011 results. She discusses: how Corning’s tax rate can change based on what percentage of income is earned in different countries;  why Corning’s tax rate changes over time; what she expects to happen going forward;  what Corning is doing to help ensure its global competitiveness; and how taxes impact business decisions.

Corning management has said that our tax rate continues to go up. Why is this happening?
Corning does business all over the world and different tax rates apply in each country where we earn income. Our overall tax rate increases if we earn a larger portion of our income in higher tax jurisdictions. For example, if we earn $150, in which $50 is earned at a 40 percent tax rate and $100 is earned at a 10 percent tax rate, our overall tax rate is 20 percent. If our markets switch and instead we earn $50 at a 10 percent tax rate and $100 at a 40 percent tax rate, then our overall tax rate increases to 30 percent. Based on this example, even though our total income of $150 did not change, our overall tax rate went up. This means we ultimately received less profit from the same amount of sales. This is an example of what happened to Corning in 2011. We call this distribution of income in different countries the “mix.” Depending on the mix, our tax rate can increase or decrease despite having earned the same amount of total income. As our income grows in the U.S. and China, where tax rates are higher, our overall tax rate increases.

Was our tax rate inordinately low in the past? Did we pay all the taxes we should have, given tax laws over recent years?
Corning always complies with all tax laws in countries where we do business. Our tax rate was low in the past for various reasons. One is the “mix” reason I just described. During the telecom crash in the early and mid-2000s, we suffered significant losses in the U.S., which has a relatively high tax rate of 38 percent. Income in high jurisdictions drives the overall tax rate higher, but losses in high jurisdictions drive the overall rate lower. So our losses in the U.S., due to the telecom crash, drove our historical rate lower. Additionally, many countries –particularly in Asia – offer tax incentives to encourage foreign investment. This has been true for us in China, Taiwan, and Korea. This is another reason why our overall tax rate has been low but is increasing: the tax incentives we have previously enjoyed in these countries are expiring.

How do we expect our tax rate to change in the future?
In general, as long as our profit growth is in higher tax jurisdictions, it is likely we will continue to see our overall tax rate rise. However, we will continue to pursue available incentives to keep our tax expense as low as possible. Changes in tax laws are unknown variables for us. Governments are running deficits and many are increasing taxes in an effort to balance their budgets. This could also drive our rate higher.

How does Corning interact with the government on tax issues?
One of the tax group’s most important initiatives is to educate government officials on the negative impact that higher overall taxes can have on our global competitiveness. Given that the U.S. corporate tax rate is one of the highest in the world, our competitors in countries with lower taxes enjoy an economic advantage over us. By paying less tax to their governments, they may have more to invest in growth.

Do tax rates influence our business decisions?
In general, Corning does consider tax implications when making business decisions. The availability of tax holidays and incentives can impact a business decision such as where we may locate a manufacturing plant. However, tax rates are just one piece of any business analysis and must be considered in conjunction with all of the other quantitative and qualitative factors including other costs of doing business, the commercial benefits of a particular location, as well as the potential economic, geographic or political risks associated with that location.

Related links:
> Corning Announces Fourth-Quarter and Full-Year Results

Forward-Looking and Cautionary Statements
This article contains “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995), which are based on current expectations and assumptions about Corning’s financial results and business operations, that involve substantial risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include: the effect of global political, economic and business conditions; conditions in the financial and credit markets; currency fluctuations; tax rates; product demand and industry capacity; competition; reliance on a concentrated customer base; manufacturing efficiencies; cost reductions; availability of critical components and materials; new product commercialization; pricing fluctuations and changes in the mix of sales between premium and non-premium products; new plant start-up or restructuring costs; possible disruption in commercial activities due to terrorist activity, armed conflict, political or financial instability, natural disasters, adverse weather conditions, or major health concerns; adequacy of insurance; equity company activities; acquisition and divestiture activities; the level of excess or obsolete inventory; the rate of technology change; the ability to enforce patents; product and components performance issues; retention of key personnel; stock price fluctuations; and adverse litigation or regulatory developments. These and other risk factors are detailed in Corning’s filings with the Securities and Exchange Commission. Forward-looking statements speak only as of the day that they are made, and Corning undertakes no obligation to update them in light of new information or future events.