oversight

Tax Administration: Foreign- and U.S.-Controlled Corporations That Did Not Pay U.S. Income Taxes, 1989-95

Published by the Government Accountability Office on 1999-03-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States General Accounting Office

GAO             Report to the Honorable Byron L.
                Dorgan, U.S. Senate



March 1999
                TAX
                ADMINISTRATION
                Foreign- and U.S.-
                Controlled
                Corporations That Did
                Not Pay U.S. Income
                Taxes, 1989-95




GAO/GGD-99-39
GAO                United States
                   General Accounting Office
                   Washington, D.C. 20548

                   General Government Division



                   B-281098

                   March 23, 1999

                   The Honorable Byron L. Dorgan
                   United States Senate

                   Dear Senator Dorgan:

                   Based on your long-standing concerns about whether foreign-controlled
                   corporations (FCC) are abusing transfer prices and not paying income tax,
                   you asked us to update our 1995 work on the nonpayment of U.S. income
                                                                              1
                   taxes by FCCs and U.S.-controlled corporations (USCC). This report
                   provides (1) comparisons of the percentages of FCCs and USCCs that filed
                   income tax returns showing no tax liabilities for 1989 through 1995, the
                   latest years for which data were available, and (2) comparisons of selected
                   characteristics, including age, industrial sector, and certain cost ratios, of
                   large corporations—those with assets of $250 million or more or gross
                   receipts of $50 million or more.

                   Our 1995 report and studies by others have suggested that differences in
                   characteristics between FCCs and USCCs may partially explain the
                   difference in their profitability. As in our 1995 report, we focused most of
                   our work on large corporations because large FCCs accounted for more
                   than 80 percent of the assets owned and gross receipts generated by
                   nontaxpaying FCCs.

                   The data on taxes paid were obtained from corporate tax returns, as filed,
                   and did not reflect IRS audit results or any net operating loss carrybacks
                   from future years. We did not attempt to determine whether the
                   corporations were abusing transfer prices. As agreed with your office, we
                   plan to conduct a separate review of advance pricing agreements, one of
                   the approaches the Internal Revenue Service (IRS) uses to resolve transfer
                   pricing disputes.

                   In each year between 1989 and 1995, a majority of corporations, both
Results in Brief   foreign- and U.S.-controlled, paid no U.S. income tax. Among large
                   corporations, the percentage of FCCs that paid no tax exceeded that for
                   USCCs from 1989 through 1993. In 1994, the difference between the two
                   groups was not statistically significant, and in 1995, the percentage of large
                   1
                    For purposes of this report, a corporation is an FCC if foreign individuals or entities own at least 50
                   percent of its voting stock. Transfer prices are prices used in transactions between affiliated
                   corporations. Our previous related reports are: International Taxation: Transfer Pricing and
                   Information on Nonpayment of Tax (GAO/GGD-95-101, Apr. 13, 1995) and International Taxation:
                   Taxes of Foreign- and U.S.-Controlled Corporations (GAO/GGD-93-112FS, June 11, 1993).




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             FCCs that paid no U.S. income tax was slightly less than that of large
             USCCs. However, there are other ways to compare FCCs and USCCs. For
             example, in 1995, large FCCs paid $8.31 of tax per $1,000 in gross receipts,
             significantly less than the $15.58 paid by large USCCs.

             Differences in the characteristics of large FCCs and USCCs may account
             for part of the differences in the amount of taxes paid by the two groups.
             One difference was the percentage of new corporations—those 3 years old
             or less—in each group. The IRS data we reviewed indicate that newer
             corporations were less likely than older corporations to pay taxes. From
             1989 to 1993, a greater percentage of large FCCs than large USCCs were
             new, but from 1994 to 1995, a greater percentage of large USCCs than large
             FCCs were new.

             Another significant difference between large FCCs and large USCCs was in
             their distribution across industrial sectors. In 1995, in comparison to large
             USCCs, large FCCs were more heavily concentrated in the manufacturing
             and wholesale trade sectors and less concentrated in the financial services
             sector. Aggregate ratios of costs to receipts for all large corporations
             differed significantly across industrial sectors. The difference in cost ratios
             across industries, combined with the fact that large FCCs and USCCs were
             concentrated in different industries, could account for some of the
             difference in the amount of taxes that large FCCs paid per dollar of
             receipts and that large USCCs paid. The ratio of taxable income per dollar
             of receipts should be inversely related to the ratio of costs per dollar of
             receipts.

             According to IRS data, about 60,000 FCCs and about 2.3 million USCCs
Background                                        2
             filed income tax returns in 1995. FCCs and USCCs may not pay U.S.
             income tax for a variety of reasons. For instance, some corporations may
             have zero tax liabilities because of current-year operating losses; losses
             carried forward from preceding tax years; or sufficient tax credits
             available to offset tax liabilities. Other corporations may report no taxable
             income because of the improper pricing of intercompany transactions. Any
             company that has a related company with which it transacts business
             needs to establish transfer prices for those intercompany transactions. The
             pricing of intercompany transactions affects the distribution of profits and
             ultimately the taxable income of the companies.



             2
              We excluded from this study’s scope certain entities, such as subchapter S corporations, which are
             corporations that are treated similarly to partnerships for federal income tax purposes.




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              B-281098




              Research efforts have attempted to explain why, on average, USCCs
                                                        3
              appear to be more profitable than FCCs. Some researchers have
              concluded that part of the difference is attributable to differences in the
              characteristics of FCCs and USCCs, while acknowledging that transfer
              price abuses may also explain some of the difference.

              The 1997 study, for example, focused on why FCCs tended to report a
              lower ratio of net income to gross receipts—a measure of profitability—
              than USCCs did. According to this study, differences in investment income,
              industrial classification, age, and amount of interest expense explain much
              of the difference in the profitability between FCCs and USCCs. That study
              also found that corporations whose largest foreign shareholders owned
              only 25 to 50 percent of the corporations’ stock had low profitability,
              which was similar to corporations that were 100-percent owned by a single
              foreign shareholder. The author suggested that, if income-shifting through
              transfer price abuses were an important factor in explaining the
              differences in profitability across corporations, then one would expect
              single shareholder corporations to be less profitable because they would
              seem to have less difficulty in shifting income between affiliates. We were
              unable to identify any studies that were able to control for all potential
              factors, other than transfer price abuse, that may explain the difference in
              profitability.

              To meet our objectives, we obtained data from IRS’ Statistics of Income
Scope and     (SOI) Division on corporate tax returns for 1989 through 1995. We used
Methodology   these data to determine the percentages of corporations that did not pay
              taxes in each year and to obtain information about their characteristics.
              We did not audit the SOI data; however, we conducted reliability tests to
              ensure the consistency of the data with selected FCC and USCC corporate
              statistics published by the SOI Division.

              In this report, we defined a corporation as being large if its reported total
              assets in tax year 1995 were at least $250 million or its reported gross
              receipts totaled at least $50 million. For years preceding tax year 1995, we
              deflated the $250 million asset and $50 million receipt definition of large
              corporate size by the gross domestic product price deflator for those
              years. We made this adjustment in the dollar magnitude of the definition
              because changing price levels, over time, alter the purchasing power of
              gross receipts and assets.
              3
              Harry Grubert, “Another Look at the Low Taxable Income of Foreign-Controlled Companies in the
              United States,” Tax Notes International (Dec. 8, 1997), pp. 1,873-97; and David S. Laster and Robert N.
              McCauley, “Making Sense of the Profits of Foreign Firms in the United States,” Federal Reserve Bank
              of New York Quarterly Review (Summer-Fall 1994).




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                        B-281098




                        Our report also compares “new” and “older” corporations. New
                        corporations are those whose income tax returns showed incorporation
                        dates within 3 years of the tax year date. For example, for tax year 1995,
                        new corporations are those with incorporation dates no earlier than 1993.
                        Other corporations are “older” corporations. A limitation on the precision
                        of our comparison between “new” versus “older” FCCs and USCCs is that
                        the definition of “new” relies on the dates of incorporation indicated on
                        corporate tax returns. In some cases, corporations that merge may also
                        reincorporate under a new corporate name. While the “new” entity may
                        represent the combination of two mature corporations, our definition
                        would count them as one “new” corporation.

                        The SOI data in this report are based on SOI’s probability sample of
                        taxpayer returns and thus are subject to some imprecision owing to
                        sampling variability. Using SOI’s sampling weights, we estimated
                        confidence intervals for the percentage of nontaxpaying FCCs and USCCs
                        for tax years 1989 through 1995.

                        We requested comments on a draft of this report from the Commissioner
                        of Internal Revenue and the Director of the Department of the Treasury’s
                        Office of Tax Analysis. IRS and Treasury’s comments are discussed near
                        the end of this letter. We did our review from July through December 1998
                        in accordance with generally accepted government auditing standards.

                        In each year from 1989 through 1995, a majority of corporations, both
FCCs Were Less Likely   foreign- and U.S.-controlled, paid no U.S. income tax. However, in each of
Than USCCs to Pay       these years, a higher percentage of FCCs than USCCs paid no taxes. The
U.S. Income Tax         percentage of FCCs not paying taxes ranged from 67 percent to 73 percent
                        during those years, while the percentage of USCCs not paying taxes ranged
                        from 59 to 62 percent, as shown in figure 1 and appendix I, table I.1.

                        Large corporations, both FCCs and USCCs, were more likely to pay taxes
                        than smaller corporations. Among large corporations, the percentage of
                        FCCs that paid no tax exceeded that for USCCs from 1989 to 1993.
                        However, in 1994, the difference between the two groups was not
                        statistically significant, and in 1995, the percentage of large FCCs that paid
                        no U.S. income tax was slightly less than that of large USCCs. In 1989, 33
                        percent of large FCCs and 27 percent of large USCCs paid no tax, while in
                        1995, 29 percent of large FCCs and 32 percent of large USCCs paid no tax.
                        (See fig. 1 and app. I, table I.2.)




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                                        B-281098




Figure 1: Trend in the Percentage of
Corporations That Paid No U.S. Income
Taxes, 1989-95




                                        Note: Data presented are based on the number of corporate income tax returns filed with IRS in the
                                        indicated year. Large FCCs or USCCs are those with assets of at least $250 million or gross receipts
                                        of at least $50 million in constant 1995 dollars.
                                        Source: GAO compilation of IRS data.


                                        Although nontaxpaying corporations, both foreign- and U.S.-controlled,
Nontaxpaying                            were the majority of all corporations that filed tax returns in 1995, they
Corporations                            accounted for well under half of all corporate assets and receipts. The 67
Accounted for a                         percent of FCCs that paid no federal income tax in 1995 accounted for 24
                                        percent of the assets and 25 percent of the gross receipts of all FCCs in
Smaller Share of Total                  that year, as shown in figure 2.
Assets and Receipts
Than Taxpaying                          Similarly, the 61 percent of USCCs that paid no U.S. income tax in 1995
Corporations                            accounted for 21 percent of the assets owned by all USCCs and 17 percent
                                        of their receipts. (See also, table I.3. in app. I.)




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                                         B-281098




Figure 2: Nontaxpaying Corporations’
Percentage of Tax Returns, Assets, and
Receipts, 1995




                                         Note: Percentages are the ratio of nontaxpaying FCC or USCC returns filed, total assets, and gross
                                         receipts to all FCC or USCC returns, assets, and receipts.
                                         Source: GAO compilation of IRS data.


                                         Large nontaxpaying FCCs and USCCs filed a small percentage of all
Large Corporations                       returns filed by nontaxpaying corporations, yet they accounted for most of
Accounted for Most of                    the assets of those corporations in 1995. Specifically, large nontaxpaying
the Assets of                            FCCs made up about 2 percent of all nontaxpaying FCCs but accounted for
                                         84 percent of the assets of all nontaxpaying FCCs. Similarly, large
Nontaxpaying FCCs                        nontaxpaying USCCs made up only about four-tenths of 1 percent of
and USCCs                                all nontaxpaying USCCs, yet they accounted for 80 percent of all
                                         nontaxpaying USCC assets. Also in 1995, large nontaxpaying FCCs
                                         accounted for 86 percent of the receipts generated by all nontaxpaying
                                         FCCs, while large nontaxpaying USCCs accounted for 48 percent of the
                                         receipts generated by all nontaxpaying USCCs. (See fig. I.1 in app. I.) The
                                         concentration of assets and receipts in the large nontaxpaying FCCs and
                                         USCCs was similar during the earlier years of our study period. This
                                         concentration was not unique to nontaxpaying corporations; taxpaying
                                         corporations were similarly concentrated.




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                                             Other ways to compare large FCCs and USCCs include examining (1) the
Large FCCs Paid Less                         percentage of large FCCs and USCCs that paid relatively little tax and (2)
Income Tax Relative to                       the taxes paid relative to gross receipts by large corporations, as shown in
Gross Receipts Than                          table 1. In 1995, the percentage of large FCCs and USCCs that paid less
                                             than $100,000 in tax was 42 percent for FCCs and 40 percent for USCCs. In
Large USCCs in 1995                          1995, large FCCs, as a whole, paid significantly less tax per $1,000 in gross
                                             receipts than did large USCCs, despite the fact that a greater percentage of
                                             large USCCs paid no tax. The reason for this is that the large FCCs that
                                             paid relatively little or no tax had significantly greater average gross
                                             receipts than did the large USCCs that paid little or no tax.


Table 1: Profile of Large FCCs and USCCs by Amount of Income Taxes Paid, 1995
                                                                                            Average
                                                    Number of        Percent of Gross receipts Income taxes paid                       Taxes paid per
Distribution by income tax paid                       returns           returns     (millions)      (thousands)                        $1,000 receipts
Large FCCs
                                                                                                                                                         a
 No tax paid                                                 812             29.4                  $408                         0
 $1 or more but less than $100,000                           341             12.3                   172                       $37               $0.22
 $100,000 or more but less than $1 million                   609             22.0                   217                       442                2.04
 $1 million or more                                        1,005             36.3                   873                    11,294               12.94
Total                                                      2,767            100.0                  $506                    $4,204               $8.31
Large USCCs
                                                                                                                                                         a
 No tax paid                                              4,843              31.5                  $176                         0
 $1 or more but less than $100,000                        1,242               8.1                   133                       $40               $0.30
 $100,000 or more but less than $1 million                3,427              22.3                   143                       443                3.09
 $1 million or more                                       5,851              38.1                 1,110                    21,033               18.96
Total                                                    15,363             100.0                  $521                    $8,112              $15.58
                                             Note: Columns may not sum to totals because of rounding.
                                             a
                                                 Data not applicable.
                                             Source: GAO compilation of IRS data.


                                             An earlier study of the relative profitability of FCCs and USCCs suggested
                                             that the lower relative age of FCCs partially explained their lower reported
                                                           4
                                             profitability. That study also showed that the reported profitability of both
                                             FCCs and USCCs varied across industrial sectors.

                                             From 1989 to 1993, a greater percentage of large FCCs than large USCCs
Age Differences                              were new (i.e., incorporated for 3 years or less). However, as shown in
Between Large FCCs                           figure 3, this relationship was reversed for 1994 and 1995, and although not
and USCCs                                    statistically significant, the percentage of new large USCCs exceeded the
                                             percentage of new large FCCs. This change could explain, in part, why the
                                             percentage of nontaxpaying large FCCs declined relative to the percentage
                                             of nontaxpaying large USCCs over the same time period.
                                             4
                                                 Grubert, 1997, p. 1,880 (table 3, cols. 2 and 4) and p. 1,883 (table 6, cols. 1 and 2).




                                             Page 7                                     GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
                                          B-281098




Figure 3: Trend in Percentages of Large
FCCs and USCCs That Are New




                                          Source: GAO compilation of IRS data.


                                          The IRS data that we examined for tax years 1989-95 also showed that, in
                                          each of those years, the percentage of new large corporations paying no
                                          tax exceeded the percentage of older large corporations paying no tax.
                                          This relationship held for large FCCs, large USCCs, and all large
                                          corporations together. (See table I.4 in app. I.)

                                          Large FCCs were more heavily concentrated in the manufacturing and
The Industrial Profile                    wholesale trade sectors and less heavily concentrated in the financial
of Large FCCs Differed                    services sector than were large USCCs. These differences in industrial
From That of Large                        concentration were found whether one compared large nontaxpaying
                                          FCCs to large nontaxpaying USCCs or all large FCCs to all large USCCs.
USCCs                                     Table 2 shows these comparisons for 1995.




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                                      B-281098




Table 2: Percentage Distribution of
Large FCCs and USCCs by Major                                                          Large FCCs                      Large USCCs
Industry, 1995                        Industry                                     Nontaxpaying    All             Nontaxpaying      All
                                      Manufacturing                                        37.8   40.8                     14.9     24.6
                                      Wholesale trade                                      24.7   26.8                       7.2    12.4
                                      Financial services                                   15.8   13.5                     54.8     32.4
                                      Nonfinancial services                                  7.8   7.0                       7.0     8.1
                                      Retail trade                                           4.8   4.2                       8.5    12.1
                                      Othera                                                 9.1   7.6                       7.6    10.5
                                      Total                                               100.0 100.0                     100.0    100.0
                                      Note: Columns may not sum to 100 because of rounding.
                                      a
                                       Other includes transportation and public utilities; mining; construction; agriculture, forestry, and
                                      fishing; and other trades.
                                      Source: GAO compilation of IRS data.


                                      The ratios of the costs of goods sold and other costs to receipts varied
Cost Ratios Varied                    significantly across industries, which could account for some of the
Significantly Across                  difference between the amount of taxes that large FCCs paid per dollar of
Industries                            receipts and the amount that large USCCs paid. The ratio of taxable
                                      income per dollar of receipts should be inversely related to the ratio of
                                      costs per dollar of receipts. Corporations in the manufacturing, wholesale
                                      trade, and retail trade industries, on average, had significantly higher ratios
                                      of costs of goods sold to receipts than corporations in the financial and
                                      nonfinancial service industries. The largest component of costs of goods
                                      sold is purchases from other businesses, which, as table 3 on p. 10
                                      indicates, are relatively unimportant for the two service industries.

                                      In contrast, corporations in the financial services industry, on average, had
                                      significantly higher ratios of interest expenses to receipts. This pattern of
                                      differences in cost ratios across industries was similar for both all large
                                      FCCs and all large USCCs. The pattern also was similar for large
                                      nontaxpaying FCCs and USCCs, with one exception: the ratio of interest
                                      expenses to receipts for nontaxpaying USCCs in the financial services
                                      sector was not significantly higher than that for nontaxpaying USCCs
                                      overall. (See table I.5 in app. I.)

                                      Wholesale trade, the industry with the highest ratio of costs of goods sold
                                      to receipts, had the lowest ratio of taxes paid to receipts, while financial
                                      services, the industry with the lowest ratio of costs of goods sold to
                                      receipts, had the highest ratio of taxes paid to receipts among the major
                                      industries. These relationships were similar for both large FCCs and large
                                      USCCs. The fact that a significantly larger percentage of all large USCCs
                                      were in the financial services industry and a significantly smaller
                                      percentage of them were in the wholesale trade industry (compared to
                                      large FCCs) may, in part, explain why the aggregate ratio of taxes paid to



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                                          B-281098




                                          receipts, shown in table 3, was significantly higher for USCCs.
                                          Nevertheless, within each industry, the ratio of taxes paid to receipts was
                                          higher for large USCCs than for large FCCs in 1995. Moreover, in every
                                          major industry except the financial services industry, a greater percentage
                                          of large FCCs than large USCCs paid no tax at all for all the years that we
                                          examined. (See tables I.6 through I.8 in app. I.)


Table 3: Cost, Tax, and Other Ratios for Large FCCs and USCCs by Industry, 1995
                                      Cost of goods sold Purchases as a    Interest as a Taxes as a % % of corporations in
Industry                                as a % of receipts % of receipts % of receipts     of receipts industry paying no tax
All large FCCs                                        65.4          49.9             6.2           0.8                   29.4
 Manufacturing                                        65.6          48.5             3.9           1.0                   27.2
 Wholesale trade                                      82.3          76.3             2.2           0.4                   27.0
 Financial services                                   30.5           1.6            24.9           1.4                   34.3
 Nonfinancial services                                38.6          12.0            10.2           0.7                   32.4
 Retail trade                                         71.0          69.4             1.4           0.6                   33.9
 Othera                                               64.0          32.1             3.9           0.8                   35.2
All large USCCs                                       52.8          32.0             6.5           1.6                   31.5
 Manufacturing                                        62.5          38.9             3.5           1.4                   19.2
 Wholesale trade                                      83.3          80.6             2.0           0.6                   18.4
 Financial services                                   29.2           1.1            17.6           2.1                   53.4
 Nonfinancial services                                32.0           8.2             3.1           1.4                   27.2
 Retail trade                                         68.0          65.6             1.8           0.9                   22.2
 Othera                                               38.9          11.4             5.6           2.3                   22.7
                                          Note: All estimates in the first three columns have sampling errors of (+/-) 2 percent or less. All
                                          estimates in the fourth column have sampling errors of (+/-) 0.7 percent or less. All estimates in the
                                          last column have sampling errors of (+/-) 5 percent or less.
                                          a
                                           Other includes transportation and public utilities; mining; construction; agriculture, forestry, and
                                          fishing; and other trades.
                                          Source: GAO compilation of IRS data.


                                          The data in table 3 do not reveal any logical relationships across industries
                                          between (1) the ratios of either costs or taxes paid to receipts and (2) the
                                          percentage of corporations paying tax in each industry. For example, even
                                          though corporations in the financial services industry, on average, had the
                                          lowest ratio of costs of goods sold to receipts and the highest ratio of taxes
                                          paid to receipts, a higher percentage of corporations in that industry paid
                                          no tax compared with all the other industries.

                                          We requested comments on a draft of this report from the Commissioner
Agency Comments                           of Internal Revenue and the Director of the Department of the Treasury’s
                                          Office of Tax Analysis. On March 8, 1999, we received comments prepared
                                          by IRS’ Chief Operations Officer through the Office of the National
                                          Director for Legislative Affairs. The Director of the Office of Tax Analysis
                                          and his staff provided comments in a February 25, 1999, meeting.




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Both IRS and Treasury were in overall agreement with the draft report.
Both elaborated on issues we had raised, and both provided some
technical comments, which we incorporated where appropriate.

As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from the
date of this letter. At that time, we will send copies to Senator William V.
Roth, Jr., Chairman, and Senator Daniel Patrick Moynihan, Ranking
Minority Member, Senate Committee on Finance; Representative Bill
Archer, Chairman, and Representative Charles B. Rangel, Ranking Minority
Member, House Committee on Ways and Means; Representative Amo
Houghton, Chairman, and Representative William J. Coyne, Ranking
Minority Member, Subcommittee on Oversight, House Committee on Ways
and Means; and other interested congressional committees. We will also
send copies to The Honorable Robert E. Rubin, Secretary of the Treasury;
The Honorable Charles O. Rossotti, Commissioner of Internal Revenue;
and other interested parties. Copies will also be made available to others
upon request.

This report was prepared under the direction of Charlie W. Daniel,
Assistant Director. Other major contributors are listed in appendix II. If
you have any questions, please call Mr. Daniel or me on (202) 512-9110.

Sincerely yours,




James R. White
Director, Tax Policy and
  Administration Issues




Page 11                    GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
Contents



Letter                                                                                                 1


Appendix I                                                                                            14

Statistical
Compendium
Appendix II                                                                                           19

Major Contributors to
This Report
Tables                  Table 1: Profile of Large FCCs and USCCs by Amount of                          7
                          Income Taxes Paid, 1995
                        Table 2: Percentage Distribution of Large FCCs and                             9
                          USCCs by Major Industry, 1995
                        Table 3: Cost, Tax, and Other Ratios for Large FCCs and                       10
                          USCCs by Industry, 1995
                        Table I.1: Number and Percent of Returns for All                              14
                          Nontaxpaying FCCs and USCCs
                        Table I.2: Number and Percent of Returns for Large                            14
                          Nontaxpaying FCCs and USCCs
                        Table I.3: Assets Owned and Business Receipts                                 15
                          Generated by All Nontaxpaying FCCs and USCCs
                        Table I.4: Percentages of Large New and Older                                 16
                          Nontaxpaying FCCs and USCCs
                        Table I.5: Selected Cost Ratios for Large Nontaxpaying                        16
                          FCCs and USCCs, 1995
                        Table I.6: All and Large Nontaxpaying FCC and USCC                            17
                          Manufacturers and Wholesalers
                        Table I.7: All and Large Nontaxpaying FCCs and USCCs                          17
                          in Nonfinancial and Financial Services
                        Table I.8: All and Large Nontaxpaying FCCs and USCCs                          18
                          in Retail Trade


Figures                 Figure 1: Trend in the Percentage of Corporations That                         5
                          Paid No U.S. Income Taxes, 1989-95
                        Figure 2: Nontaxpaying Corporations’ Percentage of Tax                         6
                          Returns, Assets, and Receipts, 1995
                        Figure 3: Trend in Percentages of Large FCCs and USCCs                         8
                          That Are New



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Contents




Figure I.1: Corporate Returns, Assets, and Receipts for                         15
  Large Nontaxpaying FCCs and USCCs as a Percentage
  of All Nontaxpaying FCCs and USCCs, 1995




Abbreviations

FCC           Foreign-controlled corporations
IRS           Internal Revenue Service
SOI           Statistics of Income
USCC          U.S.- controlled corporations




Page 13                     GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
Appendix I

Statistical Compendium


                                        The tables and figure in this statistical compendium supplement those in
                                        the letter. All the values were obtained from IRS’ SOI corporate data files
                                                                1
                                        for tax years 1989-95.




Table I.1: Number and Percent of Returns for All Nontaxpaying FCCs and USCCs
                                            FCC returns                                                USCC returns
                                                                 a                                                           a
                                             Confidence interval                                         Confidence interval
                                       Upper         Point         Lower                            Upper         Point        Lower
Year                         Number bound         estimate         bound               Number       bound      estimate        bound
1989                           32,135     76.3%       71.7%         67.1%             1,266,281       59.8%        58.9%         58.0%
1990                           32,348     77.3        73.3          69.3              1,265,841       61.5         60.6          59.7
1991                           35,138     76.6        72.8          69.0              1,265,390       62.7         61.8          60.9
1992                           34,980     73.7        69.2          64.7              1,246,355       62.6         61.6          60.6
1993                           37,588     72.9        69.6          66.3              1,217,410       61.6         60.9          60.1
1994                           38,433     73.5        70.4          67.2              1,381,055       62.0         61.3          60.6
1995                           40,195     70.2        66.8          63.4              1,377,092       61.8         61.1          60.4
                                        Note: The number of returns are population estimates based on IRS’ samples of corporate tax
                                        returns. Percentages are the ratio of nontaxpaying FCCs and USCCs to all (taxpaying and
                                        nontaxpaying) FCCs and USCCs, respectively.
                                        a
                                         The upper and lower sampling error bounds of the percentage of nontaxpaying FCCs and USCCs
                                        indicate we are confident the true estimate of the percentage would be within these bounds in 95 out
                                        of every 100 samples.
                                        Source: GAO compilation of IRS data.




Table I.2: Number and Percent of Returns for Large Nontaxpaying FCCs and USCCs
                                          FCC returns                                                 USCC returns
                                                               a                                                            a
                                           Confidence interval                                          Confidence interval
                                       Upper        Point        Lower                              Upper        Point        Lower
Year                      Number      bound      estimate        bound     Number                   bound     estimate        bound
1989                           684       34.4%       33.0%         31.6%     3,860                    27.9%       27.2%         26.5%
1990                           819       39.1        37.7          36.3      3,896                    28.9        28.1          27.4
1991                         1,019       43.6        42.2          40.8      4,196                    32.6        31.8          30.9
1992                           948       39.7        38.3          36.9      4,059                    31.2        30.5          29.8
1993                           816       33.8        32.6          31.4      4,299                    31.3        30.7          30.1
1994                           739       29.7        28.6          27.5      4,291                    30.1        29.5          28.9
1995                           812       30.4        29.4          28.3      4,843                    32.1        31.5          31.0
                                        Note: The number of returns are population estimates based on IRS’ samples of corporate tax
                                        returns. Percentages are the ratio of large nontaxpaying FCCs and USCCs to all large (taxpaying and
                                        nontaxpaying) FCCs and USCCs, respectively.
                                        a
                                        The upper and lower bound confidence intervals of the percentage of nontaxpaying FCCs and
                                        USCCs indicate we are confident the true estimate of the percentage would be within these bounds in
                                        95 out of every 100 samples.
                                        Source: GAO compilation of IRS data.

                                        1
                                        Filings made by Real Estate Investment Trusts and Regulated Investment Companies were included in
                                        our compilation. If they had been excluded, the difference would have been statistically insignificant.




                                        Page 14                              GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
                                         Appendix I
                                         Statistical Compendium




Table I.3: Assets Owned and Business Receipts Generated by All Nontaxpaying FCCs and USCCs
                                                         FCCs                                                   USCCs
Year                                         Returns      Assets     Receipts         Returns                     Assets  Receipts
1989                                           32,135        25.6%        21.0%      1,266,281                      18.6%     16.9%
1990                                           32,348        28.5         22.5       1,265,841                      20.3      18.1
1991                                           35,138        37.1         31.4       1,265,390                      20.1      18.5
1992                                           34,980        28.4         29.0       1,246,355                      20.8      18.5
1993                                           37,588        27.8         25.5       1,217,410                      20.9      17.5
1994                                           38,433        23.2         21.2       1,381,055                      21.0      17.0
1995                                           40,195        23.6         25.2       1,377,092                      20.5      17.0
                                         Note: Percentages are the ratio of nontaxpaying FCCs and USCCs to all (taxpaying and
                                         nontaxpaying) FCCs and USCCs, respectively. All percent estimates have sampling errors of (+/-)
                                         1 percent.
                                         Source: GAO compilation of IRS data.




Figure I.1: Corporate Returns, Assets,
and Receipts for Large Nontaxpaying
FCCs and USCCs as a Percentage of All
Nontaxpaying FCCs and USCCs, 1995




                                         Note: Percentages are those for large nontaxpaying FCC or USCC returns filed, total assets, and
                                         gross receipts to all nontaxpaying FCC and USCC returns, assets, and receipts.
                                         Source: GAO compilation of IRS data.




                                         Page 15                            GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
                                          Appendix I
                                          Statistical Compendium




Table I.4: Percentages of Large New and
Older Nontaxpaying FCCs and USCCs                                                                     FCCs                         USCCs
                                          Year                                                     New         Older            New    Older
                                          1989                                                     43.8%        30.9%           45.5%    25.1%
                                          1990                                                     48.8         35.9            48.0     26.0
                                          1991                                                     54.7         40.4            48.2     30.5
                                          1992                                                     41.4         38.1            47.7     29.1
                                          1993                                                     38.7         32.0            52.5     28.8
                                          1994                                                     32.5         28.3            48.5     27.8
                                          1995                                                     35.7         28.7            45.5     30.2
                                          Note: “New” includes FCCs and USCCs incorporated within 3 years; “older” includes those
                                          incorporated earlier.
                                          Source: GAO compilation of IRS data.




Table I.5: Selected Cost Ratios for Large Nontaxpaying FCCs and USCCs, 1995
                                            FCCs                                             USCCs
                       Cost of goods sold Purchases as Interest as %      Cost of goods sold Purchases as Interest as %
Major industry            as % of receipts % of receipts    of receipts     as % of receipts % of receipts   of receipts
Manufacturing                          72.1          54.1           3.9                 67.7          48.2           4.8
Wholesale trade                        76.7          72.5           3.7                 87.5          83.9           1.6
Financial services                     21.0           2.9          39.6                 14.5           0.4           4.5
Nonfinancial services                  41.5           5.6          15.0                 31.4          10.7           5.3
Retail trade                           61.3          56.5           2.8                 68.0          64.8           2.6
      a
Other                                  73.4          52.6           4.2                 46.5          14.7           8.5
Overall                                68.3          54.9           6.9                 51.3          37.3           4.3
                                          Note: All estimates in this table have sampling errors of (+/-) 2 percent or less.
                                          a
                                           Other includes transportation and public utilities; mining; construction; agriculture, forestry, and
                                          fishing; and other trades.
                                          Source: GAO compilation of IRS data.




                                          Page 16                               GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
                                         Appendix I
                                         Statistical Compendium




Table I.6: All and Large Nontaxpaying FCC and USCC Manufacturers and Wholesalers
                                                         Manufacturers                                     Wholesalers
                                                    All                Large                          All              Large
Year                                        FCCs        USCCs      FCCs    USCCs                FCCs     USCCs    FCCs     USCCs
                                                    a                                                  a                 a
1989                                         50.0%        55.6%     31.4%    19.7%               61.0%      52.4% 33.0%      18.2%
                                                  a
1990                                         56.3         58.0      37.1     22.2                63.6       53.3    37.2     18.3
                                                  a
1991                                         57.6         58.2      39.5     24.9                71.0       57.6    40.7     24.7
                                                  a
1992                                         55.1         60.6      37.1     22.3                62.0       55.9    33.9     21.2
1993                                         54.9         57.5      29.8     20.4                67.0       54.4    28.1     18.5
1994                                         52.0         54.9      24.6     17.5                66.3       55.2    24.8     16.8
1995                                         53.1         57.5      27.2     19.2                64.0       55.3    27.0     18.4
                                         Note: Percentages under the “all” category are the ratio of nontaxpaying FCCs or USCCs to all FCCs
                                         and USCCs by industry. Percentages under the “large” category are the ratio of nontaxpaying large
                                         FCCs or USCCs to all large FCCs or USCCs by industry. These estimates have sampling errors of
                                         (+/-) 10 percent or less except where noted.
                                         a
                                          Sampling errors may be as high as (+/-) 13 percent.
                                         Source: GAO compilation of IRS data.




Table I.7: All and Large Nontaxpaying FCCs and USCCs in Nonfinancial and Financial Services
                                                         Nonfinancial services                  Financial services
                                                       All                 Large               All              Large
Year                                           FCCs       USCCs     FCCs       USCCs    FCCs USCCs         FCCs USCCs
                                                        a
1989                                            71.1%       63.1%     40.1%      27.9%    82.1%    56.3%     35.5%    40.3%
1990                                            83.8        63.8      35.7       24.5     84.5     58.7      37.6     41.9
                                                     a
1991                                            72.1        65.4      50.7       29.3     79.9     59.6      40.8     44.7
                                                     a
1992                                            69.5        65.0      46.4       26.8     79.6     57.7      41.6     45.7
1993                                            71.9        65.7      43.9       27.0     74.2     57.7      36.4     49.9
                                                     b
1994                                            64.4        66.4      39.7       28.3     79.5     59.1      35.6     51.7
1995                                            61.1        65.9      32.4       27.2     74.7     58.0      34.3     53.4
                                         Note: Percentages under the “all” category are the ratio of nontaxpaying FCCs or USCCs to all FCCs
                                         and USCCs by industry. Percentages under the “large” category are the ratio of nontaxpaying large
                                         FCCs or USCCs to all large FCCs or USCCs by industry. These estimates have sampling errors of
                                         (+/-) 10 percent or less except where noted.
                                         a
                                          Sampling errors may be as high as (+/-) 17 percent.
                                         b
                                          Sampling error is 11 percent.
                                         Source: GAO compilation of IRS data.




                                         Page 17                             GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
                                        Appendix I
                                        Statistical Compendium




Table I.8: All and Large Nontaxpaying
FCCs and USCCs in Retail Trade                                                                        All                  Large
                                        Year                                                  FCCs        USCCs        FCCs    USCCs
                                                                                                       a
                                        1989                                                   82.6%        59.1%       34.0%    27.6%
                                                                                                    b
                                        1990                                                   59.7         62.0        47.5     29.3
                                                                                                    c
                                        1991                                                   72.6         63.1        56.6     31.5
                                                                                                    c
                                        1992                                                   72.1         62.2        42.2     26.0
                                                                                                    a
                                        1993                                                   71.9         61.6        40.9     21.4
                                                                                                    a
                                        1994                                                   78.8         61.3        32.4     17.4
                                                                                                    a
                                        1995                                                   78.4         61.4        33.9     22.2
                                        Note: Percentages under the “all” category are the ratio of nontaxpaying FCCs or USCCs to all FCCs
                                        and USCCs in retail trade. Percentages under the “large” category are the ratio of nontaxpaying large
                                        FCCs or USCCs to all large FCCs or USCCs in retail trade. These estimates have sampling errors of
                                        (+/-) 10 percent or less except where noted.
                                        a
                                            Sampling errors may be as high as (+/-) 14 percent.
                                        b
                                            Sampling errors may be as high as (+/-) 22 percent.
                                        c
                                            Sampling errors may be as high as (+/-) 17 percent.
                                        Source: GAO compilation of IRS data.




                                        Page 18                                GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
Appendix II

Major Contributors to This Report


                     James A. Wozny, Assistant Director
General Government   Charles C. Tuck, Senior Economist
Division             Macdonald R. Phillips, Senior Economist
                     Lawrence M. Korb, Senior Evaluator
                     Pamela R. Pavord, Evaluator
                     Elizabeth W. Scullin, Communications Analyst
                     Wendy Ahmed, Statistician


                     Shirley A. Jones, Senior Attorney
Office of General
Counsel




                     Page 19                   GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
Page 20   GAO/GGD-99-39 Foreign- and U.S.-Controlled Corporations
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