Tax Administration: Comparison of the Reported Tax Liabilities of
Foreign- and U.S.-Controlled Corporations, 1996-2000 (27-FEB-04,
GAO-04-358).
In prior reports, GAO found differences in the percentages of
foreign-controlled corporations (FCC) and U.S.-controlled
corporations (USCC) reporting no tax liability. Based on concerns
that FCCs could be avoiding taxes by improperly shifting income
to lower tax countries, GAO was asked to compare, for the years
1996 through 2000, (1) FCCs and USCCs, based on the tax
liabilities they reported on their U.S. income tax
returns--including the percentages reporting zero
liabilities--and (2) the differences in FCCs and USCCs in terms
of age and industry concentration and the extent to which these
differences might explain tax reporting patterns. The report
provides information separately for large corporations--those
with at least $250 million in assets or $50 million in gross
receipts--because, while they account for only 1 percent of all
corporations, they own over 93 percent of all assets reported on
corporate returns.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-358
ACCNO: A09365
TITLE: Tax Administration: Comparison of the Reported Tax
Liabilities of Foreign- and U.S.-Controlled Corporations,
1996-2000
DATE: 02/27/2004
SUBJECT: Comparative analysis
Corporations
Federal taxes
Foreign corporations
Liability (legal)
Tax administration
Tax evasion
Tax returns
******************************************************************
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GAO-04-358
United States General Accounting Office
GAO Report to Congressional Requesters
February 2004
TAX ADMINISTRATION
Comparison of the Reported Tax Liabilities of Foreignand U.S.-Controlled
Corporations, 1996-2000
a
GAO-04-358
Highlights of GAO-04-358, a report to congressional requesters
In prior reports, GAO found differences in the percentages of
foreign-controlled corporations (FCC) and U.S.-controlled corporations
(USCC) reporting no tax liability. Based on concerns that FCCs could be
avoiding taxes by improperly shifting income to lower tax countries, GAO
was asked to compare, for the years 1996 through 2000, (1) FCCs and USCCs,
based on the tax liabilities they reported on their U.S. income tax
returns-including the percentages reporting zero liabilities-and (2) the
differences in FCCs and USCCs in terms of age and industry concentration
and the extent to which these differences might explain tax reporting
patterns. The report provides information separately for large
corporations-those with at least $250 million in assets or $50 million in
gross receipts-because, while they account for only 1 percent of all
corporations, they own over 93 percent of all assets reported on corporate
returns.
www.gao.gov/cgi-bin/getrpt?GAO-04-358.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Jim White at (202) 512-9110
or [email protected].
February 2004
TAX ADMINISTRATION
Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled
Corporations, 1996-2000
Comparisons of the tax liabilities of FCCs and USCCs from 1996 to 2000
varied depending on the measure.
o A majority of all corporations reported no tax liabilities during
these years, with a higher percentage of FCCs doing so than USCCs.
However, the results were reversed for large corporations.
o A higher percentage of USCCs than FCCs reported tax liabilities of
less than 5 percent of their total income, with similar results for large
corporations.
o FCCs reported a lower amount of tax liability per $1,000 in gross
receipts than USCCs. The relationship was similar for large corporations.
FCCs and USCCs differ with respect to their age and industry
concentrations. A greater percentage of FCCs than USCCs were new-
incorporated for less than 3 years. FCCs were more concentrated in
wholesale trade and financial services while USCC were more concentrated
in nonfinancial services. Large FCCs and USCCs also differed in their age
and industry concentrations. Age and industry concentration have been
cited as possible explanations for the differences in tax liabilities
reported by FCCs and USCCs. However, after controlling for age and
industry concentration using a simple statistical model, the differences
in taxes reported by FCCs and USCCs were not fully explained by these
factors.
Estimated Percentages of FCCs and USCCs Reporting No Tax Liability, Tax
Years 1996-2000
Percentage 100
80
70
60
50
40
30
20
10
0 1996 1997 1998 1999 2000
Tax year
FCCs USCCs Large FCCs Large USCCs
Source: GAO analysis of Internal Revenue Service data.
Contents
Letter
Results in Brief
Background
Scope and Methodology
Comparisons of the Tax Liabilities of FCCs and USCCs Depend on
the Measure Used Age and Industry Concentration May Explain Some
Differences in FCCs and USCCs Reporting No or Little Tax Liability Agency
Comments
1 2 3 4
5
9 14
Appendixes
Appendix I: Additional Tables 15
Appendix II: Statistical Analysis Using Logistic Regression 27
Appendix III: GAO Contacts and Staff Acknowledgments 32 GAO Contacts 32
Acknowledgments 32
Tables Table 1:
Table 2: Table 3: Table 4: Table 5:
Table 6:
Table 7:
Table 8: Table 9:
Estimated Percentage of Returns and Tax Liability Per
$1,000 in Gross Receipts for All and Large FCCs and
USCCs, Tax Year 2000 9
Estimated Percentage Distribution of FCCs and USCCs by
Major Industry, Tax Year 2000 12
Estimated Percentage Distribution of Large FCCs and
USCCs by Major Industry, Tax Year 2000 13
Estimated Number and Percentage of Returns for FCCs
and USCCs Reporting No Tax Liability 15
Estimated Percentage Distribution of FCCs and USCCs by
Tax Liability as Share of Total Income, Tax Years
1996-2000 16
Estimated Percentage Distribution of Large FCCs and
USCCs by Tax Liability as Share of Total Income, Tax Years
1996-2000 17
Estimated Average Tax Liability Per $1,000 of Gross
Receipts for All and Large FCCs and USCCs, Tax Years
1996-2000 18
Profile of FCCs and USCCs by Estimated Amount of
Income Tax Liability, Tax Year 2000 18
Profile of Large FCCs and USCCs by Estimated Amount of
Income Tax Liability, Tax Year 2000 19
Contents
Table 10: Estimated FCCs and USCCs Reporting No Tax Liability That Are
Large and Small as a Percentage of All FCCs and USCCs, Tax Years 1996-2000
20
Table 11: Estimated Percentages of FCCs and USCCs That Were New, Tax Years
1996-2000 21 Table 12: Estimated Percentages of Large FCCs and USCCs That
Were New, Tax Years 1996-2000 21 Table 13: Estimated Percentage
Distribution of FCCs and USCCs by Major Industry, Tax Years 1996-2000 22
Table 14: Estimated Percentage Distribution of FCCs and USCCs Reporting No
Tax Liability by Major Industry, Tax Years 1996-2000 23
Table 15: Estimated Percentage Distribution of Large FCCs and USCCs by
Major Industry, Tax Years 1996-2000 23
Table 16: Estimated Percentage Distribution of Large FCCs and USCCs
Reporting No Tax Liability by Major Industry, Tax Years 1996-2000 24
Table 17: Estimated Percentage of FCCs and USCCs That Reported No Tax
Liability in Each Industry, Tax Years 1996-2000 24
Table 18: Estimated Percentage of Large FCCs and USCCs That Reported No
Tax Liability in Each Industry, Tax Years 1996-2000 25
Table 19: Estimated Cost Ratios for All FCCs and USCCs by Major Industry,
Tax Year 2000 25 Table 20: Estimated Cost Ratios for Large FCCs and USCCs
by Major Industry, Tax Year 2000 26
Table 21: Estimated Percentages and Odds on Reporting No Tax Liability and
Tax Liability of Less Than 5 Percent of Total Income, between All FCCs and
USCCs and Odds Ratios Indicating the Difference between FCCs and USCCs,
before and after Controlling for Age and Industry Sector, Tax Years
1996-2000 29
Table 22: Estimated Percentages and Odds on Reporting No Tax Liability and
Tax Liability of Less Than 5 Percent of Total Income, between Large FCCs
and USCCs and Odds Ratios Indicating the Difference between Large FCCs and
USCCs, before and after Controlling for Age and Industry Sector, Tax Years
1996-2000 30
Figures Figure 1: Estimated Percentages of FCCs and USCCs That Reported No
Tax Liability, Tax Years 1996-2000 6
Contents
Figure 2: Estimated Percentages of FCCs and USCCs Reporting Less Than 5
Percent in Tax Liability Relative to Total Income, Tax Years 1996-2000 7
Figure 3: Estimated Percentages of FCCs and USCCs That Were New, Tax Years
1996-2000 10
Figure 4: Estimated Percentages of Large FCCs and USCCs That Were New, Tax
Years 1996-2000 11
This is a work of the U.S. government and is not subject to copyright
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A
United States General Accounting Office Washington, D.C. 20548
February 27, 2004
The Honorable Byron Dorgan
Ranking Minority Member
Subcommittee on Competition, Foreign Commerce and Infrastructure Committee
on Commerce, Science and Transportation United States Senate
The Honorable Carl Levin
Ranking Minority Member
Permanent Subcommittee on Investigations
Committee on Governmental Affairs
United States Senate
In response to congressional requests, we have previously reported on the
tax liabilities reported by foreign-and U.S.-controlled corporations. Most
recently, in March 1999, we reported on differences in the percentages of
foreign-controlled corporations (FCC) and U.S.-controlled corporations
(USCC) reporting no income tax liability. We found that for each year from
1989 through 1995, FCCs were more likely to report zero tax liability than
USCCs, though for large corporations the distinction was not as clear-cut.
We said that transfer pricing abuses1 and other factors such as age and
industry concentration of corporations were possible explanations for the
differences in the percentages of FCCs and USCCs reporting zero tax
liabilities.2
You asked us to update our 1999 report. For the years 1996 through 2000
(the last year with data available), we agreed to compare (1) FCCs and
USCCs based on the tax liabilities they reported on their U.S. income tax
returns-including the percentages reporting zero liabilities-and (2) the
differences in FCCs and USCCs in terms of age and industry concentration
and the extent to which these differences might explain tax reporting
patterns.
1Transfer pricing is the pricing of intercompany transactions that affects
the distribution of profits and, therefore, taxable income among related
companies and sometimes across tax jurisdictions.
2U.S. General Accounting Office, Tax Administration: Foreign- and
U.S.-Controlled Corporations That Did Not Pay U.S. Income Taxes, 1989-95,
GAO/GGD-99-39 (Washington, D.C.: Mar. 23, 1999).
To meet these objectives, we analyzed data from the Internal Revenue
Service's (IRS) Statistics of Income (SOI) samples of corporate tax
returns for tax years 1996 through 2000. These samples were based on
returns as filed and did not reflect IRS audit results or any net
operating loss carrybacks from future years. The statistics in the report
are estimates based on the SOI sample. Sampling errors are reported in
appendix I. Caution should be used when comparing estimates because not
all differences between estimates are statistically significant. We also
used statistical modeling to estimate the likelihood of FCCs and USCCs
reporting little or no U.S. income tax liability, holding age and industry
sector constant. We report separately for large corporations-those with at
least $250 million in assets or $50 million in gross receipts-because,
while they account for only 1 percent of all corporations, they make up
over 93 percent of all assets reported on corporate returns. We did not
attempt to determine whether corporations were abusing transfer prices.
Results in Brief Comparisons of the tax liabilities of FCCs and USCCs from
1996 through 2000 varied depending on the measure.
o A majority of all corporations reported no liabilities during these
years with a higher percentage of FCCs doing so than USCCs, an estimated
average of 71 percent and 61 percent, respectively. However, the results
were reversed for large corporations with a greater percentage of large
USCCs reporting no tax liability.
o A greater percentage of USCCs than FCCs reported tax liabilities of
less than 5 percent of their total income, an estimated 94 percent and 89
percent, respectively, in 2000. The results were similar for large
corporations. In 2000, an estimated 82 percent of large USCCs and 76
percent of large FCCs reported taxes of less than 5 percent of their total
income.
o However, FCCs reported less tax liability per gross receipts than
USCCs; in 2000, an estimated average of $11.88 in tax liability per $1,000
in gross receipts compared with an estimated $14.75 reported by USCCs. A
similar relationship held for large corporations.
Differences in age and industry concentration have been cited as possible
explanations for differences in the tax liabilities reported between FCCs
and USCCs. Compared with USCCs, a greater percentage of FCCs were
new-incorporated for less than 3 years-for every year from 1996 through
2000. New firms may have greater expenses relative to receipts and,
therefore, lower taxable income. A comparison of industry concentrations
showed that FCCs were concentrated in different industries compared with
USCCs. Large FCCs and USCCs also exhibited differences in age and industry
concentration. Our analysis using a simple regression model showed that
age and industry do not fully explain the differences between FCCs and
USCCs in reporting no tax liabilities or tax liabilities less than 5
percent of total income.
Background In prior reports, we found that a higher percentage of FCCs
than USCCs reported no U.S. income tax from 1987 through 1995. 3 Some of
the reasons why FCCs and USCCs may not report U.S. income tax include
current-year operating losses, losses carried forward from preceding tax
years, sufficient tax credits available to offset tax liabilities, and
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. Transfer pricing abuse
occurs when income and expenses are improperly allocated among
interrelated companies for the purpose of reducing taxable income in a
high-tax jurisdiction.
As we noted in our two earlier reports, researchers have attempted to
explain why FCCs report lower tax liabilities than USCCs. Generally, the
research has recognized that some of the nontax characteristics of firms,
such as age and industry classification, may explain some of the
differences in reported tax liabilities. At the same time, researchers
have acknowledged that transfer pricing abuses may explain some of the
differences, but they have not been able to determine the extent to which
transfer pricing abuses explain the differences in the taxes reported by
FCCs and USCCs.
For the purposes of this report, an FCC is either a foreign corporation or
a U.S. corporation with 50 percent or more of its voting stock owned by a
foreign person or entity. Foreign ownership or control of a U.S.
corporation exists when a foreign investor gains control of an existing
U.S. company or
3GAO/GGD-99-39 and U.S. General Accounting Office, International Taxation:
Transfer Pricing and Information on Nonpayment of Tax, GAO/GGD-95-101
(Washington, D.C.: Apr. 13, 1995).
creates a new company and incorporates it in the United States. Both FCCs
and USCCs are subject to U.S. income tax laws although the tax treatment
of some income may differ.
Scope and Methodology
For both of our objectives, we used data from IRS's SOI files on corporate
tax returns for 1996 through 2000 to make estimates for the population of
FCCs and USCCs. The SOI corporation data we used for our analyses included
all types of corporations except for subchapter S corporations,4 which are
treated similarly to partnerships for federal income tax purposes. The SOI
data in this report are based on SOI's probability sample of corporate tax
returns and thus are subject to some imprecision owing to sampling
variability. Using SOI's sampling weights, we estimated sampling errors
for our estimates, which are reported in appendix I. Caution should be
used when comparing estimates because not all differences between
estimates are statistically significant. Differences between all FCCs and
USCCs, between FCCs and USCCs reporting no tax liability, between large
FCCs and USCCs, and between large FCCs and USCCs reporting no tax
liability are statistically significant unless noted at the bottom of each
figure or table. To ensure that the data were comparable across years, we
converted all dollar-based data to 2000 dollars. These data included tax
liabilities, total income, gross receipts, assets, cost of goods sold,
interest, and purchases reported.
SOI is a data set widely used for research purposes. IRS performs a number
quality control steps to verify the internal consistency of SOI sample
data. For example, it performs computerized tests to verify the
relationships between values on the returns selected as part of the SOI
sample, and manually edits data items to correct for problems, such as
missing items. We conducted several reliability tests to ensure that the
data excerpts we used for this report were complete and accurate. For
example, we electronically tested the data and used published data as a
comparison to ensure that the data set was complete. To ensure accuracy,
we reviewed related documentation and electronically tested for obvious
errors. We
4Consistent with our 1999 report, we included the following types of
corporate tax returns in our analyses: 1120, U.S. Corporation Income Tax
Return; 1120A, U.S. Corporations Short-Form Income Tax Return; 1120L, U.S.
Life Insurance Company Income Tax Return; 1120PC, U.S. Property and
Casualty Insurance Company Income Tax Return; 1120REIT, U.S. Income Tax
Return for Real Estate Investment Trusts; 1120-RIC, U.S. Income Tax Return
for Regulated Investment Companies; and 1120F, U.S. Income Tax Return of a
Foreign Corporation.
concluded that the data were sufficiently reliable for the purposes of
this report.
To compare FCCs and USCCs based on the tax liabilities they reported on
their U.S. income tax returns, we made estimates for a variety of measures
of tax liability.
We also used SOI data to analyze differences in FCCs and USCCs by age and
industry sector, the same factors we used in the 1999 report. We defined
new corporations as those for which income tax returns showed
incorporation dates within 3 years of the tax year date; all others were
considered old corporations. For example, for tax year 2000, new
corporations are those with incorporation dates no earlier than 1998.
Next, we used a simple logistic regression model to estimate the
likelihood of FCCs and USCCs reporting no tax liability or less than 5
percent in tax liability relative to total income, after controlling for
age and industry sector. We also used the model to compare large FCCs and
USCCs- corporations with at least $250 million in assets or $50 million in
gross receipts. The simple model allowed us to compare FCCs and USCCs
while holding age and industry constant. Our simple model did not control
for other possible influences. For a further explanation of the regression
model, see appendix II.
We requested comments on a draft of this report from the Commissioner of
Internal Revenue. We conducted our review from July 2003 through February
2004 in accordance with generally accepted government auditing standards.
Comparisons of the Tax Liabilities of FCCs and USCCs Depend on the Measure
Used
Comparisons of the tax liabilities of FCCs and USCCs vary and depend upon
the measure used. Our comparisons highlight three measures: (1) the
percentage of corporations reporting no tax liability, (2) the percentage
of corporations reporting tax liabilities less than 5 percent of their
total income, and (3) reported tax liabilities per $1,000 of gross
receipts. The first and third measures were highlighted in our 1999
report. We added the second measure to provide more information about
corporations reporting little or no tax liability.
A Higher Percentage of FCCs Than USCCs Reported No Tax Liabilities
Similar to our 1999 report, a majority of corporations, both FCCs and
USCCs, reported no tax liability from 1996 through 2000. During this time,
there was a higher percentage of FCCs compared with USCCs that reported no
tax liability. Overall, an estimated average of 71 percent of FCCs and 61
percent of USCCs reported no tax liability during this period. (See fig. 1
and table 4 in app. I.)
However, among large corporations, which owned a majority of assets
reported by all corporations, the results were reversed. A higher
percentage of large USCCs compared to large FCCs reported no tax liability
during the same period. (See fig. 1 and table 6 in app. I.)
Figure 1: Estimated Percentages of FCCs and USCCs That Reported No Tax
Liability, Tax Years 1996-2000
Percentage 100
80
70
60
50
40
30
20
10
0 1996 1997 1998 1999 2000
Tax year
FCCs USCCs Large FCCs Large USCCs
Source: GAO analysis of IRS data.
A Larger Percentage of For each year from 1996 through 2000, a higher
percentage of USCCs than USCCs Than FCCs Reported FCCs reported tax
liability of less than 5 percent of their total income.5 For Tax
Liabilities of Less Than example, in 2000, an estimated 94 percent of
USCCs and 89 percent of
FCCs reported less than 5 percent in tax liability. The relationship was
the
5 Percent of Total Income same for large corporations. In 2000, an
estimated 82 percent of large USCCs and 76 percent of large FCCs reported
tax liability of less than 5 percent of their income. (See fig. 2 and
tables 5 and 6 in app. I.)
Figure 2: Estimated Percentages of FCCs and USCCs Reporting Less Than 5
Percent in Tax Liability Relative to Total Income, Tax Years 1996-2000
Percentage 100
90
80
70
10 0
1996 1997 1998 1999 2000 Tax year
FCCs
USCCs
Large FCCs
Large USCCs Source: GAO analysis of IRS data.
Note: Differences between large FCCs and large USCCs are not statistically
significant in 1996.
5Total income is income prior to subtracting deductions for allowable
expenses.
FCCs Reported Less Tax Liability Relative to Gross Receipts Than USCCs
FCCs reported less tax liability as a percentage of gross receipts6 than
USCCs. Overall, in 2000, FCCs reported an estimated $11.88 in tax
liability per $1,000 in gross receipts compared with an estimated $14.75
reported by USCCs. (See table 1.) Among large corporations, FCCs also
reported less tax liability relative to gross receipts than USCCs. These
data were consistent across all years in the reporting period for both all
corporations and for large corporations. (See table 7 in app. I.) Another
way of comparing tax liabilities is by the percentage of corporations
reporting a tax liability below an arbitrary amount. For example, in 2000,
an estimated 92 percent of all FCCs and an estimated 98 percent of all
USCCs reported less than $100,000 in tax liability. The percentages were
not as high for large corporations: an estimated 46 percent of large FCCs
and 53 percent of large USCCs reported less than $100,000 in tax
liability. (See tables 8 and 9 in app. I.)
6Gross receipts is one measure of income, but does not include subtracting
cost of goods sold or adding other types of income, such as dividends or
interest income.
Table 1: Estimated Percentage of Returns and Tax Liability Per $1,000 in
Gross Receipts for All and Large FCCs and USCCs, Tax Year 2000
Percentage of Percentage of Tax liability/$1,000 Tax liability/$1,000
Distribution by income tax liability returns (all) returns (large)
receipts (all) receipts (large) FCCs USCCs
No tax liability 73.3 37.5 a a
$1 or more but less than $100,000 18.2 8.7 $2.70 $0.29b
$100,000 or more but less than $1 million 6.1 18.9 7.18
$1 million or more 2.4 34.9 20.25 19.39
Total 100.0 100.0 $11.88 $11.52
No tax liability 63.0 45.3 a a
$1 or more but less than $100,000 35.0 8.0 $4.11 $0.29b
$100,000 or more but less than $1 million 1.6 17.1 12.16
$1 million or more 0.3 29.5 21.96 21.50
Total 99.9 99.9 $14.75 $16.65
Source: GAO analysis of IRS data. Note: Columns may not sum to 100 because
of rounding. aNot applicable. bDifferences between large FCCs and large
USCCs are not statistically significant.
Age and Industry Concentration May Explain Some Differences in FCCs and
USCCs Reporting No or Little Tax Liability
FCCs and USCCs differ in terms of age and industry concentration. These
factors could possibly explain some of the differences in the tax
liabilities reported by FCCs and USCCs. However, when we used a simple
statistical model to control for age and industry sector, differences
remained in the percentages of FCCs and USCCs reporting no or little tax
liability.
A Larger Percentage of For every year from 1996 through 2000, a greater
estimated percentage of FCCs Were New Compared FCCs compared to USCCs were
new (incorporated for 3 years or less). to USCCs New firms may have
greater expenses relative to receipts and, therefore,
lower taxable income. Among corporations reporting no tax liability, the
differences in age between FCCs and USCCs were not always statistically
significant. (See fig. 3 and table 11 in app. I.)
Figure 3: Estimated Percentages of FCCs and USCCs That Were New, Tax Years
1996-2000
Percentage 100
35
30
25
20
15
10
5
0
1996 1997 1998 1999 2000
Tax year
FCCs, all
USCCs, all
FCCs, no tax
USCCs, no tax
Source: GAO analysis of IRS data.
Notes: "New" includes FCCs and USCCs incorporated within 3 years.
Differences between FCCs and USCCs that reported no tax liability were not
statistically significant in 1997, 1998, 1999, and 2000.
When comparing large corporations, the percentage that was new was also
higher for large FCCs than USCCs. Among large corporations reporting no
tax liability, a larger percentage of FCCs were new compared with USCCs.
However, not all the differences were statistically significant. (See fig.
4 and table 12 in app. I.)
Figure 4: Estimated Percentages of Large FCCs and USCCs That Were New, Tax
Years 1996-2000
Percentage 100
20
18
16
14
12
10 8
6
4
2
0
1996 1997 1998 1999 2000 Tax year
FCCs, all
USCCs, all FCCs, no tax USCCs, no tax
Source: GAO analysis of IRS data.
Notes: Differences between all large FCCs and all large USCCs are not
statistically significant in 1996. Differences between large FCCs and
large USCCs reporting no tax liability are not statistically significant
in 1996 and 1997.
FCCs and USCCs Were FCCs and USCCs differed in their concentration among
industries. In 2000, Concentrated in Different FCCs were more concentrated
in the wholesale trade and financial services Industries industries while
USCCs were more concentrated in the nonfinancial
services industry. Industry concentration did not change much when
looking at only corporations reporting no tax liability. (See table 2.)
Table 2: Estimated Percentage Distribution of FCCs and USCCs by Major
Industry, Tax Year 2000
Industry FCCs, all FCCs, no tax USCCs, all USCCs, no tax
Manufacturing 10.6 7.5a 6.7 6.6a
Wholesale trade 22.2 20.5 8.2
Financial services 31.8 34.6 15.2 14.3
Nonfinancial 18.5 18.5 37.5 40.5
services
Retail 4.8 4.9 12.2 11.5
Otherb 12.1 14.0 20.2 19.7
Total 100.0 100.0 100.0 100.0
Source: GAO analysis of IRS data.
Note: Columns may not sum to 100 because of rounding.
aDifferences between FCCs and USCCs reporting no tax liability are not
statistically significant.
bOther includes transportation and public utilities; mining; construction;
agriculture, forestry, and fishing; and other trades.
The concentration across industries did not vary much from year to year
during the reporting period. (See tables 13 and 14 in app. I for
year-to-year comparison.)
In 2000, all large FCCs and large FCCs reporting no tax liability were
concentrated in the wholesale trade and manufacturing sector. In contrast,
large USCCs were concentrated in the financial services industry. (See
table 3.) The distribution of large FCCs and USCCs among industry sectors
across the years 1996 through 1999 reflects that of 2000. (See tables 15
and 16 in app. I.)
Table 3: Estimated Percentage Distribution of Large FCCs and USCCs by
Major Industry, Tax Year 2000
Industry FCCs, all FCCs, no tax USCCs, all USCCs, no tax
Manufacturing 38.5 38.9 19.5
Wholesale trade 26.4 21.2 11.1
Financial services 14.1 15.5 37.2
Nonfinancial 9.0 11.1a 11.4 12.0a
services
Retail 3.6 3.6 10.6
Otherb 8.4 9.7 10.3
Total 100.0 100.0 100.1
Source: GAO analysis of IRS data.
Note: Columns may not sum to 100 because of rounding.
aDifferences between large FCCs and large USCCs reporting no tax liability
are not statistically significant.
bOther includes transportation and public utilities; mining; construction;
agriculture, forestry, and fishing; and other trades.
Differences in cost ratios across industries are possible explanations for
why industry concentration might affect the reported tax liabilities of
FCCs and USCCs. Cost differences could affect profits and thus tax
liabilities. For example, higher cost of goods sold relative to receipts
could contribute to lower taxable income relative to receipts and,
consequently, to lower tax liability relative to receipts. Tables 19 and
20 in appendix I show several types of cost ratios by major industry
groups for 2000.
After Controlling for Age and Industry, Differences Remained in FCCs and
USCCs
After controlling for age and industry concentration, we estimate that all
FCCs remained more likely than all USCCs to have reported no tax liability
from 1996 through 2000. However, consistent with our earlier comparisons,
all FCCs were significantly less likely than all USCCs to have reported
tax liabilities of less than 5 percent of their total incomes, after
controlling for the same factors. For an explanation of the simple
statistical model used to control for age and industry concentration or
for details of the regression results, see appendix II.
For large corporations, estimated differences in tax liabilities between
FCCs and USSCs after controlling for age and industry were generally
smaller than the comparisons without controlling for these two factors.
These results imply that age and industry may explain some of the
differences between large FCCs and large USCCs in reporting no tax
liability or less than 5 percent of tax liability relative to total
income. As reported in the earlier in this report, large FCCs were in all
years less likely than large USCCs to report no tax liability or less than
5 percent in tax liability. After controlling for age and industry
concentration, there are less systematic differences between FCCs and
USCCs in their likelihood of reporting either no tax liability or tax
liability of less than 5 percent.
Agency Comments We provided a draft of this report to the IRS for its
comments. On February 18, IRS provided comments via e-mail on technical
issues, which we incorporated into this report where appropriate.
As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will then send copies to the Commissioner
of Internal Revenue and other interested parties. We will also make copies
available to others on request. In addition, this report will be available
at no charge on GAO's Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at
(202) 512-9110 or at [email protected] or Ralph Block at (415) 904-2150. Key
contributors to this report are listed in appendix III.
James R. White Director, Tax Issues
Appendix I
Additional Tables
The tables in this statistical appendix supplement those in the letter.
All the data were obtained from Internal Revenue Service's (IRS)
Statistics of Income (SOI) corporate data samples for tax years 1996
through 2000. The tables in this appendix provide population estimates.
After each table, notes indicate the sampling errors. We are confident the
true estimates would be within these percentage points in 95 out of every
100 samples. Finally, we conducted tests to determine if there were
significant differences between all FCCs and USCCs, between FCCs and USCCs
reporting no tax liability, between large FCCs and USCCs, and between
large FCCs and USCCs reporting no tax liability. The comparisons that were
not statistically significant are noted in each table.
Table 4: Estimated Number and Percentage of Returns for FCCs and USCCs
Reporting No Tax Liability
Tax year
FCC returns USCC returns Number Percentage Number Percentage
1996 46,791 67.6 1,360,566
1997 50,625 71.7 1,331,638
1998 50,671 71.8 1,335,000
1999 50,149 72.3 1,310,280
2000 50,688 73.3 1,332,239
Total 248,924 71.3 6,669,723
Source: GAO analysis of IRS data.
Notes: The number of returns consists of population estimates based on
IRS's sample of corporate tax returns. Percentages are the ratio of FCCs
and USCCs reporting no tax liability to all (those reporting positive and
no tax liability) FCCs and USCCs, respectively. Percentage estimates for
FCCs have sampling errors of less than (+/-) 4 percentage points;
percentage estimates of USCCs have sampling errors of less than (+/-) 1
percentage points.
Appendix I Additional Tables
Table 5: Estimated Percentage Distribution of FCCs and USCCs by Tax Liability as
Share of Total Income, Tax Years 1996-2000
1996 1997 1998 1999
FCCs USCCs
No tax liability 67.6 71.7 71.8 72.3
Greater than 0% but lower than 5% 21.0 16.8 17.4 18.0
5% or more but less than 10% 5.0 5.0a 4.5a 4.4a 4.2a
10% or more but less than 15% 3.0 3.6 3.3 2.5a
15% or more but less than 30% 2.9 2.6 2.2 2.5
30% or more 0.6 0.3 0.8 0.4
Total 100.1 100.0 100.0 100.1
No tax liability 60.3 60.9 61.0 61.2
Greater than 0% but lower than 5% 33.7 32.7 32.4 32.2
5% or more but less than 10% 3.5 3.8a 3.9a 3.7a 3.4a
10% or more but less than 15% 1.7 1.8 1.8 2.1a
15% or more but less than 30% 0.6 0.7 0.8 0.7
30% or more 0.1 0.1 0.1 0.1
Total 99.9 100.0 100.0 100.0
Source: GAO analysis of IRS data.
Notes: Columns may not sum to 100 because of rounding. All percentage
estimates have sampling errors of less than (+/-) 4 percentage points.
aDifferences between FCCs and USCCs are not statistically significant.
Appendix I Additional Tables
Table 6: Estimated Percentage Distribution of Large FCCs and USCCs by Tax
Liability as Share of Total Income, Tax Years 19962000
1996 1997 1998 1999
Large FCCs Large USCCs
No tax liability 29.1 28.2 31.3 33.8
Greater than 0% but lower than 5% 45.5 43.9 43.3 40.7
5% or more but less than 10% 15.6 16.3 15.5 14.7
10% or more but less than 15% 5.6 7.7 5.9 6.0
15% or more but less than 30% 3.7 3.8 3.6 4.4
30% or more 0.3 0.2 0.4 0.4
Total 99.8 100.1 100.0 100.0 100.0
No tax liability 32.7 35.5 37.8 40.9
Greater than 0% but lower than 5% 42.9 40.0 39.9 38.4
5% or more but less than 10% 17.7 17.8 16.5 15.4
10% or more but less than 15% 4.8 4.9 4.1 3.6
15% or more but less than 30% 1.8 1.7 1.5 1.4
30% or more 0.2 0.2 0.2 0.3
Total 100.1 100.1 100.0 100.0 100.0
Source: GAO analysis of IRS data.
Notes: "Large" FCCs or USCCs are those with assets of at least $250
million or gross receipts of at least $50 million in constant 2000
dollars. Columns may not sum to 100 because of rounding. All percentage
estimates have sampling errors of less than (+/-) 2 percentage points.
Appendix I Additional Tables
Table 7: Estimated Average Tax Liability Per $1,000 of Gross Receipts for
All and Large FCCs and USCCs, Tax Years 1996-2000
Tax year FCCs, all USCCs, all FCCs, large USCCs, large
1996 $10.62 $16.11 $10.06 $18.82
1997 12.23 16.28 11.79 18.76
1998 10.77 15.67 10.24 17.91
1999 12.49 15.02 12.09 16.99
2000 11.88 14.75 11.52 16.65
Source: GAO analysis of IRS data.
Notes: Estimates in the first, third, and fourth columns have sampling
errors of less than (+/-) $0.30; estimates in the second column have
sampling errors of less than (+/-) $0.20.
Table 8: Profile of FCCs and USCCs by Estimated Amount of Income Tax
Liability, Tax Year 2000
Average gross Average income tax
Number of Percentage of receipts (dollars in liability (dollars in
Distribution by income tax liability returns returns millions) millions)
FCCs USCCs
No tax liability 50,688 73.3 $15 a
$1 or more but less than $100,000 12,577 18.2 6 $0.02
$100,000 or more but less than $1 million 4,193 6.1 48b
$1 million or more 1,681 2.4 741b 15.01c
Total 69,139 100 $33 $0.39
a
No tax liability 1,332,239 63.0 $2
$1 or more but less than $100,000 740,639 35.0 2 $0.01
$100,000 or more but less than $1 million 33,423 1.6 24
$1 million or more 7,387 0.3 980b 21.53c
Total 2,113,689 99.9 $6 $0.08
Source: GAO analysis of IRS data.
Notes: Columns may not sum to 100 because of rounding. Estimates in the
second column have sampling errors of less than (+/-) 2 percentage points;
estimates in the third column have sampling errors of less than (+/-) $3
million dollars except where noted; estimates in the fourth column have
sampling errors of less than (+/-) $.03 million dollars except where
noted.
aData not applicable.
bSampling errors may be as high as (+/-) $13 million dollars.
cSampling errors may be as high as (+/-) $0.2 million dollars.
Appendix I Additional Tables
Table 9: Profile of Large FCCs and USCCs by Estimated Amount of Income Tax
Liability, Tax Year 2000
Average gross Average income
receipts tax liability
Number of Percentage of (dollars in (dollars in
Distribution by returns returns
income tax liability millions) millions)
Large FCCs Large USCCs
No tax liability 1,251 37.5 $532 a
$1 or more but less than $100,000 289 8.7 143b $0.04
$100,000 or more but less than $1 million 630 18.9 260
$1 million or more 1,165 34.9 1,061 20.57
Total 3,335 100.0 632
No tax liability 8,335 45.3 $182 a
$1 or more but less than $100,000 1,476 8.0 132b $0.04
$100,000 or more but less than $1 million 3,152 17.1 149
$1 million or more 5,427 29.5 1,328 28.54
Total 18,390 99.9 $511 $8.50
Source: GAO analysis of IRS data.
Notes: Columns may not sum to 100 because of rounding. Estimates in the
second column have sampling errors of less than (+/-) 1 percentage point;
estimates in the third column have sampling errors of less than (+/-) $17
million dollars except where noted; estimates in the fourth column have
sampling errors of less than (+/-) $0.3 million dollars except where
noted.
aData not applicable.
bDifferences between large FCCs and large USCCs are not statistically
significant.
Appendix I Additional Tables
Number Percentage Number Percentage
Table 10: Estimated FCCs and USCCs Reporting No Tax Liability That Are
Large and Small as a Percentage of All FCCs and USCCs, Tax Years 1996-2000
Tax Large Large 1996 841 1.8 5,520 1997 818 1.6 6,247 1998 944 1.9 6,674 1999 1,060 2.1 7,435 2000 1,251 2.5 8,335 Total 4,913 2.0 34,210 Small Small 1996 45,951 98.2 1,355,046 99.6 1997 49,807 98.4 1,325,390 99.5 1998 49,727 98.1 1,328,327 99.5 1999 49,089 97.9 1,302,845 99.4 2000 49,437 97.5 1,323,904 99.4
year FCCs USCCs FCCs USCCs Total 24,401 98.0 6,635,513 99.5
Source: GAO analysis of IRS data.
Notes: "Small" FCCs or USCCs are those with assets of less than $250
million or gross receipts of less than $50 million in constant 2000
dollars. Percentages are the ratio of large FCCs and large USCCs reporting
no tax liability to all (large and small) FCCs and USCCs, respectively,
and of small FCCs and small USCCs reporting no tax liability to all FCCs
and USCCs, respectively. Percentage estimates for FCCs have sampling
errors of less than (+/-) .5 percentage points; percentages estimates for
USCCs have sampling errors of less than (+/-) .05 percentage points.
Appendix I Additional Tables
Table 11: Estimated Percentages of FCCs and USCCs That Were New, Tax Years
1996-2000
Tax FCCs, USCCs, FCCs, USCCs,
year all all no no tax 1996 30.2 21.8 29.9 23.4 1997 25.3 21.0 24.9a 23.0a 1998 24.3 20.3 25.0a 22.3a 1999 23.6 19.5 22.6a 21.8a
tax 2000 22.3 18.5 21.8a 20.6a
Source: GAO analysis of IRS data.
Notes: "New" includes FCCs and USCCs incorporated within 3 years.
Estimates in the second column have sampling errors of less than (+/-) 1
percentage point; estimates in the fourth column have sampling errors of
less than (+/-) 2 percentage points; estimates in the first and third
columns have sampling errors of less than (+/-) 6 percentage points.
aDifferences between FCCs and USCCs reporting no tax liability are not
statistically significant.
Table 12: Estimated Percentages of Large FCCs and USCCs That Were New, Tax
Years 1996-2000
Tax FCCs, USCCs, FCCs, USCCs,
year all all no no tax 1996 8.8a 8.6a 12.9a 12.2a 1997 11.0 9.2 13.8a 12.8a 1998 12.4 10.7 16.1 14.5 1999 13.4 10.8 18.1 15.2
tax 2000 13.6 9.5 16.8 12.6
Source: GAO analysis of IRS data.
Note: Estimates have sampling errors in the third column of less than
(+/-) 2 percentage points; the first, second, and fourth columns have
sampling errors of less than (+/-) 1 percentage point.
aDifferences between FCCs and USCCs reporting no tax liability are not
statistically significant.
Appendix I Additional Tables
Table 13: Estimated Percentage Distribution of FCCs and USCCs by Major
Industry, Tax Years 1996-2000
1996 1997 1998 1999 2000 Industry FCCs USCCs FCCs FCCs FCCs FCCs Manufacturing 9.2a 7.9a 10.3 9.9 9.7 10.6 Wholesale 24.8 8.8 22.3 21.6 22.5 22.2 Financial 36.4 15.1 37.0 34.7 33.7 31.8 16.9 17.0 16.2 18.5 services Retail 4.8 16.1 6.1 5.7 4.7 4.8 Otherb 8.5 19.7 7.4 11.1 13.3 12.1 100.0 100.0 100.1 100.0
USCCs USCCs USCCs USCCs 7.5 7.5 7.2 trade 8.7 8.0 8.1 services 15.4 15.1 15.3 15.2 Nonfinancial 16.3 32.4 32.9 36.9 36.9 37.5 16.1 12.5 12.2 12.2 19.3 19.9 20.4 20.2 Total 100.0 100.0 99.9 99.9 100.1 100.0
Source: GAO analysis of IRS data.
Notes: Columns may not sum to 100 because of rounding. Estimates have
sampling errors for FCCs of less than (+/-) 4 percentage points; estimates
for USCCs have sampling errors of less than (+/-) 1 percentage point.
aDifferences between FCCs and USCCs are not statistically significant.
bOther includes transportation and public utilities; mining; construction;
agriculture, forestry, and fishing; and other trades.
Appendix I Additional Tables
Table 14: Estimated Percentage Distribution of FCCs and USCCs Reporting No
Tax Liability by Major Industry, Tax Years 19962000
1996 1997 1998 1999 2000 Industry FCCs FCCs FCCs FCCs FCCs USCCs Manufacturing 6.5a 8.2a 7.7a 7.0a 7.5a 6.6a Wholesale 23.6 20.8 19.6 20.1 20.5 Financial 40.8 40.9 37.5 37.7 34.6 14.3 Nonfinancial 14.7 15.0 16.9 16.6 18.5 40.5 services Retail 5.4 7.4 6.2 4.9 4.9 11.5 Otherb 9.1 7.6 12.1 13.7 14.0 19.7 100.1 99.9 100.0 100.0
USCCs USCCs USCCs USCCs 7.4a 7.0a 7.0a 6.7a trade 8.0 7.8 7.4 7.2 services 14.3 14.5 14.8 14.7 35.1 35.8 40.3 40.0 16.2 16.3 11.4 11.3 19.0 18.7 19.0 20.1 Total 100.0 100.1 99.9 100.0 100.0 100.0
Source: GAO analysis of IRS data.
Notes: Columns may not sum to 100 because of rounding. Estimates for FCCs
have sampling errors of less than (+/-) 6 percentage points; estimates for
USCCs have sampling errors of less than (+/-) 2 percentage points.
aDifferences between FCCs and USCCs are not statistically significant.
bOther includes transportation and public utilities; mining; construction;
agriculture, forestry, and fishing; and other trades.
Table 15: Estimated Percentage Distribution of Large FCCs and USCCs by
Major Industry, Tax Years 1996-2000
1996 1997 1998 1999 2000 Industry FCCs FCCs FCCs FCCs FCCs USCCs Manufacturing 39.0 40.0 40.0 39.5 38.5 19.5 Wholesale 28.5 28.1 26.2 26.1 26.4 11.1 Financial 14.1 13.7 14.4 14.4 14.1 37.2 7.4 7.1 7.3 8.2 services Retail 3.7 3.7 4.3 3.6 3.6 10.6 7.3 7.3 7.7 8.1
USCCs USCCs USCCs USCCs 24.1 23.2 21.8 20.3 trade 12.7 11.9 10.7 11.1 services 32.5 33.9 36.0 36.9 Nonfinancial 8.1 9.0 9.8 11.0 9.0 11.4 12.2 11.6 11.3 10.7 Othera 10.4 10.3 10.4 10.1 8.4 10.3
Total 100.0 100.0 99.9 99.9 99.9 100.0 99.9 100.1 100.0 100.1
Source: GAO analysis of IRS data.
Notes: Columns may not sum to 100 because of rounding. Estimates for FCCs
have sampling errors of less than (+/-) 2 percent; estimates for USCCs
have sampling errors of less than (+/-) 1 percent.
aOther includes transportation and public utilities; mining; construction;
agriculture, forestry, and fishing; and other trades.
Appendix I Additional Tables
Table 16: Estimated Percentage Distribution of Large FCCs and USCCs
Reporting No Tax Liability by Major Industry, Tax Years 1996-2000
1996 1997 1998 1999 2000 Industry FCCs FCCs FCCs FCCs USCCs FCCs Manufacturing 34.5 35.4 35.1 37.1 13.9 38.8 Wholesale 27.8 26.1 24.8 22.5 5.6 21.2 Financial 16.3 16.1 16.7 17.4 55.9 15.5 7.5a 8.6a 8.3a 11.1a services Retail 4.5 5.0 5.9a 3.5 5.5 3.6 Otherb 9.5 8.8 9.1 10.4 7.6 9.7 100.1 100.0 99.9 99.9
USCCs USCCs USCCs USCCs 15.0 14.2 14.6 14.6 trade 7.7 7.5 5.7 services 54.4 54.7 56.8 51.8 Nonfinancial 7.1a 8.7a 9.0a 9.2 11.6 12.0a 9.1 7.7 6.1a 6.7 7.1 7.8 Total 100.0 99.9 100.0 100.1 100.1 99.9
Source: GAO analysis of IRS data.
Notes: Columns may not sum to 100 because of rounding. Estimates for FCCs
have sampling errors of less than (+/-) 3 percent; estimates for USCCs
have sampling errors of less than (+/-) 2 percent.
aDifferences between FCCs and USCCs are not statistically significant.
bOther includes transportation and public utilities; mining; construction;
agriculture, forestry, and fishing; and other trades.
Table 17: Estimated Percentage of FCCs and USCCs That Reported No Tax
Liability in Each Industry, Tax Years 1996-2000
Manufacturing Wholesale trade Financial services
Nonfinancial services Retail Tax year
FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs
47.4ab 56.8a 64.4 54.7 75.6 56.8 60.8ab 65.5a 76.6ac 60.7a
1997 57.3a 56.8a 66.9 54.4 79.2 57.4 63.8ab 66.2a 87.3b 61.5
1998 56.1a 57.4a 65.1 56.2 77.6 59.8 71.0a 66.6a 78.4b 55.7
1999 51.9a 57.3a 64.5 54.0 81.0 58.7 74.4 66.5 75.0c 57.0
51.4 61.7 67.7 56.8 79.8 59.3 73.6a 68.2a 73.8ac 59.4a
Source: GAO analysis of IRS data. Note: All estimates have sampling errors
of less than (+/-) 10 percent except where noted. aDifferences between
FCCs and USCCs are not statistically significant. bSampling errors may be
as high as (+/-) 14 percentage points. cSampling errors may be as high as
(+/-) 23 percentage points.
Appendix I Additional Tables
Table 18: Estimated Percentage of Large FCCs and USCCs That Reported No Tax
Liability in Each Industry, Tax Years 1996-2000
Manufacturing Wholesale trade Financial services
Nonfinancial services Retail Tax year
FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs
1996 25.7 20.3 28.3 19.9 33.7 54.7 29.6a 28.5a 35.1 24.3
1997 24.9 21.8 26.2a 22.5a 32.8 57.3 34.3a 34.3a 38.5 23.5
1998 27.5 25.3 29.6 20.0 36.5 59.7 35.6a 34.4a 42.6 20.5
1999 31.7 27.9 29.2 20.5 40.6 62.0 37.6 43.3 32.7 20.9
2000 37.9 34.1 30.1 25.7 41.3 63.2 46.0a 47.9a 37.8 30.0
Source: GAO analysis of IRS data. Note: All estimates have sampling errors
of less than (+/-) 6 percentage points. aDifferences between FCCs and
USCCs are not statistically significant.
Table 19: Estimated Cost Ratios for All FCCs and USCCs by Major Industry,
Tax Year 2000
Cost of goods sold as a percentage of gross receipts
Purchases as a percentage of gross receipts
Interest as a percentage of gross receipts
Industry
No tax All No tax All No tax All
FCCs USCCs
Manufacturing 76.3 71.6 56.7 56.8 5.2 4.5a
Wholesale trade 86.3 83.3 80.2 80.2 1.6
Financial services 43.0b 49.2 3.4 1.7 118.8c 74.9 c
Nonfinancial services 50.7 46.0 19.4 16.7 5.1
Retail trade 69.1 71.4 60.6 63.1 2.7
Other 57.0 59.7 17.7 20.0 6.5
Manufacturing 69.2 67.8 45.0 43.8 4.6 4.5a Wholesale trade 81.0 81.7 73.9
78.1 1.8 1.4 Financial services 56.4b 53.5 1.9 1.1 19.1 41.1 Nonfinancial
services 26.0 30.8 11.3 11.3 2.8 3.1 Retail trade 73.5 73.1 68.3 69.7 1.7
1.4 Other 49.8 53.4 21.1 22.2 7.3 5.3 Source: GAO analysis of IRS data.
Note: All estimates have sampling errors of less than (+/-) 3 percentage
points except where noted.
aDifferences between FCCs and USCCs are not statistically significant.
bSampling errors may be as high as (+/-) 5 percentage points.
cSampling errors may be as high as (+/-) 24 percentage points.
Appendix I Additional Tables
Table 20: Estimated Cost Ratios for Large FCCs and USCCs by Major Industry, Tax
Year 2000
Cost of goods sold as a percentage of gross receipts
Purchases as a percentage of gross receipts
Interest as a percentage of gross receipts
Industry
No tax All No tax All No tax All
FCCs USCCs
Manufacturing 76.4 71.7 56.9 57.0 5.3
Wholesale trade 87.4 83.8a 81.1 80.9a 1.6
Financial services 45.0b 50.5 2.4 1.3 99.8c 68.7b
Nonfinancial services 52.8 47.3 19.2 16.8 5.4
Retail trade 70.2 71.9 60.9 63.4 2.9
Other 55.8 59.9 17.5a 20.3 6.7
Manufacturing 70.0 68.0 45.9 44.0 5.1
Wholesale trade 84.6 84.0a 77.0 81.0a 2.0
Financial services 64.0b 56.2 1.3 0.9 18.3
Nonfinancial services 30.7 35.4 11.0 10.9 4.9
Retail trade 71.6 72.4 65.7 69.1 2.1
Other 44.0 51.2 18.5a 21.4 10.1
Source: GAO analysis of IRS data. Note: All estimates have sampling errors
of less than (+/-) 3 percentage points except where noted. aDifferences
between large FCCS and USCCs are not statistically significant. bSampling
errors may be as high as (+/-) 6 percentage points. cSampling errors may
be as high as (+/-) 23 percentage points.
Appendix II
Statistical Analysis Using Logistic Regression
We used the SOI data from IRS's sample of corporate tax returns to
estimate the differences between FCCs and USCCs in reporting no U.S.
income tax liability or tax liability of less than 5 percent relative to
total income. We looked at all of the corporations and separately at large
corporations in each tax year from 1996 through 2000, and calculated odds
ratios to estimate the difference between FCCs and USCCs.1 We used USCCs
as the reference category in our calculations, so the odds ratios indicate
how much more likely (when the ratios exceed 1.0) or less likely (when
they are less than 1.0) the odds were of FCCs reporting to have no tax
liability or tax liability of less than 5 percent compared with USCCs. We
show these odds ratios in the tables 21 and 22 both before and after
adjusting them to control for the age and industry sector of each
corporation. While the unadjusted odds ratios can be derived directly from
the unadjusted odds shown in these tables, the adjusted odds ratios are
from logistic regression models that were used in each year to estimate
the difference between FCCs and USSCs after the controls for age and
industry sector were introduced.2 The following explains how odds ratios
are calculated and elaborates on the tables in this appendix.
The odds on whether FCCs and USCCs report no tax liability or tax
liability less than 5 percent are somewhat different from, but related to,
the percentage of each type of corporation reporting no tax liability or
tax liability of less than 5 percent. The odds of reporting no tax
liability equal the percentage reporting no tax liability divided by the
percentage reporting positive tax liability. For the sample of all FCCs
and USCCs in 1996, for example, 67.6 percent of FCCs reported no tax
liability. (See table 21.) The odds of an FCC reporting no tax liability
in that year was 2.08, which equals 67.6/32.43 and implies that 2.08 of
FCCs reported no tax liability for every FCC that reported some tax
liability, or that 208 FCCs reported no tax liability for every 100 FCCs
that reported some tax liability. Since 60.3 percent of USCCs reported no
tax liability in 1996, the odds of USCCs reporting no tax liability was
1.52, which equals 60.3/39.7. The
1In all 5 years, 99 percent or more of all corporations were small, as we
defined them. However, we reported separately on large corporations
because they make up 93 percent of total assets of all corporations.
2Logistic regression is an appropriate technique to use when the dependent
variable is binary, or has two categories, such as whether a corporation
reported no tax liability versus positive tax liability or whether a
corporation reported less than 5 percent in tax liability versus 5 percent
or more in tax liability.
3Rounded values are used in this example to show how to simply calculate
odds ratios.
Appendix II
Statistical Analysis Using Logistic
Regression
unadjusted ratio of these odds, which is 2.08/1.52 = 1.37, apart from
rounding, implies that FCCs were more likely than USCCs to have reported
no tax liability by a factor of 1.37. While odds are somewhat less
familiar than percentages, the use of odds and odds ratios are unlike
percentages and percentage differences, which are unaffected by whether we
choose to look at the likelihood of whether an outcome does or does not
occur, and by how likely or unlikely the outcome is across the subgroups
we are comparing.
Table 21 shows how different all FCCs and USCCs were, using both
percentage differences and odds ratios in each year, in terms or reporting
no tax liability or tax liability of less than 5 percent of total income.
Both before (unadjusted) and after (adjusted) controlling for age and
industry sector, in every year FCCs were significantly more likely than
USSCs to have reported no tax liability, with odds ratios ranging from
roughly 1.37 to roughly 1.79. At the same time, FCCs were significantly
less likely than USCCs to have reported tax liability of less than 5
percent in all years, with odds ratios ranging from roughly 0.49 to 0.78.
Appendix II
Statistical Analysis Using Logistic
Regression
Table 21: Estimated Percentages and Odds on Reporting No Tax Liability and
Tax Liability of Less Than 5 Percent of Total Income, between All FCCs and
USCCs and Odds Ratios Indicating the Difference between FCCs and USCCs,
before and after Controlling for Age and Industry Sector, Tax Years
1996-2000
All corporations
Percentage reporting no tax liability
Odds on reporting no tax liability Odds ratios Tax year
FCC USCC FCC USCC Unadjusted Adjusted
1996 67.6 60.3 2.08 1.52 1.37 1.47
1997 71.7 60.9 2.53 1.56 1.62 1.77
1998 71.8 61.0 2.55 1.56 1.63 1.71
1999 72.3 61.2 2.60 1.58 1.65 1.79
2000 73.3 63.0 2.75 1.70 1.61 1.74
5-year average 71.3 61.3 2.49 1.58 1.57
Percentage reporting less than 5 percent in tax liability
Odds on reporting less than 5 percent in tax liability Odds ratios Tax
year
FCC USCC FCC USCC Unadjusted Adjusted
1996 88.6 94.0 7.77 15.80 0.49 0.69
1997 88.5 93.6 7.67 14.73 0.52 0.73
1998 89.2 93.4 8.27 14.16 0.58 0.78
90.2 93.4 9.24 14.24 0.65 0.86a
2000 88.6 94.0 7.74 15.60 0.50 0.66
5-year average 89.0 93.7 8.10 14.88 0.54
Source: GAO analysis of IRS data.
Note: Adjustments to control for age and industry sector involved the use
of dummy variables to contrast corporations that were less than 3 years
old with other corporations, and to distinguish corporations in the
manufacturing, wholesale, financial services, nonfinancial services,
retail, and "other" sectors.
aDenotes odds ratios in each year that did not reflect differences between
FCCs and USSCs. Those not denoted can reasonably, with 95 percent
confidence, be assumed to be due to something other than chance or random
fluctuations. (The significance of the difference in the averaged odds
ratios was not tested, since over the 5 years some corporations
contributed five observations, some contributed four, some three, etc.)
Table 22 shows how different large FCCs and USCCs were in each year in
terms of reporting no tax liability or less than 5 percent of tax
liability relative to income. The unadjusted odds ratios reveal that
before controlling for age and industry sector, large FCCs were in every
year significantly less likely than large USSCs to have reported no tax,
and in all years except for 1996, they were significantly less likely to
report less than 5 percent in tax liability. After adjusting for age and
industry, however, differences between large FCCs' and USCCs' likelihood
of reporting no tax liability or less than 5 percent in tax liability were
smaller except for one
Appendix II
Statistical Analysis Using Logistic
Regression
year (1996). Large FCCs were more likely than large USCCs to report no tax
liability in 2 of the 5 years (1996 and 1998), less likely than large
USCCs to report no tax liability in 1 year (2000), and no different than
large USCCs in the other 2 years (1997 and 1999). With respect to
reporting tax liabilities of less than 5 percent, large FCCs were
significantly more likely than USCCs to have reported less than 5 percent
in tax liability, after adjusting for age and industry sector, in 1 year
(1996), significantly less likely in 2 years (1999 and 2000), and no
different than USCCs in the other 2 years (1997 and 1998). Most of the
statistically significant differences between large FCCs and USSCs were
quite modest, and the odds ratios indicate that the former were not very
different from the latter in terms of reporting no tax liability or of
reporting tax liability less than 5 percent of total income.
Large corporations
Table 22: Estimated Percentages and Odds on Reporting No Tax Liability and
Tax Liability of Less Than 5 Percent of Total Income, between Large FCCs
and USCCs and Odds Ratios Indicating the Difference between Large FCCs and
USCCs, before and after Controlling for Age and Industry Sector, Tax Years
1996-2000
Percentage Odds on
reporting liability reporting Odds Tax FCC FCC Unadjusted Adjusted 1996 29.1 0.41 0.85 1.15 28.2 0.39 0.71 0.97a 1998 31.3 0.46 0.75 1.04 33.8 0.51 0.74 1.02a 2000 37.5 0.60 0.72 0.95 32.2 0.47 0.76
no tax no tax ratios year USCC USCC 32.7 0.49 35.5 0.55 37.8 0.61 40.9 0.69 45.3 0.83 5-year 38.6 0.63
liability average
Percentage reporting less than 5 percent in tax liability
Odds on reporting less than 5 percent in tax liability Odds ratios Tax
year
FCC USCC FCC USCC Unadjusted Adjusted
74.7 75.6 2.95 3.10 0.95a 1.14a
1997 72.0 75.5 2.57 3.08 0.84 1.00a
1998 74.6 77.7 2.94 3.48 0.84 1.00a
1999 74.5 79.3 2.92 3.84 0.76 0.92
2000 75.6 82.0 3.10 4.56 0.68 0.81
5-year average 74.3 78.1 2.90 3.56 0.81 0.97
Source: GAO analysis of IRS data.
Note: Adjustments to control for age and industry sector involved the use
of dummy variables to contrast corporations that were less than 3 years
old with other corporations, and to distinguish corporations in the
manufacturing, wholesale, financial services, nonfinancial services,
retail, and "other" sectors.
Appendix II
Statistical Analysis Using Logistic
Regression
aDenotes odds ratios in each year that do not reflect differences between
FCCs and USSCs. Those not denoted can reasonably, with 95 percent
confidence, be assumed to be due to something other than chance or random
fluctuations. (The significance of the difference in the averaged odds
ratios was not tested, since over the 5 years some corporations
contributed five observations, some contributed four, some three, etc.)
Appendix III
GAO Contacts and Staff Acknowledgments
GAO Contacts James R. White, (202) 512-9110 Ralph T. Block, (415) 904-2150
Acknowledgments In addition to the individuals above, Jeff Arkin, Susan
Baker, Amy Friedheim, Shirley Jones, Don Marples, John Mingus, Amy
Rosewarne, Sam Scrutchins, Doug Sloane, Wendy Turenne, Jennifer Li Wong,
and Jim Wozny made key contributions to this report.
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