    Tax Administration: Comparison of the Reported Tax Liabilities of
    Foreign- and U.S.-Controlled Corporations, 1998-2005 (24-JUL-08,
    GAO-08-957).

    Concerns about transfer pricing abuse have led researchers to
    compare the tax liabilities of foreign- and U.S.-controlled
    corporations. (Transfer prices are the prices related companies
    charge on intercompany transactions.) However, such comparisons
    are complicated because other factors may explain the differences
    in reported tax liabilities. In three prior reports, GAO found
    differences in the percentages of foreign-controlled and
    U.S.-controlled corporations reporting no tax liability. GAO was
    asked to update the previous reports by comparing: (1) the tax
    liabilities of foreign-controlled domestic corporations (FCDC)
    and U.S.-controlled corporations (USCC)-including those reporting
    zero tax liabilities for 1998 through 2005 (the latest available
    data) and (2) characteristics of FCDCs and USCCs such as age,
    size, and industry. GAO analyzed data from the Internal Revenue
    Service's Statistics of Income samples of corporate tax returns.
    GAO does not make any recommendations in this report. In
    commenting on a draft of this report, IRS provided comments on
    technical issues, which we incorporated into this report where
    appropriate.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-957
        ACCNO:   A83060
      TITLE:     Tax Administration: Comparison of the Reported Tax
    Liabilities of Foreign- and U.S.-Controlled Corporations,
    1998-2005
         DATE:   07/24/2008
      SUBJECT:   Comparative analysis
    	     Corporate audits
    	     Corporations
    	     Financial management
    	     Financial statements
    	     Foreign corporations
    	     Income taxes
    	     International relations
    	     Liability (legal)
    	     Losses
    	     Noncompliance
    	     Prices and pricing
    	     Program abuses
    	     Program evaluation
    	     Program management
    	     Reporting requirements
    	     Tax administration
    	     Tax credit
    	     Tax information confidentiality
    	     Tax returns
    	     Taxes
    	     Taxpayers

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    GAO-08-957

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    Report to Congressional Requesters:

    United States Government Accountability Office:

    GAO:

    July 2008:

    Tax Administration:

    Comparison of the Reported Tax Liabilities of Foreign-and U.S.-
    Controlled Corporations,

    1998-2005:

    Tax Administration:

    GAO-08-957:

    GAO Highlights:

    Highlights of GAO-08-957, a report to congressional requesters.

    Why GAO Did This Study:

    Concerns about transfer pricing abuse have led researchers to compare
    the tax liabilities of foreign- and U.S.-controlled corporations.
    (Transfer prices are the prices related companies charge on
    intercompany transactions.) However, such comparisons are complicated
    because other factors may explain the differences in reported tax
    liabilities. In three prior reports, GAO found differences in the
    percentages of foreign-controlled and U.S.-controlled corporations
    reporting no tax liability. GAO was asked to update the previous
    reports by comparing: (1) the tax liabilities of foreign-controlled
    domestic corporations (FCDC) and U.S.-controlled corporations
    (USCC)�including those reporting zero tax liabilities for 1998 through
    2005 (the latest available data) and (2) characteristics of FCDCs and
    USCCs such as age, size, and industry. GAO analyzed data from the
    Internal Revenue Service�s Statistics of Income samples of corporate
    tax returns. GAO does not make any recommendations in this report. In
    commenting on a draft of this report, IRS provided comments on
    technical issues, which we incorporated into this report where
    appropriate.

    What GAO Found:

    FCDCs reported lower tax liabilities than USCCs by most measures shown
    in this report. A greater percentage of large FCDCs reported no tax
    liability in a given year from 1998 through 2005. For all corporations,
    a higher percentage of FCDCs reported no tax liabilities than USCCs
    through 2001 but differences after 2001 were not statistically
    significant. Most large FCDCs and USCCs that reported no tax liability
    in 2005 also reported that they had no current-year income. A smaller
    proportion of these corporations had losses from prior years and tax
    credits that eliminated any tax liability. By another measure, large
    FCDCs were more likely to report no tax liability over multiple years
    than large USCCs. In 2005, comparisons of FCDCs and USCCs based on
    ratios of reported tax liabilities to gross receipts or total assets
    showed that FCDCs reported less tax than USCCs.

    FCDCs and USCCs differed in age, size, and industry. FCDCs were younger
    than USCCs in that a greater percentage had been incorporated for 3
    years or less from 1998 through 2005. In 2005, FCDCs were larger on
    average than USCCs in that they reported higher average gross receipts
    and assets than USCCs. A comparison by industry in 2005 showed that
    large FCDCs were relatively more concentrated in manufacturing and
    wholesale trade, while large USCCs were more evenly distributed across
    industries. GAO did not attempt to determine the extent to which these
    factors and others, such as transfer pricing abuse, explain differences
    in tax liabilities.

    Figure: Percentages of FCDCs and USCCs That Reported No Tax Liability,
    Tax Years 1998 through 2005:

    This figure is a combination line graph showing percentages of FCDCs
    and USCCs that reported no tax liability, tax years 1998 through 2005.
    The lines represent all FCDCs, all USCCs, large FCDCs, and large USCCs.
    The X axis represents the tax year, and the Y axis represents the
    percentage.

    Tax year: 1998;
    Large USCCs: 23.2;
    Large FCDCs: 29.3;
    All USCCs: 60.9;
    All FCDCs: 66.5.

    Tax year: 1999;
    Large USCCs: 26.3;
    Large FCDCs: 31.5;
    All USCCs: 61.1;
    All FCDCs: 67.

    Tax year: 2000;
    Large USCCs: 31.4;
    Large FCDCs: 35.2;
    All USCCs: 62.8;
    All FCDCs: 68.4.

    Tax year: 2001;
    Large USCCs: 38;
    Large FCDCs: 53.6;
    All USCCs: 64.6;
    All FCDCs: 71.7.

    Tax year: 2002;
    Large USCCs: 37.8;
    Large FCDCs: 49.5;
    All USCCs: 68.6;
    All FCDCs: 71.4.

    Tax year: 2003;
    Large USCCs: 32.6;
    Large FCDCs: 40.9;
    All USCCs: 69.3;
    All FCDCs: 66.9.

    Tax year: 2004;
    Large USCCs: 29.7;
    Large FCDCs: 34.4;
    All USCCs: 69.1;
    All FCDCs: 65.8.

    Tax year: 2005;
    Large USCCs: 25.2;
    Large FCDCs: 28;
    All USCCs: 66.7;
    All FCDCs: 65.2.

    [See PDF for image]

    Source: GAO analysis of IRS data.

    [End of figure]

    To view the full product, including the scope and methodology, click on
    [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-957]. For more
    information, contact Jim White at (202) 512-9110 or whitej@gao.gov.

    [End of section]

    Contents:

    Letter:

    Results in Brief:

    Background:

    FCDCs Reported Lower Tax Liabilities Than USCCs by Most Measures:

    FCDCs and USCCs Differ by Age, Size, and Industry:

    Agency Comments:

    Appendix I: Objectives, Scope, and Methodology:

    Appendix II: Additional Tables:

    Appendix III: GAO Contact and Staff Acknowledgments:

    Tables:

    Table 1: FCDCs and USCCs Reporting No Tax Liability, Tax Years 1998
    through 2005:

    Table 2: FCDCs and USCCs Reporting No Tax Liability, Tax Years 1998
    through 2005:

    Table 3: FCDCs and USCCs That Established No Tax Liability by Tax
    Return Line Item, Tax Year 2005:

    Table 4: FCDCs and USCCs Average Gross Receipts and Tax Liabilities,
    Tax Year 2005:

    Table 5: Percentage of FCDCs and USCCs That Were New, Tax Years 1998
    through 2005:

    Table 6: FCDCs and USCCs Cost Ratios by Major Industry, Tax Year 2005:

    Figures:

    Figure 1: Percentages of FCDCs and USCCs That Reported No Tax
    Liability, Tax Years 1998 through 2005:

    Figure 2: Percentage of Large FCDCs and USCCs That Reported No Tax
    Liability for Multiple Years between 1998 and 2005:

    Figure 3: Percentage of FCDCs and USCCs with No Tax Liability by the
    First Line on Their Tax Return Where They Established No Tax Liability,
    Tax Year 2005:

    Figure 4: FCDC and USCC Tax Liabilities as a Percentage of Gross
    Receipts and Assets, Tax Year 2005:

    Figure 5: Percentage of FCDCs and USCCs That Were New, Tax Years 1998
    through 2005:

    Figure 6: FCDC and USCC Average Gross Receipts and Assets, Tax Year
    2005:

    Figure 7: FCDCs and USCCs by Major Industry, Tax Year 2005:

    Figure 8: Percentage of Total Deductions for FCDCs and USCCs That First
    Established No Tax Liability on Line 28, Tax Year 2005:

    United States Government Accountability Office:

    Washington, DC 20548:

    July 24, 2008:

    The Honorable Carl Levin:
    Chairman:
    Permanent Subcommittee on Investigations:
    Committee on Homeland Security and Governmental Affairs:
    United States Senate:

    The Honorable Byron Dorgan:
    United States Senate:

    In response to your long-standing concerns about whether foreign-
    controlled U.S. corporations are abusing transfer prices and avoiding
    U.S. income tax, we compared the tax liabilities of foreign-and U.S.-
    controlled companies incorporated in the U.S. in three prior
    reports.[Footnote 1] We reported that from 1989 through 2000 foreign-
    controlled corporations were more likely to report zero U.S. income tax
    liability than U.S.-controlled corporations with a majority of both
    types of corporations reporting no liability. We said that corporations
    may not report U.S income taxes for a variety of reasons including
    current-year operating losses, tax credits, and transfer pricing
    abuses.

    Transfer prices are the prices related companies, such as a parent and
    subsidiary, charge on intercompany transactions. By manipulating
    transfer prices, multinational companies can shift income from higher
    to lower tax jurisdictions, reducing the companies' overall tax
    liability. As we noted in our previous reports, researchers acknowledge
    that transfer pricing abuses may explain some of the differences in tax
    liabilities of foreign-controlled corporations compared to U.S.-
    controlled corporations. However, researchers have had difficulty
    determining the exact extent to which transfer pricing abuses explain
    the differences due to data limitations.

    Based on your request, we updated our 2004 report. Specifically, we
    agreed to study (1) how the tax liability of foreign-controlled
    domestic corporations (FCDC) compares to that of U.S.-controlled
    corporations (USCC)--including the percentage of corporations reporting
    zero tax liabilities for tax years 1998 through 2005 and (2) how
    corporate characteristics such as age, size, and industry compare
    between FCDCs and USCCs.[Footnote 2]

    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 1998 through 2005. These SOI samples were based
    on returns as filed, and did not reflect IRS audit results or any net
    operating loss carrybacks from future years. The data that we report
    are estimates based on the SOI sample. Sampling errors are reported in
    appendix II. Caution should be used when comparing estimates because
    not all differences between estimates are statistically significant.
    Various types of corporations report their taxes on different forms and
    may differ in their tax liabilities. Unlike our previous reports, here
    we report separately for each form type. The estimates in the body of
    the report are for corporations filing Forms 1120 or 1120-A. (In app.
    II we provide separate estimates for corporations filing Forms 1120-L,
    1120-PC, 1120-REIT, 1120-RIC, and 1120S.) We also report separately for
    large corporations--those with at least $250 million in assets or $50
    million in gross receipts--because, while they account for less than 1
    percent of all corporations, they make up over 90 percent of all assets
    reported on corporate returns.

    As agreed, we did not attempt to determine whether corporations were
    abusing transfer prices. Nor did we attempt to determine the extent to
    which this abuse explains any differences in the reported tax
    liabilities of FCDCs and USCCs. Detailed information on our scope and
    methodology appears in appendix I.

    We conducted our work from November 2007 through July 2008 in
    accordance with generally accepted government auditing standards. Those
    standards require that we plan and perform the audit to obtain
    sufficient, appropriate evidence to provide a reasonable basis for our
    findings and conclusions based on our audit objectives. We believe that
    the evidence obtained provides a reasonable basis for our findings and
    conclusions based on our audit objectives.

    Results in Brief:

    FCDCs reported lower tax liabilities than USCCs by most measures shown
    in this report. A greater percentage of large FCDCs reported no tax
    liability in a given year from 1998 through 2005, and large FCDCs were
    more likely to report no tax liability over multiple years than large
    USCCs. Corporations can establish the basis for no tax liability at
    different places on their tax returns. For example, some corporations
    could have zero income before deducting expenses and others could have
    zero net income after deducting expenses--both of which could result in
    no tax liability. In 2005, large FCDCs and USCCs differed little in
    where on their tax returns they first established no tax liability.
    Most large FCDCs and USCCs first established no tax liability where
    they reported their net current income after deducting expenses. A
    smaller proportion--about 10 percent--reported losses from prior years
    that eliminated any tax liability. In 2005, alternative comparisons of
    FCDCs and USCCs based on ratios of reported tax liabilities to gross
    receipts or total assets showed that FCDCs reported less tax than
    USCCs.

    FCDCs and USCCs differed in age, size, and industry. FCDCs were younger
    than USCCs in that a greater percentage had been incorporated for 3
    years or less from 1998 through 2005. In 2005, FCDCs were larger on
    average than USCCs in that they reported higher average gross receipts
    and assets than USCCs. A comparison by industry showed that FCDCs were
    concentrated in different industries compared with USCCs in 2005. We
    did not attempt to determine the extent to which these factors
    explained differences in tax liabilities.

    In commenting on a draft of this report, IRS provided comments on
    technical issues, which we incorporated into this report where
    appropriate.

    Background:

    Researchers have studied the factors explaining why FCDCs report lower
    tax liabilities than USCCs.[Footnote 3] Generally, the research has
    recognized that nontax characteristics such as age and industry may
    explain some of the differences in reported tax liabilities. The
    researchers have also found that transfer pricing abuses may play a
    role in explaining the differences. However, measuring the separate
    effects of these factors on tax liabilities has been difficult due to
    data limitations.

    Factors like the age and industry of corporations may affect tax
    liabilities by affecting net income. For example, younger corporations
    may be less likely than older corporations to have net income and,
    therefore, more likely to report no tax liability than older
    corporations. If FCDCs tend to be younger than USCCs, age differences
    may explain some of the difference in reported tax liabilities. We
    noted in our 1999 report that a study by Grubert (1997) suggested that
    the lower relative age of foreign-controlled corporations partially
    explained their lower reported profitability. However, data are not
    available on all the nontax characteristics that may affect tax
    liabilities.

    Tax liabilities may also be reduced through transfer pricing abuse. Any
    company that has a related company, such as a subsidiary with which it
    transacts business, needs to establish transfer prices for those
    intercompany transactions. The transfer price should be the "arm's
    length price," i.e., the price that would be charged if the transaction
    occurred between unrelated companies. Section 482 of the Internal
    Revenue Code provides IRS authority to allocate income among related
    companies if IRS determines that the transfer prices used by the
    taxpayer were inappropriate. How transfer prices are set affects the
    distribution of profits and ultimately the taxable income of the
    companies. The following is an example of abusive cross-border transfer
    pricing. A foreign parent corporation with a subsidiary operating in
    the United States charges the subsidiary excessive prices for goods and
    services rendered (for example, $1,000 instead of the going rate of
    $600). This raises the subsidiary's expenses (by $400), lowers its
    profits (by $400), and effectively shifts that income ($400) outside of
    the United States. At a 35-percent U.S. corporate income tax rate, the
    subsidiary will pay $140 less in U.S. taxes than it would if the $400
    in profits were attributed to it.

    Researchers have used direct and indirect methods to estimate the
    extent to which transfer pricing abuses explain the differences in
    reported tax liabilities. Direct methods analyze the transfer prices
    used by corporations and compare them to arm's length prices. This
    method is difficult to apply because price data are often unavailable
    and determining the price that would be charged between unrelated
    parties can be difficult. An alternative, indirect method used by
    researchers analyzes data about the characteristics of corporations in
    order to test for a statistical relationship between tax rates and
    subsidiaries' profitability or tax liability. In some of these studies,
    statistical methods are used to explain as much of the difference in
    reported tax liabilities as can be explained by the nontax
    characteristics and the remaining unexplained difference is identified
    as the upper limit of the difference that could be explained by
    transfer pricing abuse.[Footnote 4] However, how close this upper limit
    estimate is to the actual effect of transfer pricing abuse depends on
    how many of the important nontax characteristics have been included in
    the first stage of the analysis. As noted above, data are unavailable
    for some important nontax characteristics.

    Low tax burdens can be measured in various ways. Zero tax liability is
    one way. However, corporations paying only small, but not zero, amounts
    of tax also face low tax burdens. Furthermore, corporations that pay no
    or little tax over a number of years have a lower cumulative tax
    burden. Therefore, measures based on a range of tax amounts and tax
    years may give a fuller description of which types of corporations pay
    relatively less. Finally, the amount of taxes paid generally
    corresponds with the size of the corporation, with large corporations
    on average paying more than small ones. Tax liability can be measured
    as the amount of tax paid as a percentage of gross receipts or total
    assets in order to account for differences in the size of corporations.

    FCDCs Reported Lower Tax Liabilities Than USCCs by Most Measures:

    Our comparison of tax liabilities highlights three measures that are
    used by tax experts: (1) the percentage of corporations reporting no
    tax liability, (2) the number of years corporations reported no tax
    liability, and (3) tax liabilities reported by corporations as a
    percentage of gross receipts and assets.

    A Large Percentage of Both FCDCs and USCCs Reported No Tax Liabilities:

    A greater percentage of large FCDCs reported no tax liability in a
    given year from 1998 through 2005, as shown in figure 1. (See table 1
    in app. II for the detailed estimates.) From 1998 through 2001, a
    higher percentage of all FCDCs reported no tax liability than all
    USCCs, but differences after 2001 were not statistically significant.

    As figure 1 shows, the number of large FCDCs and large USCCs that
    reported no tax liability peaked around 2001 and 2002. These years
    correspond roughly with a period of economic recession in the United
    States. However, we did not do any analysis to determine the effect of
    the recession on the patterns shown if figure 1.

    After 2001, the percentage of large FCDCs and USCCs reporting no tax
    liability began to converge. By 2005, the difference was reduced to 3
    percentage points. For corporations other than those filing tax Forms
    1120 and 1120-A, the percentage of corporations that reported no tax
    liability varied by tax year and tax return type. (For detailed
    comparisons of these corporations, see table 2 in app. II.)

    Figure 1: Percentages of FCDCs and USCCs That Reported No Tax
    Liability, Tax Years 1998 through 2005:

    This figure is a combination line graph showing percentages of FCDCs
    and USCCs that reported no tax liability, tax years 1998 through 2005.
    The lines represent all FCDCs, all USCCs, large FCDCs, and large USCCs.
    The X axis represents the tax year, and the Y axis represents the
    percentage.

    Tax year: 1998;
    Large USCCs: 23.2;
    Large FCDCs: 29.3;
    All USCCs: 60.9;
    All FCDCs: 66.5.

    Tax year: 1999;
    Large USCCs: 26.3;
    Large FCDCs: 31.5;
    All USCCs: 61.1;
    All FCDCs: 67.

    Tax year: 2000;
    Large USCCs: 31.4;
    Large FCDCs: 35.2;
    All USCCs: 62.8;
    All FCDCs: 68.4.

    Tax year: 2001;
    Large USCCs: 38;
    Large FCDCs: 53.6;
    All USCCs: 64.6;
    All FCDCs: 71.7.

    Tax year: 2002;
    Large USCCs: 37.8;
    Large FCDCs: 49.5;
    All USCCs: 68.6;
    All FCDCs: 71.4.

    Tax year: 2003;
    Large USCCs: 32.6;
    Large FCDCs: 40.9;
    All USCCs: 69.3;
    All FCDCs: 66.9.

    Tax year: 2004;
    Large USCCs: 29.7;
    Large FCDCs: 34.4;
    All USCCs: 69.1;
    All FCDCs: 65.8.

    Tax year: 2005;
    Large USCCs: 25.2;
    Large FCDCs: 28;
    All USCCs: 66.7;
    All FCDCs: 65.2.

    [See PDF for image]

    Source: GAO analysis of IRS data.

    [End of figure]

    Notes: "Large" FCDCs or USCCs are those with assets of at least $250
    million dollars or gross receipts of at least $50 million dollars.
    Differences between all FCDCs and all USCCs were not statistically
    significant in 2002, 2003, 2004, and 2005.

    [End of figure]

    A Greater Percentage of Large FCDCs Reported No Tax Liability over
    Multiple Years between 1998 and 2005:

    In the 8 years from 1998 through 2005, large FCDCs in a panel data set
    that we analyzed consisting of tax returns that were present in the SOI
    corporate files in every year were more likely to report no tax
    liability over multiple years than large USCCs in the same panel data
    set. As figure 2 shows, about 72 percent of FCDCs and 55 percent of
    USCCs reported no tax liability for at least 1 year during the 8 years.
    About 57 percent of FCDCs and 42 percent of USCCs reported no tax
    liability in multiple years--2 or more years--and about 34 percent of
    FCDCs and 24 percent of USCCs reported no tax liability for at least
    half the study period--4 or more years. A correspondingly higher
    percentage of USCCs reported a tax liability in all 8 years, 45 percent
    for USCCs and 28 percent for FCDCs.

    Figure 2: Percentage of Large FCDCs and USCCs That Reported No Tax
    Liability for Multiple Years between 1998 and 2005:

    This figure is a combination bar graph showing percentage of large
    FCDCs and USCCs that reported no tax liability for multiple years
    between 1998 and 2005.

    Tax liability reported in all years;
    Large FCDCs: 28.3;
    Large USCCs: 45.1.

    No tax liability reported in at least 1 year;
    Large FCDCs: 71.7;
    Large USCCs: 54.9.

    No tax liability reported for 1 year;
    Large FCDCs: 14.5;
    Large USCCs: 13.0.

    No tax liability reported for multiple years: 2 years;
    Large FCDCs: 11.7;
    Large USCCs: 9.1.

    No tax liability reported for multiple years: 3 years;
    Large FCDCs: 11.2;
    Large USCCs: 8.4.

    No tax liability reported for multiple years: 4 years;
    Large FCDCs: 11.0;
    Large USCCs: 7.7.

    No tax liability reported for multiple years: 5 years;
    Large FCDCs: 10.5;
    Large USCCs: 5.8.

    No tax liability reported for multiple years: 6 years;
    Large FCDCs: 5.7;
    Large USCCs: 4.8.

    No tax liability reported for multiple years: 7 years;
    Large FCDCs: 4.1;
    Large USCCs: 3.4.

    No tax liability reported for multiple years: 8 years;
    Large FCDCs: 2.9;
    Large USCCs: 2.7.

    [See PDF for image]

    Source: GAO analysis of panel data developed by GAO from the SOI
    database.

    [End of figure]

    Large FCDCs and USCCs Were Similar in Where on Their Tax Returns They
    Established Zero Tax Liability:

    Large FCDCs and USCCs reporting no tax liability in 2005 arrived at
    that result in similar ways on their tax returns, as shown in figure 3.
    At a high level, corporate tax returns are organized to (1) calculate
    gross profit as gross receipts or sales minus the cost of goods sold;
    (2) calculate total income as gross profit plus other types of income;
    (3) report various deductible expenses; (4) calculate taxable income as
    the difference between income and deductions; and (5) calculate the tax
    liability for the taxable income. Corporations can establish the basis
    for a zero tax liability at different stages in these calculations by
    reporting, for example, that they have no total income or no taxable
    income which results in their having no tax liability. Figure 3 shows
    the percentage of corporations reporting no tax liability in 2005 by
    the line on their tax return where they first reported the zero dollar
    amounts that resulted in no tax liability. For example, the figure
    shows that 3 percent of large FCDCs and 1 percent of large USCCs
    established no tax liability by reporting no gross profit on line 3 of
    their returns.[Footnote 5] This pattern of similar percentages for
    large corporations continues throughout the tax return. For example, a
    similar, small percentage of large FCDCs or USCCs, around 4 to 5
    percent, established their zero tax liability on line 11 by reporting
    zero total income.

    As figure 3 shows, the overwhelming majority, about 79 to 80 percent of
    both large FCDCs and USCCs that reported zero tax liability in 2005,
    established it on line 28 where they reported zero taxable income
    before net operating losses. This means that their reported current-
    year deductions more than offset the positive current-year total income
    reported on line 11. The two most commonly used deductions, as a
    percentage of the value of all deductions claimed, were "other
    deductions"[Footnote 6] and the deduction for salaries and wages. See
    table 3 and figure 8 in appendix II for detailed comparisons of tax
    return line items and deductions.

    On the corporate tax return, current-year taxable income is reported
    before net operating losses from other years are deducted and any tax
    credits are subtracted from tax liabilities. In 2005, losses from prior
    years and tax credits had less impact on where on the tax return large
    corporations first established no tax liability. Figure 3 shows on line
    30 that a relatively small number of large corporations--about 10
    percent--first established a zero tax liability by carrying forward
    losses from prior years, and that an even smaller number--about 3
    percent--first established no tax liability through their use of tax
    credits, as reported on line 11 schedule J in the figure.

    All FCDCs and USCCs differed in some ways from large FCDCs and USCCs in
    where on their tax returns they first established no tax liability,
    reflecting the influence of small corporations. As figure 3 shows, a
    higher percentage of all corporations established no tax liability on
    the gross profit and total income lines on their returns than large
    corporations. All corporations also show a greater impact of losses
    from prior years, with 19 to 24 percent first establishing no tax
    liability when they reported taxable income on line 30 after
    subtracting these losses.

    However, there were also similarities between all corporations and
    large corporations in 2005. As with large corporations, all FCDCs and
    USCCs were most likely to first establish no tax liability on line 28
    of their tax returns--over 46 percent for FCDCs and 58 percent for
    USCCs. In addition, as with large corporations, tax credits had little
    impact with only about 1 percent of all corporations first establishing
    no liability through their use of credits.

    Figure 3 also shows that all FCDCs differed from all USCCs more than
    the large FCDCs differed from large USCCs. Whereas large FCDCs and
    USCCs differed little in where on the return they established no tax
    liability, all FCDCs were more than twice as likely to first establish
    no tax liability on the gross profit and total income lines as all
    USCCs.

    Figure 3: Percentage of FCDCs and USCCs with No Tax Liability by the
    First Line on Their Tax Return Where They Established No Tax Liability,
    Tax Year 2005:

    This figure is a copy of a tax return showing percentage of FCDCs and
    USCCs with no tax liability by the first line on their tax return where
    they established no tax liability, tax year 2005.

    [See PDF for image]

    Source: GAO analysis of IRS information.

    Note: Percentages do not total to 100 due to certain adjustments that
    IRS made to reported tax return data to account for such factors as a
    one-time dividend deduction election.

    [A] Differences between FCDCs and USCCs are not statistically
    significant.

    [End of figure]

    FCDCs Reported Less Tax Liability Than USCCs as a Percentage of Both
    Gross Receipts and Total Assets:

    Alternative comparisons of FCDCs and USCCs based on ratios of reported
    tax liabilities to gross receipts or total assets also showed that
    FCDCs reported less tax than USCCs. Figure 4 shows that taxes as a
    percentage of gross receipts and assets were higher for USCCs than
    FCDCs. FCDCs reported lower tax liabilities in 2005 as a percentage of
    gross receipts than USCCs. For all FCDCs the percentage was about 1.4
    percent, while for all USCCs the percentage was about 1.7 percent. This
    pattern was similar for large corporations where FCDCs had lower tax
    liability as a percentage of gross receipts-about 1.3 percent compared
    to about 2.1 percent for large USCCs.

    Figure 4: FCDC and USCC Tax Liabilities as a Percentage of Gross
    Receipts and Assets, Tax Year 2005:

    This figure is a multiple bar graph showing FCDS and USCC tax
    liabilities as a percentage of gross receipts and assets, tax year
    2005. The X axis represents the gross receipts and the assets. The Y
    axis represents the percentage.

    Gross receipts;
    All FCDCs: 1.38;
    All USCCs: 1.70;
    Large FCDCs: 1.34;
    Large USCCs: 2.06.

    Assets;
    All FCDCs: 0.59;
    All USCCs: 0.86;
    Large FCDCs: 0.56;
    Large USCCs: 0.84.

    [See PDF for image]

    Source: GAO analysis.

    [End of figure]

    Another comparison of FCDCs and USCCs based on amounts of tax liability
    in addition to zero tax liability showed that differences between FCDCs
    and USCCs became smaller as their reported tax liabilities increased.
    The difference between the percentage of large FCDCs and USCCs that
    report no tax liability was about 3 percent in 2005, and this
    difference reduces to 1 percent when we include corporations reporting
    tax liabilities less than $100,000 in the comparison. The difference is
    eliminated entirely when we compare those that report less than $1
    million in tax liability. (For details of these comparisons, see table
    4 in app. II.)

    FCDCs and USCCs Differ by Age, Size, and Industry:

    Differences in age, size, industry and other nontax factors between
    FCDCs and USCCs could explain some of the differences in their reported
    tax liabilities. Also, companies in different industries often have
    different financial characteristics which could affect relative
    measures of tax liability. For instance, the relative levels of assets
    and receipts of companies primarily engaged in wholesale trade differ
    significantly from those primarily engaged in credit intermediation,
    such as commercial banks. We did not attempt to explain the extent to
    which these factors or others, such as transfer pricing abuses, might
    explain differences in the reported tax liabilities of FCDCs and USCCs.

    A Higher Percentage of Large FCDCs Than Large USCCs Were New:

    A higher percentage of large FCDCs than large USCCs were new
    corporations (incorporated for 3 years or less) for tax years 1998
    through 2005, as shown in figure 5. The percentages of large FCDCs that
    were new ranged from 9 percent to 14 percent, while for large USCCs the
    percentages ranged from 7 percent to 10 percent. For all FCDCs and
    USCCs, except for 1998 through 2000, there were no years with a
    statistically significant difference between the percentages of these
    types of corporations that were new. (See table 5 in app. II for the
    detailed estimates.)

    Figure 5: Percentage of FCDCs and USCCs That Were New, Tax Years 1998
    through 2005:

    This figure is a combination line graph showing percentage of FCDCs and
    USCCs that were new, tax years 1998 through 2005. The lines represent
    all FCDCs, all USCCs, large FCDCs, and large USCCs. The X axis
    represents tax year, and the Y axis represents percentage.

    Tax year: 1998;
    Large USCCs: 10.4;
    Large FCDCs: 11.9;
    All USCCs: 20.2;
    All FCDCs: 26.1.

    Tax year: 1999;
    Large USCCs: 10.1;
    Large FCDCs: 13.5;
    All USCCs: 19.4;
    All FCDCs: 25.4.

    Tax year: 2000;
    Large USCCs: 9.1;
    Large FCDCs: 13.6;
    All USCCs: 18.4;
    All FCDCs: 23.7.

    Tax year: 2001;
    Large USCCs: 8.2;
    Large FCDCs: 14;
    All USCCs: 19.4;
    All FCDCs: 21.9.

    Tax year: 2002;
    Large USCCs: 7.2;
    Large FCDCs: 11.2;
    All USCCs: 19.1;
    All FCDCs: 23.6.

    Tax year: 2003;
    Large USCCs: 6.6;
    Large FCDCs: 10;
    All USCCs: 18.5;
    All FCDCs: 19.8.

    Tax year: 2004;
    Large USCCs: 7.1;
    Large FCDCs: 9.5;
    All USCCs: 18.1;
    All FCDCs: 19.9.

    Tax year: 2005;
    Large USCCs: 8;
    Large FCDCs: 9.1;
    All USCCs: 18.8;
    All FCDCs: 22.2.

    [See PDF for image]

    Source: GAO analysis of IRS data.

    Note: Differences between all FCDCs and all USCCs were not
    statistically significant in 2001, 2002, 2003, 2004, and 2005.

    [End of figure]

    FCDCs Reported Higher Average Gross Receipts and Assets Than USCCs:

    FCDCs tended to be larger in that in 2005 they reported higher average
    assets and gross receipts than USCCs, as shown in figure 6. All FCDCs
    reported an average of about $100 million in assets compared to about
    $9 million for all USCCs. Large FCDCs also reported higher amounts of
    assets--an average of about $1.6 billion compared to about $1.1 billion
    for large USCCs.

    FCDCs reported more average gross receipts in 2005. All FCDCs reported
    an average of about $43 million in gross receipts, while USCCs reported
    an average of about $5 million. Although the magnitudes were larger for
    large corporations, the pattern of gross receipts was similar. Large
    FCDCs reported higher average gross receipts--about $663 million
    compared to about $447 million for large USCCs.

    Figure 6: FCDC and USCC Average Gross Receipts and Assets, Tax Year
    2005:

    This figure is a combination bar graph showing FCDC and USCC average
    gross receipts and assets, tax year 2005. The X axis represents average
    gross receipts and average assets.

    Average gross receipts;
    All FCDCs: $43;
    All USCCs: $5;
    Large FCDCs: $663;
    Large USCCs: $447.

    Average assets;
    All FCDCs: $100;
    All USCCs: $9;
    Large FCDCs: $1,595;
    Large USCCs: $1,090.

    [See PDF for image]

    Source: GAO analysis of IRS data.

    [End of figure]

    FCDCs and USCCs Were Concentrated in Different Industries:

    In 2005, FCDCs and USCCs differed in their distribution across
    industries. As figure 7 shows, all FCDCs were more concentrated in the
    wholesale trade and financial services industries, while all USCCs were
    more concentrated in the nonfinancial services industry. When the focus
    is limited to large corporations, FCDCs were relatively more
    concentrated in manufacturing and wholesale trade. Large USCCs were
    more evenly distributed across the industries shown in figure 7.

    Figure 7: FCDCs and USCCs by Major Industry, Tax Year 2005:

    This figure is a combination of two horizontal bar graphs displaying
    FCDCs and USCCs by major industry, tax year 2005. The left bar graph
    represents all FCDCs and USCCs. The right bar graph represents large
    FCDCs and large USCCs. The values represent percentage.

    Manufacturing;
    All FCDCs: 10.9;
    All USCCs: 6.0;
    Large FCDCs: 38.5;
    Large USCCs: 22.7.

    Wholesale trade;
    All FCDCs: 25.5;
    All USCCs: 7.9;
    Large FCDCs: 29.2;
    Large USCCs: 15.8.

    Financial services;
    All FCDCs: 27.2;
    All USCCs: 14.8;
    Large FCDCs: 9.1;
    Large USCCs: 18.4.

    Nonfinancial services;
    All FCDCs: 16.2;
    All USCCs: 37.2;
    Large FCDCs: 9.5;
    Large USCCs: 14.2.

    Retail trade;
    All FCDCs: 6.1;
    All USCCs: 11.6;
    Large FCDCs: 3.5;
    Large USCCs: 12.1.

    Other [A];
    All FCDCs: 14.2;
    All USCCs: 22.5;
    Large FCDCs: 10.3;
    Large USCCs: 16.7.

    [See PDF for image]

    Source: GAO analysis of IRS data.

    [A] Other includes transportation and warehousing; utilities; mining;
    construction; agriculture, forestry, hunting and fishing; and other
    trades.

    [End of figure]

    Differences in cost ratios across industries are possible explanations
    for why industry concentration might affect the reported tax
    liabilities of FCDCs and USCCs. Cost differences could affect profits,
    and thus tax liabilities. For example, the higher cost of goods sold
    relative to receipts could contribute to lower taxable income relative
    to receipts, and consequently lower tax liability relative to receipts.
    In tax year 2005, all FCDCs were more likely to have higher cost of
    goods sold, purchases, and interest as a percentage of gross receipts
    for most industries than were USCCs. The results were similar for large
    corporations. (For details of these comparisons of cost ratios, see
    table 6 in app. II.)

    Agency Comments:

    We provided a draft of this report to the IRS for its comments. On July
    21, the Research, Analysis and Statistics unit provided comments via e-
    mail on technical issues, which we incorporated into this report where
    appropriate.

    As agreed with your offices, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 30 days
    from its date. At that time, we will send copies of this report to the
    Secretary of the Treasury, the Commissioner of Internal Revenue, and
    other interested parties. This report will also be available at no
    charge on GAO's Web site at [hyperlink, http://www.gao.gov].

    If you or your staff has any questions about this report, please
    contact me at (202) 512-9110 or whitej@gao.gov. Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on
    the last page of this report. GAO staff who made contributions to this
    report are listed in appendix III.

    Signed by:

    James R. White:

    Director, Tax Issues Strategic Issues Team:

    [End of section]

    Appendix I: Objectives, Scope, and Methodology:

    The objectives of this assignment were to study (1) how the tax
    liability of foreign-controlled domestic corporations (FCDC) compares
    to that of U.S.-controlled corporations (USCC)--including the
    percentage of corporations reporting zero tax liabilities for tax years
    1998 through 2005 and (2) how corporate characteristics, such as age,
    size, or industry, compare between FCDCs and USCCs. For both of our
    objectives, we used data from Internal Revenue Service's (IRS)
    Statistics of Income (SOI) files on corporate tax returns for tax years
    1998 through 2005. These SOI samples were based on returns as filed,
    and did not reflect IRS audit results or any net operating loss
    carrybacks from future years. Each tax return is treated as a separate
    corporation which, in the case of consolidated returns, may be composed
    of a number of subsidiary corporations. To provide information on the
    number of years large corporations did not report tax liabilities, we
    developed a panel data set consisting of the tax returns of large
    corporations that were present in the SOI corporate files in every year
    from 1998 through 2005. We did not include corporations that changed
    ownership status as USCCs or FCDCs during this period. We also did not
    analyze changes in the composition of corporations that filed
    consolidated returns. The gross receipts and assets of the corporations
    present in the panel data set account for on average about 40 percent
    of gross receipts and assets of all corporations and about 50 percent
    of the gross receipts and assets of large corporations from 1998
    through 2005. Over time, the corporations present in the panel data
    account for an increasing share of corporate gross receipts and assets.
    For example in 1998 and 1999 the panel data corporations accounted for
    about 40 percent of the gross receipts and assets of all large
    corporations. This percentage increased to about 60 percent by 2005.

    To compare all and large FCDCs 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. For the purposes of this report,
    an FCDC is a U.S. corporation with 50 percent or more of its voting
    stock owned by a foreign person or entity. Foreign control of a U.S.
    corporation exists when a foreign investor gains control of an existing
    U.S. company or creates a new company that it incorporates in the
    United States. Both FCDCs and USCCs are subject to U.S. income tax laws
    although the tax treatment of some income may differ. Large
    corporations are those with at least $250 million of assets or at least
    $50 million of receipts. We also compared differences in FCDCs and
    USCCs by age and industry sector. 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 2005, new corporations are those with
    incorporation dates no earlier than 2003. We did not attempt to
    determine whether corporations were abusing transfer prices. Nor did we
    attempt to determine the extent to which such abuse explains any
    differences in the reported tax liabilities of FCDCs and USCCs.

    The SOI corporation data we used in our comparison of tax liabilities
    of FCDCs and USCCs included domestic corporations. We reported
    separately for corporations that reported tax liabilities on Form 1120
    (U.S. Corporation Income Tax Return) and Form 1120-A (U.S. Corporation
    Short-Form Income Tax Return). We also provided in table 2 of appendix
    II information on corporations that reported no tax liabilities on
    Forms 1120-L (U.S. Life Insurance Company Income Tax Return), 1120-PC
    (U.S. Property and Casualty Insurance Company Income Tax Return), 1120-
    REIT (U.S. Income Tax Return for Real Estate Investment Trusts), 1120-
    RIC (U.S. Income Tax Return for Regulated Investment Companies), and
    1120S (U.S. Income Tax Return for an S Corporation). Some of these
    types of corporations, such as REITs and RICs, are pass-through
    entities that generally do not incur corporate tax liabilities. We did
    not include foreign corporations in our comparison of FCDCs and USCCs
    or those that filed Form 1120-F (U.S. Income Tax Return of a Foreign
    Corporation).

    The SOI data in this report is based on SOI's probability sample of
    corporate tax returns and thus is 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 II.
    Caution should be used when comparing estimates because not all
    differences between estimates are statistically significant.
    Differences between all FCDCs and USCCs, and large FCDCs and USCCs, are
    statically 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 2005 dollars. The 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. SOI data are not
    available to the public except in aggregate form via published tables.
    These data tables are publicly available either in printed form or on
    the [hyperlink, http://www.irs.gov] Web site. IRS performs a number of
    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 concluded that the data were sufficiently
    reliable for the purposes of this report.

    We requested comments on a draft of this report from the Commissioner
    of Internal Revenue. We conducted our review from November 2007 through
    July 2008 in accordance with generally accepted government auditing
    standards. Those standards require that we plan and perform the audit
    to obtain sufficient appropriate evidence to provide a reasonable basis
    for our findings and conclusions based on our audit objectives. We
    believe that the evidence obtained provides a reasonable basis for our
    findings and conclusions based on our audit objectives.

    [End of section]

    Appendix II: Additional Tables:

    The tables in this statistical appendix supplement those in the letter
    and 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 FCDCs and USCCs and between large FCDCs and USCCs. The
    comparisons that were not statistically significant are noted in each
    table.

    Corporations That Reported No Tax Liability:

    Table 1: FCDCs and USCCs Reporting No Tax Liability, Tax Years 1998
    through 2005:

    Tax year: 1998;
    FCDCs, all: Number: Forms 1120 and 1120-A: 39,414;
    FCDCs, all: Percentage: Forms 1120 and 1120-A: 66.5;
    USCCs, all: Number: Forms 1120 and 1120-A: 1,322,375;
    USCCs, all: Percentage: Forms 1120 and 1120-A: 60.9;
    FCDCs, large: Number: Forms 1120 and 1120-A: 898;
    FCDCs, large: Percentage: Forms 1120 and 1120-A: 29.3;
    USCCs, large: Number: Forms 1120 and 1120-A: 3,451;
    USCCs, large: Percentage: Forms 1120 and 1120-A: 23.2.

    Tax year: 1999;
    FCDCs, all: Number: Forms 1120 and 1120-A: 38,687;
    FCDCs, all: Percentage: Forms 1120 and 1120-A: 67.0;
    USCCs, all: Number: Forms 1120 and 1120-A: 1,296,663;
    USCCs, all: Percentage: Forms 1120 and 1120-A: 61.1;
    FCDCs, large: Number: Forms 1120 and 1120-A: 1,007;
    FCDCs, large: Percentage: Forms 1120 and 1120-A: 31.5;
    USCCs, large: Number: Forms 1120 and 1120-A: 3,961;
    USCCs, large: Percentage: Forms 1120 and 1120-A: 26.3.

    Tax year: 2000;
    FCDCs, all: Number: Forms 1120 and 1120-A: 39,341;
    FCDCs, all: Percentage: Forms 1120 and 1120-A: 68.4;
    USCCs, all: Number: Forms 1120 and 1120-A: 1,316,163;
    USCCs, all: Percentage: Forms 1120 and 1120-A: 62.8;
    FCDCs, large: Number: Forms 1120 and 1120-A: 1,190;
    FCDCs, large: Percentage: Forms 1120 and 1120-A: 35.2;
    USCCs, large: Number: Forms 1120 and 1120-A: 4,804;
    USCCs, large: Percentage: Forms 1120 and 1120-A: 31.4.

    Tax year: 2001;
    FCDCs, all: Number: Forms 1120 and 1120-A: 41,544;
    FCDCs, all: Percentage: Forms 1120 and 1120-A: 71.7;
    USCCs, all: Number: Forms 1120 and 1120-A: 1,330,859;
    USCCs, all: Percentage: Forms 1120 and 1120-A: 64.6;
    FCDCs, large: Number: Forms 1120 and 1120-A: 1,802;
    FCDCs, large: Percentage: Forms 1120 and 1120-A: 53.6;
    USCCs, large: Number: Forms 1120 and 1120-A: 5,463;
    USCCs, large: Percentage: Forms 1120 and 1120-A: 38.0.

    Tax year: 2002;
    FCDCs, all: Number: Forms 1120 and 1120-A: 42,567;
    FCDCs, all: Percentage: Forms 1120 and 1120-A: 71.4[A];
    USCCs, all: Number: Forms 1120 and 1120-A: 1,385,182;
    USCCs, all: Percentage: Forms 1120 and 1120-A: 68.6[A];
    FCDCs, large: Number: Forms 1120 and 1120-A: 1,600;
    FCDCs, large: Percentage: Forms 1120 and 1120-A: 49.5;
    USCCs, large: Number: Forms 1120 and 1120-A: 5,143;
    USCCs, large: Percentage: Forms 1120 and 1120-A: 37.8.

    Tax year: 2003;
    FCDCs, all: Number: Forms 1120 and 1120-A: 38,166;
    FCDCs, all: Percentage: Forms 1120 and 1120-A: 66.9[A];
    USCCs, all: Number: Forms 1120 and 1120-A: 1,367,105;
    USCCs, all: Percentage: Forms 1120 and 1120-A: 69.3[A];
    FCDCs, large: Number: Forms 1120 and 1120-A: 1,333;
    FCDCs, large: Percentage: Forms 1120 and 1120-A: 40.9;
    USCCs, large: Number: Forms 1120 and 1120-A: 4,386;
    USCCs, large: Percentage: Forms 1120 and 1120-A: 32.6.

    Tax year: 2004;
    FCDCs, all: Number: Forms 1120 and 1120-A: 36,353;
    FCDCs, all: Percentage: Forms 1120 and 1120-A: 65.8[A];
    USCCs, all: Number: Forms 1120 and 1120-A: 1,350,332;
    USCCs, all: Percentage: Forms 1120 and 1120-A: 69.1[A];
    FCDCs, large: Number: Forms 1120 and 1120-A: 1,183;
    FCDCs, large: Percentage: Forms 1120 and 1120-A: 34.4;
    USCCs, large: Number: Forms 1120 and 1120-A: 4,072;
    USCCs, large: Percentage: Forms 1120 and 1120-A: 29.7.

    Tax year: 2005;
    FCDCs, all: Number: Forms 1120 and 1120-A: 38,483;
    FCDCs, all: Percentage: Forms 1120 and 1120-A: 65.2[A];
    USCCs, all: Number: Forms 1120 and 1120-A: 1,263,726;
    USCCs, all: Percentage: Forms 1120 and 1120-A: 66.7[A];
    FCDCs, large: Number: Forms 1120 and 1120-A: 998;
    FCDCs, large: Percentage: Forms 1120 and 1120-A: 28.0;
    USCCs, large: Number: Forms 1120 and 1120-A: 3,565;
    USCCs, large: Percentage: Forms 1120 and 1120-A: 25.2.

    Source: GAO analysis of IRS data.

    Note: Percentage estimates for FCDCs have sampling errors of less than
    (+/-) 4 percentage points; percentage estimates for USCCs have sampling
    errors of less than (+/-) 1 percentage point.

    [A] Differences between FCDCs and USCCs are not statistically
    significant.

    [End of table]

    Table 2: FCDCs and USCCs Reporting No Tax Liability, Tax Years 1998
    through 2005:

    Tax year: 1998;
    FCDCs, all: Number: Forms 1120-L: 12;
    FCDCs, all: Percentage: Forms 1120-L: 16.4;
    USCCs, all: Number: Forms 1120-L: 638;
    USCCs, all: Percentage: Forms 1120-L: 33.2;
    FCDCs, large: Number: Forms 1120-L: 10;
    FCDCs, large: Percentage: Forms 1120-L: 17.9[B];
    USCCs, large: Number: Forms 1120-L: 88;
    USCCs, large: Percentage: Forms 1120-L: 16.9[B].

    Tax year: 1999;
    FCDCs, all: Number: Forms 1120-L: 20;
    FCDCs, all: Percentage: Forms 1120-L: 25.2[B];
    USCCs, all: Number: Forms 1120-L: 644;
    USCCs, all: Percentage: Forms 1120-L: 35.4[B];
    FCDCs, large: Number: Forms 1120-L: 11;
    FCDCs, large: Percentage: Forms 1120-L: 19.0[B];
    USCCs, large: Number: Forms 1120-L: 88;
    USCCs, large: Percentage: Forms 1120-L: 17.4[B].

    Tax year: 2000;
    FCDCs, all: Number: Forms 1120-L: 23;
    FCDCs, all: Percentage: Forms 1120-L: 24.8[B];
    USCCs, all: Number: Forms 1120-L: 641;
    USCCs, all: Percentage: Forms 1120-L: 36.9[B];
    FCDCs, large: Number: Forms 1120-L: 15;
    FCDCs, large: Percentage: Forms 1120-L: 23.8[B];
    USCCs, large: Number: Forms 1120-L: 96;
    USCCs, large: Percentage: Forms 1120-L: 20.5[B].

    Tax year: 2001;
    FCDCs, all: Number: Forms 1120-L: 38;
    FCDCs, all: Percentage: Forms 1120-L: 39.5[B];
    USCCs, all: Number: Forms 1120-L: 664;
    USCCs, all: Percentage: Forms 1120-L: 38.1[B];
    FCDCs, large: Number: Forms 1120-L: 28;
    FCDCs, large: Percentage: Forms 1120-L: 40.0;
    USCCs, large: Number: Forms 1120-L: 129;
    USCCs, large: Percentage: Forms 1120-L: 25.7.

    Tax year: 2002;
    FCDCs, all: Number: Forms 1120-L: 39;
    FCDCs, all: Percentage: Forms 1120-L: 39.7[B];
    USCCs, all: Number: Forms 1120-L: 672;
    USCCs, all: Percentage: Forms 1120-L: 38.1[B];
    FCDCs, large: Number: Forms 1120-L: 34;
    FCDCs, large: Percentage: Forms 1120-L: 45.3;
    USCCs, large: Number: Forms 1120-L: 182;
    USCCs, large: Percentage: Forms 1120-L: 31.6.

    Tax year: 2003;
    FCDCs, all: Number: Forms 1120-L: 21;
    FCDCs, all: Percentage: Forms 1120-L: 34.3[B];
    USCCs, all: Number: Forms 1120-L: 634;
    USCCs, all: Percentage: Forms 1120-L: 36.3[B];
    FCDCs, large: Number: Forms 1120-L: 14;
    FCDCs, large: Percentage: Forms 1120-L: 33.3[B];
    USCCs, large: Number: Forms 1120-L: 152;
    USCCs, large: Percentage: Forms 1120-L: 24.2[B].

    Tax year: 2004;
    FCDCs, all: Number: Forms 1120-L: 28;
    FCDCs, all: Percentage: Forms 1120-L: 28.5[B];
    USCCs, all: Number: Forms 1120-L: 566;
    USCCs, all: Percentage: Forms 1120-L: 33.5[B];
    FCDCs, large: Number: Forms 1120-L: 16;
    FCDCs, large: Percentage: Forms 1120-L: 21.6[B];
    USCCs, large: Number: Forms 1120-L: 133;
    USCCs, large: Percentage: Forms 1120-L: 20.9[B].

    Tax year: 2005;
    FCDCs, all: Number: Forms 1120-L: 32;
    FCDCs, all: Percentage: Forms 1120-L: 28.7[B];
    USCCs, all: Number: Forms 1120-L: 458;
    USCCs, all: Percentage: Forms 1120-L: 29.2[B];
    FCDCs, large: Number: Forms 1120-L: 24;
    FCDCs, large: Percentage: Forms 1120-L: 27.3;
    USCCs, large: Number: Forms 1120-L: 97;
    USCCs, large: Percentage: Forms 1120-L: 15.4.

    Tax year: 1998;
    FCDCs, all: Number: Forms 1120-PC: 25;
    FCDCs, all: Percentage: Forms 1120-PC: 33.3[B];
    USCCs, all: Number: Forms 1120-PC: 1,554;
    USCCs, all: Percentage: Forms 1120-PC: 43.8[B];
    FCDCs, large: Number: Forms 1120-PC: 13;
    FCDCs, large: Percentage: Forms 1120-PC: 32.5[B];
    USCCs, large: Number: Forms 1120-PC: 130;
    USCCs, large: Percentage: Forms 1120-PC: 26.0[B].

    Tax year: 1999;
    FCDCs, all: Number: Forms 1120-PC: 31;
    FCDCs, all: Percentage: Forms 1120-PC: 42.4[B];
    USCCs, all: Number: Forms 1120-PC: 1,742;
    USCCs, all: Percentage: Forms 1120-PC: 47.6[B];
    FCDCs, large: Number: Forms 1120-PC: 19;
    FCDCs, large: Percentage: Forms 1120-PC: 47.5[B];
    USCCs, large: Number: Forms 1120-PC: 154;
    USCCs, large: Percentage: Forms 1120-PC: 32.0[B].

    Tax year: 2000;
    FCDCs, all: Number: Forms 1120-PC: 37;
    FCDCs, all: Percentage: Forms 1120-PC: 49.6[B];
    USCCs, all: Number: Forms 1120-PC: 1,703;
    USCCs, all: Percentage: Forms 1120-PC: 46.6[B];
    FCDCs, large: Number: Forms 1120-PC: 23;
    FCDCs, large: Percentage: Forms 1120-PC: 54.3;
    USCCs, large: Number: Forms 1120-PC: 144;
    USCCs, large: Percentage: Forms 1120-PC: 30.1.

    Tax year: 2001;
    FCDCs, all: Number: Forms 1120-PC: 59;
    FCDCs, all: Percentage: Forms 1120-PC: 64.0;
    USCCs, all: Number: Forms 1120-PC: 1,799;
    USCCs, all: Percentage: Forms 1120-PC: 46.7;
    FCDCs, large: Number: Forms 1120-PC: 39;
    FCDCs, large: Percentage: Forms 1120-PC: 69.6;
    USCCs, large: Number: Forms 1120-PC: 187;
    USCCs, large: Percentage: Forms 1120-PC: 40.1.

    Tax year: 2002;
    FCDCs, all: Number: Forms 1120-PC: 47;
    FCDCs, all: Percentage: Forms 1120-PC: 53.4[B];
    USCCs, all: Number: Forms 1120-PC: 1,794;
    USCCs, all: Percentage: Forms 1120-PC: 43.9[B];
    FCDCs, large: Number: Forms 1120-PC: 26;
    FCDCs, large: Percentage: Forms 1120-PC: 65.0;
    USCCs, large: Number: Forms 1120-PC: 170;
    USCCs, large: Percentage: Forms 1120-PC: 35.0.

    Tax year: 2003;
    FCDCs, all: Number: Forms 1120-PC: 42;
    FCDCs, all: Percentage: Forms 1120-PC: 39.7[B];
    USCCs, all: Number: Forms 1120-PC: 1,550;
    USCCs, all: Percentage: Forms 1120-PC: 35.1[B];
    FCDCs, large: Number: Forms 1120-PC: 12;
    FCDCs, large: Percentage: Forms 1120-PC: 25.4[B];
    USCCs, large: Number: Forms 1120-PC: 90;
    USCCs, large: Percentage: Forms 1120-PC: 17.3[B].

    Tax year: 2004;
    FCDCs, all: Number: Forms 1120-PC: 32;
    FCDCs, all: Percentage: Forms 1120-PC: 32.7[B];
    USCCs, all: Number: Forms 1120-PC: 1,813;
    USCCs, all: Percentage: Forms 1120-PC: 32.8[B];
    FCDCs, large: Number: Forms 1120-PC: 16;
    FCDCs, large: Percentage: Forms 1120-PC: 34.8;
    USCCs, large: Number: Forms 1120-PC: 81;
    USCCs, large: Percentage: Forms 1120-PC: 15.5.

    Tax year: 2005;
    FCDCs, all: Number: Forms 1120-PC: 40;
    FCDCs, all: Percentage: Forms 1120-PC: 36.8[B];
    USCCs, all: Number: Forms 1120-PC: 1,502;
    USCCs, all: Percentage: Forms 1120-PC: 26.0[B];
    FCDCs, large: Number: Forms 1120-PC: 23;
    FCDCs, large: Percentage: Forms 1120-PC: 41.1;
    USCCs, large: Number: Forms 1120-PC: 73;
    USCCs, large: Percentage: Forms 1120-PC: 14.2.

    Tax year: 1998;
    FCDCs, all: Number: Forms 1120-REIT: 27;
    FCDCs, all: Percentage: Forms 1120-REIT: 93.1[B];
    USCCs, all: Number: Forms 1120-REIT: 862;
    USCCs, all: Percentage: Forms 1120-REIT: 95.4[B];
    FCDCs, large: Number: Forms 1120-REIT: 12;
    FCDCs, large: Percentage: Forms 1120-REIT: 100.0[B];
    USCCs, large: Number: Forms 1120-REIT: 316;
    USCCs, large: Percentage: Forms 1120-REIT: 95.8[B].

    Tax year: 1999;
    FCDCs, all: Number: Forms 1120-REIT: 29;
    FCDCs, all: Percentage: Forms 1120-REIT: 90.7[B];
    USCCs, all: Number: Forms 1120-REIT: 974;
    USCCs, all: Percentage: Forms 1120-REIT: 93.8[B];
    FCDCs, large: Number: Forms 1120-REIT: 18;
    FCDCs, large: Percentage: Forms 1120-REIT: 85.7[B];
    USCCs, large: Number: Forms 1120-REIT: 341;
    USCCs, large: Percentage: Forms 1120-REIT: 95.0[B].

    Tax year: 2000;
    FCDCs, all: Number: Forms 1120-REIT: 30;
    FCDCs, all: Percentage: Forms 1120-REIT: 83.3[B];
    USCCs, all: Number: Forms 1120-REIT: 995;
    USCCs, all: Percentage: Forms 1120-REIT: 93.6[B];
    FCDCs, large: Number: Forms 1120-REIT: 17;
    FCDCs, large: Percentage: Forms 1120-REIT: 85.0[B];
    USCCs, large: Number: Forms 1120-REIT: 327;
    USCCs, large: Percentage: Forms 1120-REIT: 94.0[B].

    Tax year: 2001;
    FCDCs, all: Number: Forms 1120-REIT: 47;
    FCDCs, all: Percentage: Forms 1120-REIT: 94.0[B];
    USCCs, all: Number: Forms 1120-REIT: 930;
    USCCs, all: Percentage: Forms 1120-REIT: 94.8[B];
    FCDCs, large: Number: Forms 1120-REIT: 21;
    FCDCs, large: Percentage: Forms 1120-REIT: 95.5[B];
    USCCs, large: Number: Forms 1120-REIT: 333;
    USCCs, large: Percentage: Forms 1120-REIT: 95.4[B].

    Tax year: 2002;
    FCDCs, all: Number: Forms 1120-REIT: 46;
    FCDCs, all: Percentage: Forms 1120-REIT: 90.2[B];
    USCCs, all: Number: Forms 1120-REIT: 989;
    USCCs, all: Percentage: Forms 1120-REIT: 95.2[B];
    FCDCs, large: Number: Forms 1120-REIT: 19;
    FCDCs, large: Percentage: Forms 1120-REIT: 95.0[B];
    USCCs, large: Number: Forms 1120-REIT: 375;
    USCCs, large: Percentage: Forms 1120-REIT: 94.9[B].

    Tax year: 2003;
    FCDCs, all: Number: Forms 1120-REIT: 42;
    FCDCs, all: Percentage: Forms 1120-REIT: 87.4[B];
    USCCs, all: Number: Forms 1120-REIT: 965;
    USCCs, all: Percentage: Forms 1120-REIT: 95.5[B];
    FCDCs, large: Number: Forms 1120-REIT: 19;
    FCDCs, large: Percentage: Forms 1120-REIT: 86.4[B];
    USCCs, large: Number: Forms 1120-REIT: 387;
    USCCs, large: Percentage: Forms 1120-REIT: 94.6[B].

    Tax year: 2004;
    FCDCs, all: Number: Forms 1120-REIT: 48;
    FCDCs, all: Percentage: Forms 1120-REIT: 96.0[B];
    USCCs, all: Number: Forms 1120-REIT: 1,008;
    USCCs, all: Percentage: Forms 1120-REIT: 94.0[B];
    FCDCs, large: Number: Forms 1120-REIT: 26;
    FCDCs, large: Percentage: Forms 1120-REIT: 96.3[B];
    USCCs, large: Number: Forms 1120-REIT: 407;
    USCCs, large: Percentage: Forms 1120-REIT: 93.1[B].

    Tax year: 2005;
    FCDCs, all: Number: Forms 1120-REIT: 76;
    FCDCs, all: Percentage: Forms 1120-REIT: 96.2[B];
    USCCs, all: Number: Forms 1120-REIT: 1,104;
    USCCs, all: Percentage: Forms 1120-REIT: 94.4[B];
    FCDCs, large: Number: Forms 1120-REIT: 33;
    FCDCs, large: Percentage: Forms 1120-REIT: 97.1[B];
    USCCs, large: Number: Forms 1120-REIT: 430;
    USCCs, large: Percentage: Forms 1120-REIT: 92.7[B].

    Tax year: 1998;
    FCDCs, all: Number: Forms 1120-RIC: 86;
    FCDCs, all: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, all: Number: Forms 1120-RIC: 9,730;
    USCCs, all: Percentage: Forms 1120-RIC: 99.2[B];
    FCDCs, large: Number: Forms 1120-RIC: 11;
    FCDCs, large: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, large: Number: Forms 1120-RIC: 3,299;
    USCCs, large: Percentage: Forms 1120-RIC: 99.5[B].

    Tax year: 1999;
    FCDCs, all: Number: Forms 1120-RIC: 93;
    FCDCs, all: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, all: Number: Forms 1120-RIC: 10,159;
    USCCs, all: Percentage: Forms 1120-RIC: 99.4[B];
    FCDCs, large: Number: Forms 1120-RIC: 29;
    FCDCs, large: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, large: Number: Forms 1120-RIC: 3,561;
    USCCs, large: Percentage: Forms 1120-RIC: 99.3[B].

    Tax year: 2000;
    FCDCs, all: Number: Forms 1120-RIC: 103;
    FCDCs, all: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, all: Number: Forms 1120-RIC: 10,817;
    USCCs, all: Percentage: Forms 1120-RIC: 99.3[B];
    FCDCs, large: Number: Forms 1120-RIC: 34;
    FCDCs, large: Percentage: 1Forms 1120-RIC: 00.0[B];
    USCCs, large: Number: Forms 1120-RIC: 3,732;
    USCCs, large: Percentage: Forms 1120-RIC: 99.4[B].

    Tax year: 2001;
    FCDCs, all: Number: Forms 1120-RIC: 97;
    FCDCs, all: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, all: Number: Forms 1120-RIC: 11,171;
    USCCs, all: Percentage: Forms 1120-RIC: 99.6[B];
    FCDCs, large: Number: Forms 1120-RIC: 34;
    FCDCs, large: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, large: Number: Forms 1120-RIC: 3,739;
    USCCs, large: Percentage: Forms 1120-RIC: 99.5[B].

    Tax year: 2002;
    FCDCs, all: Number: Forms 1120-RIC: 104;
    FCDCs, all: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, all: Number: Forms 1120-RIC: 10,889;
    USCCs, all: Percentage: Forms 1120-RIC: 99.3[B];
    FCDCs, large: Number: Forms 1120-RIC: 33;
    FCDCs, large: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, large: Number: Forms 1120-RIC: 3,663;
    USCCs, large: Percentage: Forms 1120-RIC: 99.2[B].

    Tax year: 2003;
    FCDCs, all: Number: Forms 1120-RIC: 118;
    FCDCs, all: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, all: Number: Forms 1120-RIC: 10,787;
    USCCs, all: Percentage: Forms 1120-RIC: 99.3[B];
    FCDCs, large: Number: Forms 1120-RIC: 50;
    FCDCs, large: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, large: Number: Forms 1120-RIC: 4,093;
    USCCs, large: Percentage: Forms 1120-RIC: 99.1[B].

    Tax year: 2004;
    FCDCs, all: Number: Forms 1120-RIC: 107;
    FCDCs, all: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, all: Number: Forms 1120-RIC: 10,726;
    USCCs, all: Percentage: Forms 1120-RIC: 99.4[B];
    FCDCs, large: Number: Forms 1120-RIC: 58;
    FCDCs, large: Percentage: Forms 1120-RIC: 100.0[B];
    USCCs, large: Number: Forms 1120-RIC: 4,309;
    USCCs, large: Percentage: Forms 1120-RIC: 99.2[B].

    Tax year: 2005;
    FCDCs, all: Number: Forms 1120-RIC: 257;
    FCDCs, all: Percentage: Forms 1120-RIC: 98.8[B];
    USCCs, all: Number: Forms 1120-RIC: 10,602;
    USCCs, all: Percentage: Forms 1120-RIC: 99.2[B];
    FCDCs, large: Number: Forms 1120-RIC: 157;
    FCDCs, large: Percentage: Forms 1120-RIC: 99.4[B];
    USCCs, large: Number: Forms 1120-RIC: 4,437;
    USCCs, large: Percentage: Forms 1120-RIC: 99.2[B].

    Tax year: 1998;
    FCDCs, all: Number: Forms 1120S: [A];
    FCDCs, all: Percentage: Forms 1120S: [A];
    USCCs, all: Number: Forms 1120S: 2,579,022;
    USCCs, all: Percentage: Forms 1120S: 99.6;
    FCDCs, large: Number: Forms 1120S: [A];
    FCDCs, large: Percentage: Forms 1120S: [A];
    USCCs, large: Number: Forms 1120S: 8,076;
    USCCs, large: Percentage: Forms 1120S: 93.7.

    Tax year: 1999;
    FCDCs, all: Number: Forms 1120S: [A];
    FCDCs, all: Percentage: Forms 1120S: [A];
    USCCs, all: Number: Forms 1120S: 2,716,695;
    USCCs, all: Percentage: Forms 1120S: 99.6;
    FCDCs, large: Number: Forms 1120S: [A];
    FCDCs, large: Percentage: Forms 1120S: [A];
    USCCs, large: Number: Forms 1120S: 8,638;
    USCCs, large: Percentage: Forms 1120S: 92.3.

    Tax year: 2000;
    FCDCs, all: Number: Forms 1120S: [A];
    FCDCs, all: Percentage: Forms 1120S: [A];
    USCCs, all: Number: Forms 1120S: 2,846,262;
    USCCs, all: Percentage: Forms 1120S: 99.7;
    FCDCs, large: Number: Forms 1120S: [A];
    FCDCs, large: Percentage: Forms 1120S: [A];
    USCCs, large: Number: Forms 1120S: 9,453;
    USCCs, large: Percentage: Forms 1120S: 93.8.

    Tax year: 2001;
    FCDCs, all: Number: Forms 1120S: [A];
    FCDCs, all: Percentage: Forms 1120S: [A];
    USCCs, all: Number: Forms 1120S: 2,978,696;
    USCCs, all: Percentage: Forms 1120S: 99.8;
    FCDCs, large: Number: Forms 1120S: [A];
    FCDCs, large: Percentage: Forms 1120S: [A];
    USCCs, large: Number: Forms 1120S: 9,529;
    USCCs, large: Percentage: Forms 1120S: 94.2.

    Tax year: 2002;
    FCDCs, all: Number: Forms 1120S: [A];
    FCDCs, all: Percentage: Forms 1120S: [A];
    USCCs, all: Number: Forms 1120S: 3,144,831;
    USCCs, all: Percentage: Forms 1120S: 99.7;
    FCDCs, large: Number: Forms 1120S: [A];
    FCDCs, large: Percentage: Forms 1120S: [A];
    USCCs, large: Number: Forms 1120S: 9,809;
    USCCs, large: Percentage: Forms 1120S: 94.4.

    Tax year: 2003;
    FCDCs, all: Number: Forms 1120S: [A];
    FCDCs, all: Percentage: Forms 1120S: [A];
    USCCs, all: Number: Forms 1120S: 3,334,293;
    USCCs, all: Percentage: Forms 1120S: 99.8;
    FCDCs, large: Number: Forms 1120S: [A];
    FCDCs, large: Percentage: Forms 1120S: [A];
    USCCs, large: Number: Forms 1120S: 10,651;
    USCCs, large: Percentage: Forms 1120S: 95.1.

    Tax year: 2004;
    FCDCs, all: Number: Forms 1120S: [A];
    FCDCs, all: Percentage: Forms 1120S: [A];
    USCCs, all: Number: Forms 1120S: 3,512,014;
    USCCs, all: Percentage: Forms 1120S: 99.8;
    FCDCs, large: Number: Forms 1120S: [A];
    FCDCs, large: Percentage: Forms 1120S: [A];
    USCCs, large: Number: Forms 1120S: 12,386;
    USCCs, large: Percentage: Forms 1120S: 95.7.

    Tax year: 2005;
    FCDCs, all: Number: Forms 1120S: [A];
    FCDCs, all: Percentage: Forms 1120S: [A];
    USCCs, all: Number: Forms 1120S: 3,674,551;
    USCCs, all: Percentage: Forms 1120S: 99.8;
    FCDCs, large: Number: Forms 1120S: [A];
    FCDCs, large: Percentage: Forms 1120S: [A];
    USCCs, large: Number: Forms 1120S: 12,504;
    USCCs, large: Percentage: Forms 1120S: 95.2.

    Source: GAO analysis of IRS data.

    Notes: Percentage estimates for all FCDCs have sampling errors of less
    than (+/-) 17 percentage points; percentage estimates for large FCDCs
    have sampling errors of less than (+/-) 24 percentage points;
    percentage estimates for USCCs have sampling errors of less than (+/-)
    5 percentage points. S corporations, RICs, and REITs are pass-through
    entities that generally incur no corporate tax liability.

    [A] Not applicable--S corporations are prohibited from foreign
    ownership.

    [B] Differences between FCDCs and USCCs are not statistically
    significant.

    [End of table]

    Corporations That Established No Tax Liability by Tax Return Line Item:

    Table 3: FCDCs and USCCs That Established No Tax Liability by Tax
    Return Line Item, Tax Year 2005:

    Tax return line item: Gross profit--line 3;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    19.22;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    8.52;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: [Empty].

    Tax return line item: Total income--line 11;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    14.98;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    7.05;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: [Empty].

    Tax return line item: Taxable income before net operating loss
    deductions and special deductions--line 28;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    46.35;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    57.52;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: [Empty].

    Tax return line item: Net operating loss deduction--line 29a;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: 18.51[B];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: 23.47[B].

    Tax return line item: Special deductions--line 29b;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: 0.18;
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: 0.69.

    Tax return line item: Taxable income--line 30;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    18.60[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    23.67[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: [Empty].

    Tax return line item: Income tax--Schedule J, line 3;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    0.04;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    2.18;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: [Empty].

    Tax return line item: Foreign tax credit--Schedule J, line 6a;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: 0.06[B];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: 0.02[B].

    Tax return line item: General business credit--Schedule J, line 6d;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: 0.73[B];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: 0.53[B].

    Tax return line item: Other credits--Schedule J, lines 6b, c, e, f;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: 0.03[B];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: 0.06[B].

    Tax return line item: Total tax--Schedule J, line 11;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    0.81[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    1.07[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: [Empty].

    Tax return line item: Total;
    Percentage of returns where $0 is first reported: All FCDCs, no tax:
    100.00;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: All USCCs, no tax:
    100.00;
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: [Empty].

    Tax return line item: Gross profit--line 3;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    2.92;
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    1.28;
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: [Empty].

    Tax return line item: Total income--line 11;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    4.83[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    4.30[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: [Empty].

    Tax return line item: Taxable income before net operating loss
    deductions and special deductions--line 28;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    79.42[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    80.44[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: All USCCs, no tax: [Empty].

    Tax return line item: Net operating loss deduction--line 29a;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: 9.46[B];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: 10.37[B].

    Tax return line item: Special deductions--line 29b;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: 1.50[B];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: 1.24[B].

    Tax return line item: Taxable income--line 30;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    10.11[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    10.62[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: [Empty].

    Tax return line item: Income tax--Schedule J, line 3;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    0.00[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    0.14[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: [Empty].

    Tax return line item: Foreign tax credit--Schedule J, line 6a;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: 1.90[B];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: 2.20[B].

    Tax return line item: General business credit--Schedule J, line 6d;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: 0.00;
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: 0.72.

    Tax return line item: Other credits--Schedule J, lines 6b, c, e, f;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: 1.00[B];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    [Empty];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: 1.16[B].

    Tax return line item: Total tax--Schedule J, line 11;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    2.72[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    3.22[B];
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: [Empty].

    Tax return line item: Total;
    Percentage of returns where $0 is first reported: Large FCDCs, no tax:
    100.00;
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large FCDCs, no tax: [Empty];
    Percentage of returns where $0 is first reported: Large USCCs, no tax:
    100.00;
    Percentage of returns for line item where deduction or credit was
    reported[A]: Large USCCs, no tax: [Empty].

    Source: GAO analysis of IRS data.

    Note: Percentage estimates for all FCDCs have sampling errors of less
    than (+/-) 6 percentage points; percentage estimates for large FCDCs
    and USCCs have sampling errors of less than (+/-) 2 percentage points.

    [A] These percentages will not total to the corresponding tax return
    line item percentage since corporations can report multiple deductions
    and credits.

    [B] Differences between FCDCs and USCCs are not statistically
    significant.

    [End of table]

    Figure 8: Percentage of Total Deductions for FCDCs and USCCs That First
    Established No Tax Liability on Line 28, Tax Year 2005:

    This figure is a copy of a tax return showing the percentage of total
    deductions for FCDCs and USCCs that first established no tax liability
    on line 28, tax year 2005.

    [See PDF for image]

    Source: GAO analysis of IRS information.

    Notes: Percentages do not total to 100 due to rounding. All estimates
    have sampling errors of less than (+/-) .3 percentage points. Figure 8
    reports the share of each type of deduction in total deductions for
    corporations that first established no tax liability on line 28 on
    their returns. For example, the figure shows that 18.3 percent of the
    total deductions claimed by FCDCs that reported zero taxable income on
    line 28 were deductions for interest expense.

    [End of figure]

    Average Gross Receipts and Tax Liabilities:

    Table 4: FCDCs and USCCs Average Gross Receipts and Tax Liabilities,
    Tax Year 2005:

    Distribution by income tax liability: ; Number of returns: ; Percentage
    of returns: ; Average gross receipts (dollars in millions): ; Average
    tax liability (dollars in millions): ; Tax liability/ $1,000 gross
    receipts (dollars in millions): ; Tax liability/ $1,000 total income
    (dollars in millions): ; Tax liability/ $1,000 assets (dollars in
    millions): .

    Distribution by income tax liability: No tax Liability: All FCDCs;
    Number of returns: 38,483;
    Percentage of returns: 65.2[B];
    Average gross receipts (dollars in millions): $11.30;
    Average tax liability (dollars in millions): [A];
    Tax liability/ $1,000 gross receipts (dollars in millions): [A];
    Tax liability/ $1,000 total income (dollars in millions): [A];
    Tax liability/ $1,000 assets (dollars in millions): [A].

    Distribution by income tax liability: No tax Liability: All USCCs;
    Number of returns: 1,263,726;
    Percentage of returns: 66.7[B];
    Average gross receipts (dollars in millions): $1.65;
    Average tax liability (dollars in millions): [A];
    Tax liability/ $1,000 gross receipts (dollars in millions): [A];
    Tax liability/ $1,000 total income (dollars in millions): [A];
    Tax liability/ $1,000 assets (dollars in millions): [A].

    Distribution by income tax liability: No tax Liability: Large FCDCs;
    Number of returns: 998;
    Percentage of returns: 28.0;
    Average gross receipts (dollars in millions): $373.09;
    Average tax liability (dollars in millions): [A];
    Tax liability/ $1,000 gross receipts (dollars in millions): [A];
    Tax liability/ $1,000 total income (dollars in millions): [A];
    Tax liability/ $1,000 assets (dollars in millions): [A].

    Distribution by income tax liability: No tax Liability: Large USCCs;
    Number of returns: 3,565;
    Percentage of returns: 25.2;
    Average gross receipts (dollars in millions): $303.45;
    Average tax liability (dollars in millions): [A];
    Tax liability/ $1,000 gross receipts (dollars in millions): [A];
    Tax liability/ $1,000 total income (dollars in millions): [A];
    Tax liability/ $1,000 assets (dollars in millions): [A].

    Distribution by income tax liability: 1 or more but less than $100,000:
    All FCDCs;
    Number of returns: 14,035;
    Percentage of returns: 23.8;
    Average gross receipts (dollars in millions): $10.02;
    Average tax liability (dollars in millions): $0.02;
    Tax liability/ $1,000 gross receipts (dollars in millions): $1.69;
    Tax liability/ $1,000 total income (dollars in millions): $5.00;
    Tax liability/ $1,000 assets (dollars in millions): $1.33.

    Distribution by income tax liability: 1 or more but less than $100,000:
    All USCCs;
    Number of returns: 594,094;
    Percentage of returns: 31.4;
    Average gross receipts (dollars in millions): $1.92;
    Average tax liability (dollars in millions): $0.01;
    Tax liability/ $1,000 gross receipts (dollars in millions): $3.64;
    Tax liability/ $1,000 total income (dollars in millions): $8.20;
    Tax liability/ $1,000 assets (dollars in millions): $5.49.

    Distribution by income tax liability: 1 or more but less than $100,000:
    Large FCDCs;
    Number of returns: 378;
    Percentage of returns: 10.6;
    Average gross receipts (dollars in millions): $263.18;
    Average tax liability (dollars in millions): $0.04;
    Tax liability/ $1,000 gross receipts (dollars in millions): $0.16;
    Tax liability/ $1,000 total income (dollars in millions): $0.53;
    Tax liability/ $1,000 assets (dollars in millions): $0.12.

    Distribution by income tax liability: 1 or more but less than $100,000:
    Large USCCs;
    Number of returns: 1,755;
    Percentage of returns: 12.4;
    Average gross receipts (dollars in millions): $114.12;
    Average tax liability (dollars in millions): $0.04;
    Tax liability/ $1,000 gross receipts (dollars in millions): $0.33;
    Tax liability/ $1,000 total income (dollars in millions): $0.94;
    Tax liability/ $1,000 assets (dollars in millions): $0.20.

    Distribution by income tax liability: $100,000 or more but less than $1
    million: All FCDCs;
    Number of returns: 4,459;
    Percentage of returns: 7.6;
    Average gross receipts (dollars in millions): $56.07;
    Average tax liability (dollars in millions): $0.35;
    Tax liability/ $1,000 gross receipts (dollars in millions): $6.26;
    Tax liability/ $1,000 total income (dollars in millions): $18.56;
    Tax liability/ $1,000 assets (dollars in millions): $4.86.

    Distribution by income tax liability: $100,000 or more but less than $1
    million: All USCCs;
    Number of returns: 29,636;
    Percentage of returns: 1.6;
    Average gross receipts (dollars in millions): $27.73;
    Average tax liability (dollars in millions): $0.30;
    Tax liability/ $1,000 gross receipts (dollars in millions): $10.67;
    Tax liability/ $1,000 total income (dollars in millions): $25.10;
    Tax liability/ $1,000 assets (dollars in millions): $7.56.

    Distribution by income tax liability: $100,000 or more but less than $1
    million: Large FCDCs;
    Number of returns: 785;
    Percentage of returns: 22.0;
    Average gross receipts (dollars in millions): $263.56;
    Average tax liability (dollars in millions): $0.45[B];
    Tax liability/ $1,000 gross receipts (dollars in millions): $1.70;
    Tax liability/ $1,000 total income (dollars in millions): $5.37;
    Tax liability/ $1,000 assets (dollars in millions): $1.27.

    Distribution by income tax liability: $100,000 or more but less than $1
    million: Large USCCs;
    Number of returns: 3,367;
    Percentage of returns: 23.8;
    Average gross receipts (dollars in millions): $157.90;
    Average tax liability (dollars in millions): $0.45[B];
    Tax liability/ $1,000 gross receipts (dollars in millions): $2.85;
    Tax liability/ $1,000 total income (dollars in millions): $7.35;
    Tax liability/ $1,000 assets (dollars in millions): $2.08.

    Distribution by income tax liability: $1 million or more: All FCDCs;
    Number of returns: 2,043;
    Percentage of returns: 3.5;
    Average gross receipts (dollars in millions): $828.14;
    Average tax liability (dollars in millions): $16.17;
    Tax liability/ $1,000 gross receipts (dollars in millions): $19.52;
    Tax liability/ $1,000 total income (dollars in millions): $49.22;
    Tax liability/ $1,000 assets (dollars in millions): $6.99.

    Distribution by income tax liability: $1 million or more: All USCCs;
    Number of returns: 7,364;
    Percentage of returns: 0.4;
    Average gross receipts (dollars in millions): $615.83;
    Average tax liability (dollars in millions): $18.06;
    Tax liability/ $1,000 gross receipts (dollars in millions): $29.33;
    Tax liability/ $1,000 total income (dollars in millions): $48.37;
    Tax liability/ $1,000 assets (dollars in millions): $11.10.

    Distribution by income tax liability: $1 million or more: Large FCDCs;
    Number of returns: 1,403;
    Percentage of returns: 39.4[B];
    Average gross receipts (dollars in millions): $1,199.48;
    Average tax liability (dollars in millions): $22.28;
    Tax liability/ $1,000 gross receipts (dollars in millions): $18.58;
    Tax liability/ $1,000 total income (dollars in millions): $47.41;
    Tax liability/ $1,000 assets (dollars in millions): $6.65.

    Distribution by income tax liability: $1 million or more: Large USCCs;
    Number of returns: 5,446;
    Percentage of returns: 38.5[B];
    Average gross receipts (dollars in millions): $826.24;
    Average tax liability (dollars in millions): $23.55;
    Tax liability/ $1,000 gross receipts (dollars in millions): $28.50;
    Tax liability/ $1,000 total income (dollars in millions): $47.31;
    Tax liability/ $1,000 assets (dollars in millions): $10.79.

    Distribution by income tax liability: Total: All FCDCs;
    Number of returns: 59,020;
    Percentage of returns: 100.0;
    Average gross receipts (dollars in millions): $42.66;
    Average tax liability (dollars in millions): $0.59;
    Tax liability/ $1,000 gross receipts (dollars in millions): $13.84;
    Tax liability/ $1,000 total income (dollars in millions): $36.78;
    Tax liability/ $1,000 assets (dollars in millions): $5.91.

    Distribution by income tax liability: Total: All USCCs;
    Number of returns: 1,894,819;
    Percentage of returns: 100.0;
    Average gross receipts (dollars in millions): $4.53;
    Average tax liability (dollars in millions): $0.08;
    Tax liability/ $1,000 gross receipts (dollars in millions): $17.01;
    Tax liability/ $1,000 total income (dollars in millions): $31.11;
    Tax liability/ $1,000 assets (dollars in millions): $8.59.

    Distribution by income tax liability: Total: Large FCDCs;
    Number of returns: 3,563;
    Percentage of returns: 100.0;
    Average gross receipts (dollars in millions): $662.61;
    Average tax liability (dollars in millions): $8.88;
    Tax liability/ $1,000 gross receipts (dollars in millions): $13.39;
    Tax liability/ $1,000 total income (dollars in millions): $36.08;
    Tax liability/ $1,000 assets (dollars in millions): $5.56.

    Distribution by income tax liability: Total: Large USCCs;
    Number of returns: 14,132;
    Percentage of returns: 100.0;
    Average gross receipts (dollars in millions): $446.72;
    Average tax liability (dollars in millions): $9.19;
    Tax liability/ $1,000 gross receipts (dollars in millions): $20.56;
    Tax liability/ $1,000 total income (dollars in millions): $36.77;
    Tax liability/ $1,000 assets (dollars in millions): $8.43.

    Source: GAO analysis of IRS data.

    Note: Estimates in the second column have sampling errors of less than
    (+/-) 4 percentage points; estimates in the third column have sampling
    errors of less than (+/-) $24 million dollars; estimates in the fourth,
    fifth, and seventh columns have sampling errors of less than (+/-) $0.5
    million dollars; estimates in the sixth column have sampling errors of
    less than (+/-) $1.2 million dollars.

    [A] Not applicable.

    [B] Differences between FCDCs and USCCs are not statistically
    significant.

    [End of table]

    Corporations That Were New:

    Table 5: Percentage of FCDCs and USCCs That Were New, Tax Years 1998
    through 2005:

    Tax year: 1998;
    FCDCs, all: 26.1;
    USCCs, all: 20.2;
    FCDCs, large: 11.9;
    USCCs, large: 10.4.

    Tax year: 1999;
    FCDCs, all: 25.4;
    USCCs, all: 19.4;
    FCDCs, large: 13.5;
    USCCs, large: 10.1.

    Tax year: 2000;
    FCDCs, all: 23.7;
    USCCs, all: 18.4;
    FCDCs, large: 13.6;
    USCCs, large: 9.1.

    Tax year: 2001;
    FCDCs, all: 21.9[A];
    USCCs, all: 19.4[A];
    FCDCs, large: 14.0;
    USCCs, large: 8.2.

    Tax year: 2002;
    FCDCs, all: 23.6[A];
    USCCs, all: 19.1[A];
    FCDCs, large: 11.2;
    USCCs, large: 7.2.

    Tax year: 2003;
    FCDCs, all: 19.8[A];
    USCCs, all: 18.5[A];
    FCDCs, large: 10.0;
    USCCs, large: 6.6.

    Tax year: 2004;
    FCDCs, all: 19.9[A];
    USCCs, all: 18.1[A];
    FCDCs, large: 9.5;
    USCCs, large: 7.1.

    Tax year: 2005;
    FCDCs, all: 22.2[A];
    USCCs, all: 18.8[A];
    FCDCs, large: 9.1;
    USCCs, large: 8.0.

    Source: GAO analysis of IRS data.

    Note: Percentage estimates for all FCDCs have sampling errors of less
    than (+/-) 5 percentage points; percentage estimates for large FCDCs
    have sampling errors of less than (+/-) 2 percentage points; USCCs have
    sampling errors of less than (+/-) 1 percentage point.

    [A] Differences between FCDCs and USCCs are not statistically
    significant.

    [End of table]

    Cost Ratios by Major Industry:

    Table 6: FCDCs and USCCs Cost Ratios by Major Industry, Tax Year 2005:

    Industry: All FCDCs: Manufacturing;
    Cost of goods sold as a percentage of gross receipts: All: 77.8;
    Cost of goods sold as a percentage of gross receipts: No tax: 77.4;
    Purchases as a percentage of gross receipts: All: 65.6;
    Purchases as a percentage of gross receipts: No tax: 55.8; Interest as
    a percentage of gross receipts: All: 2.3; Interest as a percentage of
    gross receipts: No tax: 3.6.

    Industry: All FCDCs: Wholesale trade;
    Cost of goods sold as a percentage of gross receipts: All: 82.2;
    Cost of goods sold as a percentage of gross receipts: No tax: 84.9;
    Purchases as a percentage of gross receipts: All: 76.1;
    Purchases as a percentage of gross receipts: No tax: 76.2;
    Interest as a percentage of gross receipts: All: 1.0;
    Interest as a percentage of gross receipts: No tax: 1.0.

    Industry: All FCDCs: Financial services;
    Cost of goods sold as a percentage of gross receipts: All: 10.3[A];
    Cost of goods sold as a percentage of gross receipts: No tax: 26.7;
    Purchases as a percentage of gross receipts: All: 5.2;
    Purchases as a percentage of gross receipts: No tax: 17.4;
    Interest as a percentage of gross receipts: All: 156.6;
    Interest as a percentage of gross receipts: No tax: 68.5.

    Industry: All FCDCs: Nonfinancial services;
    Cost of goods sold as a percentage of gross receipts: All: 41.2;
    Cost of goods sold as a percentage of gross receipts: No tax: 37.0;
    Purchases as a percentage of gross receipts: All: 15.4;
    Purchases as a percentage of gross receipts: No tax: 14.8;
    Interest as a percentage of gross receipts: All: 3.6;
    Interest as a percentage of gross receipts: No tax: 5.1.

    Industry: All FCDCs: Retail trade;
    Cost of goods sold as a percentage of gross receipts: All: 71.7[A];
    Cost of goods sold as a percentage of gross receipts: No tax: 79.9;
    Purchases as a percentage of gross receipts: All: 67.0;
    Purchases as a percentage of gross receipts: No tax: 79.4;
    Interest as a percentage of gross receipts: All: 1.1;
    Interest as a percentage of gross receipts: No tax: 1.2.

    Industry: All FCDCs: Other;
    Cost of goods sold as a percentage of gross receipts: All: 53.7;
    Cost of goods sold as a percentage of gross receipts: No tax: 54.2[A];
    Purchases as a percentage of gross receipts: All: 19.1;
    Purchases as a percentage of gross receipts: No tax: 13.6;
    Interest as a percentage of gross receipts: All: 5.2;
    Interest as a percentage of gross receipts: No tax: 7.1.

    Industry: All FCDCs: Total;
    Cost of goods sold as a percentage of gross receipts: All: 73.1;
    Cost of goods sold as a percentage of gross receipts: No tax: 71.4;
    Purchases as a percentage of gross receipts: All: 60.4;
    Purchases as a percentage of gross receipts: No tax: 51.3;
    Interest as a percentage of gross receipts: All: 6.0;
    Interest as a percentage of gross receipts: No tax: 4.6.

    Industry: All USCCs: Manufacturing;
    Cost of goods sold as a percentage of gross receipts: All: 69.8;
    Cost of goods sold as a percentage of gross receipts: No tax: 72.6;
    Purchases as a percentage of gross receipts: All: 48.7; Purchases as a
    percentage of gross receipts: No tax: 51.6; Interest as a percentage of
    gross receipts: All: 2.6; Interest as a percentage of gross receipts:
    No tax: 4.0.

    Industry: All USCCs: Wholesale trade;
    Cost of goods sold as a percentage of gross receipts: All: 80.6;
    Cost of goods sold as a percentage of gross receipts: No tax: 79.6;
    Purchases as a percentage of gross receipts: All: 74.9;
    Purchases as a percentage of gross receipts: No tax: 71.3;
    Interest as a percentage of gross receipts: All: 0.9;
    Interest as a percentage of gross receipts: No tax: 1.2.

    Industry: All USCCs: Financial services;
    Cost of goods sold as a percentage of gross receipts: All: 10.6[A];
    Cost of goods sold as a percentage of gross receipts: No tax: 13.9;
    Purchases as a percentage of gross receipts: All: 3.5;
    Purchases as a percentage of gross receipts: No tax: 4.8;
    Interest as a percentage of gross receipts: All: 87.0;
    Interest as a percentage of gross receipts: No tax: 45.2.

    Industry: All USCCs: Nonfinancial services;
    Cost of goods sold as a percentage of gross receipts: All: 26.5;
    Cost of goods sold as a percentage of gross receipts: No tax: 23.9;
    Purchases as a percentage of gross receipts: All: 10.5;
    Purchases as a percentage of gross receipts: No tax: 10.3;
    Interest as a percentage of gross receipts: All: 1.9;
    Interest as a percentage of gross receipts: No tax: 2.0.

    Industry: All USCCs: Retail trade;
    Cost of goods sold as a percentage of gross receipts: All: 71.5[ A];
    Cost of goods sold as a percentage of gross receipts: No tax: 74.8;
    Purchases as a percentage of gross receipts: All: 68.3;
    Purchases as a percentage of gross receipts: No tax: 70.4;
    Interest as a percentage of gross receipts: All: 0.9;
    Interest as a percentage of gross receipts: No tax: 1.0.

    Industry: All USCCs: Other;
    Cost of goods sold as a percentage of gross receipts: All: 51.8;
    Cost of goods sold as a percentage of gross receipts: No tax: 52.5[ A];
    Purchases as a percentage of gross receipts: All: 23.2;
    Purchases as a percentage of gross receipts: No tax: 20.8;
    Interest as a percentage of gross receipts: All: 4.1;
    Interest as a percentage of gross receipts: No tax: 5.0.

    Industry: All USCCs: Total;
    Cost of goods sold as a percentage of gross receipts: All: 59.5;
    Cost of goods sold as a percentage of gross receipts: No tax: 54.6;
    Purchases as a percentage of gross receipts: All: 42.8;
    Purchases as a percentage of gross receipts: No tax: 36.3;
    Interest as a percentage of gross receipts: All: 5.5;
    Interest as a percentage of gross receipts: No tax: 4.9.

    Industry: Large FCDCs: Manufacturing;
    Cost of goods sold as a percentage of gross receipts: All: 77.9;
    Cost of goods sold as a percentage of gross receipts: No tax: 77.4;
    Purchases as a percentage of gross receipts: All: 66.0;
    Purchases as a percentage of gross receipts: No tax: 55.7;
    Interest as a percentage of gross receipts: All: 2.3;
    Interest as a percentage of gross receipts: No tax: 3.8.

    Industry: Large FCDCs: Wholesale trade;
    Cost of goods sold as a percentage of gross receipts: All: 82.6;
    Cost of goods sold as a percentage of gross receipts: No tax: 87.3;
    Purchases as a percentage of gross receipts: All: 76.4[ A];
    Purchases as a percentage of gross receipts: No tax: 77.5;
    Interest as a percentage of gross receipts: All: 1.1;
    Interest as a percentage of gross receipts: No tax: 1.1.

    Industry: Large FCDCs: Financial services;
    Cost of goods sold as a percentage of gross receipts: All: 9.4[ A];
    Cost of goods sold as a percentage of gross receipts: No tax: 31.2;
    Purchases as a percentage of gross receipts: All: 4.9;
    Purchases as a percentage of gross receipts: No tax: 20.5;
    Interest as a percentage of gross receipts: All: 173.1;
    Interest as a percentage of gross receipts: No tax: 82.2[ A].

    Industry: Large FCDCs: Nonfinancial services;
    Cost of goods sold as a percentage of gross receipts: All: 42.3;
    Cost of goods sold as a percentage of gross receipts: No tax: 37.4;
    Purchases as a percentage of gross receipts: All: 15.5;
    Purchases as a percentage of gross receipts: No tax: 15.2;
    Interest as a percentage of gross receipts: All: 3.9;
    Interest as a percentage of gross receipts: No tax: 5.6.

    Industry: Large FCDCs: Retail trade;
    Cost of goods sold as a percentage of gross receipts: All: 72.4;
    Cost of goods sold as a percentage of gross receipts: No tax: 82.8;
    Purchases as a percentage of gross receipts: All: 67.8[ A];
    Purchases as a percentage of gross receipts: No tax: 83.2;
    Interest as a percentage of gross receipts: All: 1.1;
    Interest as a percentage of gross receipts: No tax: 1.3[ A].

    Industry: Large FCDCs: Other;
    Cost of goods sold as a percentage of gross receipts: All: 53.9;
    Cost of goods sold as a percentage of gross receipts: No tax: 54.1;
    Purchases as a percentage of gross receipts: All: 19.1;
    Purchases as a percentage of gross receipts: No tax: 12.3;
    Interest as a percentage of gross receipts: All: 5.5;
    Interest as a percentage of gross receipts: No tax: 7.7.

    Industry: Large FCDCs: Total;
    Cost of goods sold as a percentage of gross receipts: All: 73.6;
    Cost of goods sold as a percentage of gross receipts: No tax: 72.3;
    Purchases as a percentage of gross receipts: All: 61.1;
    Purchases as a percentage of gross receipts: No tax: 51.4;
    Interest as a percentage of gross receipts: All: 6.2;
    Interest as a percentage of gross receipts: No tax: 4.8.

    Industry: Large USCCs: Manufacturing;
    Cost of goods sold as a percentage of gross receipts: All: 70.3;
    Cost of goods sold as a percentage of gross receipts: No tax: 74.5;
    Purchases as a percentage of gross receipts: All: 49.3;
    Purchases as a percentage of gross receipts: No tax: 54.4;
    Interest as a percentage of gross receipts: All: 2.7;
    Interest as a percentage of gross receipts: No tax: 4.5.

    Industry: Large USCCs: Wholesale trade;
    Cost of goods sold as a percentage of gross receipts: All: 82.3;
    Cost of goods sold as a percentage of gross receipts: No tax: 83.2;
    Purchases as a percentage of gross receipts: All: 76.0[ A];
    Purchases as a percentage of gross receipts: No tax: 72.4;
    Interest as a percentage of gross receipts: All: 1.0;
    Interest as a percentage of gross receipts: No tax: 1.4.

    Industry: Large USCCs: Financial services;
    Cost of goods sold as a percentage of gross receipts: All: 8.9[ A];
    Cost of goods sold as a percentage of gross receipts: No tax: 11.5;
    Purchases as a percentage of gross receipts: All: 3.3;
    Purchases as a percentage of gross receipts: No tax: 5.1;
    Interest as a percentage of gross receipts: All: 129.2;
    Interest as a percentage of gross receipts: No tax: 86.9[ A].

    Industry: Large USCCs: Nonfinancial services;
    Cost of goods sold as a percentage of gross receipts: All: 30.3;
    Cost of goods sold as a percentage of gross receipts: No tax: 29.7;
    Purchases as a percentage of gross receipts: All: 10.1;
    Purchases as a percentage of gross receipts: No tax: 9.7;
    Interest as a percentage of gross receipts: All: 2.9;
    Interest as a percentage of gross receipts: No tax: 3.9.

    Industry: Large USCCs: Retail trade;
    Cost of goods sold as a percentage of gross receipts: All: 70.3;
    Cost of goods sold as a percentage of gross receipts: No tax: 74.7;
    Purchases as a percentage of gross receipts: All: 67.3[ A];
    Purchases as a percentage of gross receipts: No tax: 70.7;
    Interest as a percentage of gross receipts: All: 1.0;
    Interest as a percentage of gross receipts: No tax: 1.2[ A].

    Industry: Large USCCs: Other;
    Cost of goods sold as a percentage of gross receipts: All: 48.9;
    Cost of goods sold as a percentage of gross receipts: No tax: 48.6;
    Purchases as a percentage of gross receipts: All: 22.3;
    Purchases as a percentage of gross receipts: No tax: 18.2;
    Interest as a percentage of gross receipts: All: 5.2;
    Interest as a percentage of gross receipts: No tax: 7.2.

    Industry: Large USCCs: Total;
    Cost of goods sold as a percentage of gross receipts: All: 61.5;
    Cost of goods sold as a percentage of gross receipts: No tax: 59.0;
    Purchases as a percentage of gross receipts: All: 44.4;
    Purchases as a percentage of gross receipts: No tax: 38.4;
    Interest as a percentage of gross receipts: All: 6.9;
    Interest as a percentage of gross receipts: No tax: 7.7.

    Source: GAO analysis of IRS data.

    Note: All estimates have sampling errors of less than (+/-) 6
    percentage points.

    [A] Differences between FCDCs and USCCs are not statistically
    significant.

    [End of table]

    [End of section]

    Appendix III: GAO Contact and Staff Acknowledgments:

    GAO Contact:

    James R. White, (202) 512-9110 or whitej@gao.gov:

    Acknowledgments:

    In addition to the contact person named above, Kevin Daly, Assistant
    Director; Amy Bowser; Sara Daleski; Laurie King; Donna Miller; and John
    Mingus made key contributions to this report.

    [End of section]

    Footnotes:

    [1] Transfer 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. Our
    previous reports are: GAO, International Taxation: Taxes of Foreign-and
    U.S.-Controlled Corporations, GAO/GGD-93-112FS (Washington, D.C.: June
    11, 1993); 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); and Tax Administration: Comparison of the
    Reported Tax Liabilities of Foreign-and U.S.-Controlled Corporations,
    1996-2000, GAO-04-358 (Washington, D.C.: Feb. 27, 2004).

    [2] For purposes of this report, an FCDC is a U.S. corporation in which
    foreign individuals or entities own at least 50 percent of the
    corporation's voting stock.

    [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).

    [4] For examples of studies using direct methods, see Kimberly
    Clausing, "Tax Motivated Transfer Pricing and U.S. Intrafirm Trade
    Prices," Journal of Public Economics (2003) pp. 2207 - 2223, and Andrew
    Bernard, J. Jensen and Peter Schott, "Transfer Pricing by U.S.-Based
    Multinational Firms," NBER working paper 12493 (August 2006). For
    examples of indirect methods, see James Hines, "Tax Policy and the
    Activities of Multinational Corporations," NBER working paper 5589 (May
    1996), pp. 25-30.

    [5] This is the only line on the tax return shown in figure 3 with a
    statistically significant difference between the percentage of large
    FCDCs and USCCs first reporting zero dollars.

    [6] Other deductions are all allowable deductions that are not
    deductible elsewhere on Form 1120. These include travel, meals, and
    entertainment expenses; dividends paid in cash on stock held by
    employee stock ownership plans; insurance premiums; and legal and
    professional fees.

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