Tax Administration: Foreign- and U.S.-Controlled Corporations That Did
Not Pay U.S. Income Taxes, 1989-95 (Letter Report, 03/23/99,
GAO/GGD-99-39).

Pursuant to a congressional request, GAO provided an update to its
report on the nonpayment of U.S. income taxes by foreign-controlled
corporations (FCC) and U.S.-controlled corporations (USCC), focusing on
comparisons of: (1) the percentages of FCCs and USCCs that filed income
tax returns showing no tax liabilities for 1989 through 1995, the latest
years for which data were available; and (2) selected characteristics,
including age, industrial sector, and certain cost ratios, of large
corporations--those with assets of $250 million or more or gross
receipts of $50 million or more.

GAO noted that: (1) in each year between 1989 and 1995, a majority of
corporations, both foreign- and U.S.-controlled, paid no U.S. income
tax; (2) among large corporations, the percentage of FCCs that paid no
tax exceeded that for USCCs from 1989 through 1993; (3) in 1994, the
difference between the two groups was not statistically significant, and
in 1995, the percentage of large FCCs that paid no U.S. income tax was
slightly less than that of large USCCs; (4) differences in the
characteristics of large FCCs and USCCs may account for part of the
differences in the amount of taxes paid by the two groups; (5) one
difference was the percentage of new corporations--3 years old or
less--in each group; (6) the Internal Revenue Service data GAO reviewed
indicate that newer corporations were less likely than older
corporations to pay taxes; (7) from 1989 to 1993, a greater percentage
of large FCCs than large USCCs were new, but from 1994 to 1995, a
greater percentage of large USCCs than large FCCs were new; (8) another
significant difference between large FCCs and large USCCs was in their
distribution across industrial sectors; (9) in 1995, in comparison to
large USCCs, large FCCs were more heavily concentrated in the
manufacturing and wholesale trade sectors and less concentrated in the
financial services sector; (10) aggregate ratios of costs to receipts
for all large corporations differed significantly across industrial
sectors; (11) the difference in cost ratios across industries, combined
with the fact that large FCCs and USCCs were concentrated in different
industries, could account for some of the difference in the amount of
taxes that large FCCs paid per dollar of receipts and that large USCCs
paid; and (12) the ratio of taxable income per dollar of receipts should
be inversely related to the ratio of costs per dollar of receipts.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-99-39
     TITLE:  Tax Administration: Foreign- and U.S.-Controlled 
             Corporations That Did Not Pay U.S. Income Taxes, 1989-95
      DATE:  03/23/99
   SUBJECT:  Tax administration
             Foreign investments in US
             Tax nonpayment
             Tax evasion
             Foreign corporations
             Income taxes
             Comparative analysis
             Tax law

             
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gg99039 TAX ADMINISTRATION

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

United States General Accounting Office

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


March 1999 

GAO/GGD-99-39

March 1999   GAO/GGD-99-39

United States General Accounting Office Washington, D. C. 20548

General Government Division

B-281098

Page 1 GAO/GGD-99-39 Foreign- and U. S.- Controlled Corporations

GAO March 23, 1999 The Honorable Byron L. Dorgan United States
Senate

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

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

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

In each year between 1989 and 1995, a majority of corporations,
both foreign- and U. S.- controlled, paid no U. S. income tax.
Among large corporations, the percentage of FCCs that paid no tax
exceeded that for USCCs from 1989 through 1993. In 1994, the
difference between the two groups was not statistically
significant, and in 1995, the percentage of large

1 For purposes of this report, a corporation is an FCC if foreign
individuals or entities own at least 50 percent of its voting
stock. Transfer prices are prices used in transactions between
affiliated corporations. Our previous related reports are:
International Taxation: Transfer Pricing and Information on
Nonpayment of Tax (GAO/GGD-95-101, Apr. 13, 1995) and
International Taxation: Taxes of Foreign- and U. S.- Controlled
Corporations (GAO/GGD-93-112FS, June 11, 1993). Results in Brief

B-281098 Page 2 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

FCCs that paid no U. S. income tax was slightly less than that of
large USCCs. However, there are other ways to compare FCCs and
USCCs. For example, in 1995, large FCCs paid $8.31 of tax per
$1,000 in gross receipts, significantly less than the $15. 58 paid
by large USCCs.

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

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

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

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

B-281098 Page 3 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

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

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

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

In this report, we defined a corporation as being large if its
reported total assets in tax year 1995 were at least $250 million
or its reported gross receipts totaled at least $50 million. For
years preceding tax year 1995, we deflated the $250 million asset
and $50 million receipt definition of large corporate size by the
gross domestic product price deflator for those years. We made
this adjustment in the dollar magnitude of the definition because
changing price levels, over time, alter the purchasing power of
gross receipts and assets.

3 Harry Grubert, Another Look at the Low Taxable Income of
Foreign- Controlled Companies in the United States, Tax Notes
International (Dec. 8, 1997), pp. 1,873- 97; and David S. Laster
and Robert N. McCauley, Making Sense of the Profits of Foreign
Firms in the United States, Federal Reserve Bank of New York
Quarterly Review (Summer- Fall 1994). Scope and

Methodology

B-281098 Page 4 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

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

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

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

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

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

Than USCCs to Pay U. S. Income Tax

B-281098 Page 5 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

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

Source: GAO compilation of IRS data.

Although nontaxpaying corporations, both foreign- and U. S.-
controlled, were the majority of all corporations that filed tax
returns in 1995, they accounted for well under half of all
corporate assets and receipts. The 67 percent of FCCs that paid no
federal income tax in 1995 accounted for 24 percent of the assets
and 25 percent of the gross receipts of all FCCs in that year, as
shown in figure 2.

Similarly, the 61 percent of USCCs that paid no U. S. income tax
in 1995 accounted for 21 percent of the assets owned by all USCCs
and 17 percent of their receipts. (See also, table I. 3. in app.
I.)

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

Nontaxpaying Corporations Accounted for a Smaller Share of Total
Assets and Receipts Than Taxpaying Corporations

B-281098 Page 6 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

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

Source: GAO compilation of IRS data.

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

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

Large Corporations Accounted for Most of the Assets of
Nontaxpaying FCCs and USCCs

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

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

Average Distribution by income tax paid Number of

returns Percent of returns Gross receipts

(millions) Income taxes paid (thousands) Taxes paid per

$1,000 receipts

Large FCCs No tax paid 812 29.4 $408 0 a $1 or more but less than
$100,000 341 12.3 172 $37 $0.22 $100, 000 or more but less than $1
million 609 22.0 217 442 2.04 $1 million or more 1,005 36.3 873
11,294 12.94

Total 2,767 100.0 $506 $4,204 $8.31

Large USCCs No tax paid 4,843 31.5 $176 0 a $1 or more but less
than $100,000 1, 242 8.1 133 $40 $0.30 $100, 000 or more but less
than $1 million 3, 427 22.3 143 443 3.09 $1 million or more 5,851
38.1 1,110 21,033 18.96

Total 15,363 100.0 $521 $8,112 $15.58

Note: Columns may not sum to totals because of rounding. a Data
not applicable.

Source: GAO compilation of IRS data.

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

From 1989 to 1993, a greater percentage of large FCCs than large
USCCs were new (i. e., incorporated for 3 years or less). However,
as shown in figure 3, this relationship was reversed for 1994 and
1995, and although not statistically significant, the percentage
of new large USCCs exceeded the percentage of new large FCCs. This
change could explain, in part, why the percentage of nontaxpaying
large FCCs declined relative to the percentage of nontaxpaying
large USCCs over the same time period.

4 Grubert, 1997, p. 1,880 (table 3, cols. 2 and 4) and p. 1,883
(table 6, cols. 1 and 2). Large FCCs Paid Less

Income Tax Relative to Gross Receipts Than Large USCCs in 1995

Table 1: Profile of Large FCCs and USCCs by Amount of Income Taxes
Paid, 1995

Age Differences Between Large FCCs and USCCs

B-281098 Page 8 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

Source: GAO compilation of IRS data.

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

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

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

The Industrial Profile of Large FCCs Differed From That of Large
USCCs

B-281098 Page 9 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

Large FCCs Large USCCs Industry Nontaxpaying All Nontaxpaying All

Manufacturing 37.8 40.8 14.9 24.6 Wholesale trade 24.7 26.8 7. 2
12.4 Financial services 15.8 13.5 54.8 32.4 Nonfinancial services
7.8 7. 0 7.0 8. 1 Retail trade 4. 8 4.2 8. 5 12.1 Other a 9.1 7. 6
7.6 10.5

Total 100.0 100.0 100.0 100.0

Note: Columns may not sum to 100 because of rounding. a Other
includes transportation and public utilities; mining;
construction; agriculture, forestry, and

fishing; and other trades. Source: GAO compilation of IRS data.

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

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

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

Table 2: Percentage Distribution of Large FCCs and USCCs by Major
Industry, 1995

Cost Ratios Varied Significantly Across Industries

B-281098 Page 10 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

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

Industry Cost of goods sold as a % of receipts Purchases as a

% of receipts Interest as a % of receipts Taxes as a %

of receipts % of corporations in industry paying no tax All large
FCCs 65.4 49.9 6. 2 0.8 29.4

Manufacturing 65.6 48.5 3. 9 1.0 27.2 Wholesale trade 82.3 76.3 2.
2 0.4 27.0 Financial services 30.5 1. 6 24.9 1. 4 34.3
Nonfinancial services 38.6 12.0 10.2 0. 7 32.4 Retail trade 71.0
69.4 1. 4 0.6 33.9 Other a 64.0 32.1 3. 9 0.8 35.2

All large USCCs 52.8 32.0 6. 5 1.6 31.5

Manufacturing 62.5 38.9 3. 5 1.4 19.2 Wholesale trade 83.3 80.6 2.
0 0.6 18.4 Financial services 29.2 1. 1 17.6 2. 1 53.4
Nonfinancial services 32.0 8. 2 3.1 1. 4 27.2 Retail trade 68.0
65.6 1. 8 0.9 22.2 Other a 38.9 11.4 5. 6 2.3 22.7

Note: All estimates in the first three columns have sampling
errors of (+/-) 2 percent or less. All estimates in the fourth
column have sampling errors of (+/-) 0. 7 percent or less. All
estimates in the last column have sampling errors of (+/-) 5
percent or less. a Other includes transportation and public
utilities; mining; construction; agriculture, forestry, and

fishing; and other trades. Source: GAO compilation of IRS data.

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

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

Table 3: Cost, Tax, and Other Ratios for Large FCCs and USCCs by
Industry, 1995

Agency Comments

B-281098 Page 11 GAO/GGD-99-39 Foreign- and U. S.- Controlled
Corporations

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

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

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

Sincerely yours, James R. White Director, Tax Policy and

Administration Issues

Page 12 GAO/GGD-99-39 Foreign- and U. S.- Controlled Corporations

Contents 1 Letter 14 Appendix I Statistical Compendium

19 Appendix II Major Contributors to This Report

Table 1: Profile of Large FCCs and USCCs by Amount of Income Taxes
Paid, 1995

7 Table 2: Percentage Distribution of Large FCCs and

USCCs by Major Industry, 1995 9

Table 3: Cost, Tax, and Other Ratios for Large FCCs and USCCs by
Industry, 1995

10 Table I. 1: Number and Percent of Returns for All

Nontaxpaying FCCs and USCCs 14

Table I. 2: Number and Percent of Returns for Large Nontaxpaying
FCCs and USCCs

14 Table I. 3: Assets Owned and Business Receipts

Generated by All Nontaxpaying FCCs and USCCs 15

Table I. 4: Percentages of Large New and Older Nontaxpaying FCCs
and USCCs

16 Table I. 5: Selected Cost Ratios for Large Nontaxpaying

FCCs and USCCs, 1995 16

Table I. 6: All and Large Nontaxpaying FCC and USCC Manufacturers
and Wholesalers

17 Table I. 7: All and Large Nontaxpaying FCCs and USCCs

in Nonfinancial and Financial Services 17

Table I. 8: All and Large Nontaxpaying FCCs and USCCs in Retail
Trade

18 Tables

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

5 Figure 2: Nontaxpaying Corporations' Percentage of Tax

Returns, Assets, and Receipts, 1995 6 Figures

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

8

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

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

15

Abbreviations

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

Appendix I Statistical Compendium

Page 14 GAO/GGD-99-39 Foreign- and U. S.- Controlled Corporations

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

FCC returns USCC returns Confidence interval a Confidence interval
a

Year Number Upper bound Point

estimate Lower bound Number Upper

bound Point estimate Lower

bound

1989 32,135 76.3% 71.7% 67.1% 1,266,281 59.8% 58.9% 58.0% 1990
32,348 77.3 73.3 69.3 1, 265,841 61.5 60.6 59.7 1991 35,138 76.6
72.8 69.0 1, 265,390 62.7 61.8 60.9 1992 34,980 73.7 69.2 64.7 1,
246,355 62.6 61.6 60.6 1993 37,588 72.9 69.6 66.3 1, 217,410 61.6
60.9 60.1 1994 38,433 73.5 70.4 67.2 1, 381,055 62.0 61.3 60.6
1995 40,195 70.2 66.8 63.4 1, 377,092 61.8 61.1 60.4

Note: The number of returns are population estimates based on IRS'
samples of corporate tax returns. Percentages are the ratio of
nontaxpaying FCCs and USCCs to all (taxpaying and nontaxpaying)
FCCs and USCCs, respectively. a The upper and lower sampling error
bounds of the percentage of nontaxpaying FCCs and USCCs

indicate we are confident the true estimate of the percentage
would be within these bounds in 95 out of every 100 samples.

Source: GAO compilation of IRS data.

FCC returns USCC returns Confidence interval a Confidence interval
a

Year Number Upper bound Point

estimate Lower bound Number Upper

bound Point estimate Lower

bound

1989 684 34.4% 33.0% 31.6% 3,860 27.9% 27.2% 26.5% 1990 819 39.1
37.7 36.3 3, 896 28.9 28.1 27.4 1991 1,019 43.6 42.2 40.8 4, 196
32.6 31.8 30.9 1992 948 39.7 38.3 36.9 4, 059 31.2 30.5 29.8 1993
816 33.8 32.6 31.4 4, 299 31.3 30.7 30.1 1994 739 29.7 28.6 27.5
4, 291 30.1 29.5 28.9 1995 812 30.4 29.4 28.3 4, 843 32.1 31.5
31.0

Note: The number of returns are population estimates based on IRS'
samples of corporate tax returns. Percentages are the ratio of
large nontaxpaying FCCs and USCCs to all large (taxpaying and
nontaxpaying) FCCs and USCCs, respectively. a The upper and lower
bound confidence intervals of the percentage of nontaxpaying FCCs
and

USCCs indicate we are confident the true estimate of the
percentage would be within these bounds in 95 out of every 100
samples.

Source: GAO compilation of IRS data.

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

Table I. 1: Number and Percent of Returns for All Nontaxpaying
FCCs and USCCs Table I. 2: Number and Percent of Returns for Large
Nontaxpaying FCCs and USCCs

Appendix I Statistical Compendium

Page 15 GAO/GGD-99-39 Foreign- and U. S.- Controlled Corporations

FCCs USCCs Year Returns Assets Receipts Returns Assets Receipts

1989 32,135 25.6% 21.0% 1,266,281 18.6% 16.9% 1990 32,348 28.5
22.5 1, 265,841 20.3 18.1 1991 35,138 37.1 31.4 1, 265,390 20.1
18.5 1992 34,980 28.4 29.0 1, 246,355 20.8 18.5 1993 37,588 27.8
25.5 1, 217,410 20.9 17.5 1994 38,433 23.2 21.2 1, 381,055 21.0
17.0 1995 40,195 23.6 25.2 1, 377,092 20.5 17.0

Note: Percentages are the ratio of nontaxpaying FCCs and USCCs to
all (taxpaying and nontaxpaying) FCCs and USCCs, respectively. All
percent estimates have sampling errors of (+/-) 1 percent.

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

Source: GAO compilation of IRS data.

Table I. 3: Assets Owned and Business Receipts Generated by All
Nontaxpaying FCCs and USCCs Figure I. 1: Corporate Returns,
Assets, and Receipts for Large Nontaxpaying FCCs and USCCs as a
Percentage of All Nontaxpaying FCCs and USCCs, 1995

Appendix I Statistical Compendium

Page 16 GAO/GGD-99-39 Foreign- and U. S.- Controlled Corporations

FCCs USCCs Year New Older New Older

1989 43.8% 30.9% 45.5% 25.1% 1990 48.8 35.9 48.0 26.0 1991 54.7
40.4 48.2 30.5 1992 41.4 38.1 47.7 29.1 1993 38.7 32.0 52.5 28.8
1994 32.5 28.3 48.5 27.8 1995 35.7 28.7 45.5 30.2 Note: New
includes FCCs and USCCs incorporated within 3 years; older
includes those incorporated earlier.

Source: GAO compilation of IRS data.

FCCs USCCs Major industry Cost of goods sold

as % of receipts Purchases as % of receipts Interest as %

of receipts Cost of goods sold as % of receipts Purchases as

% of receipts Interest as % of receipts

Manufacturing 72.1 54.1 3. 9 67.7 48.2 4. 8 Wholesale trade 76.7
72.5 3. 7 87.5 83.9 1. 6 Financial services 21.0 2. 9 39.6 14.5 0.
4 4.5 Nonfinancial services 41.5 5. 6 15.0 31.4 10.7 5. 3 Retail
trade 61.3 56.5 2. 8 68.0 64.8 2. 6 Other a 73.4 52.6 4. 2 46.5
14.7 8. 5

Overall 68.3 54.9 6. 9 51.3 37.3 4. 3

Note: All estimates in this table have sampling errors of (+/-) 2
percent or less. a Other includes transportation and public
utilities; mining; construction; agriculture, forestry, and

fishing; and other trades. Source: GAO compilation of IRS data.

Table I. 4: Percentages of Large New and Older Nontaxpaying FCCs
and USCCs

Table I. 5: Selected Cost Ratios for Large Nontaxpaying FCCs and
USCCs, 1995

Appendix I Statistical Compendium

Page 17 GAO/GGD-99-39 Foreign- and U. S.- Controlled Corporations

Manufacturers Wholesalers All Large All Large Year FCCs USCCs FCCs
USCCs FCCs USCCs FCCs USCCs

1989 50.0% a 55.6% 31.4% 19.7% 61.0% a 52.4% 33.0% a 18.2% 1990
56.3 a 58.0 37.1 22.2 63.6 53.3 37.2 18.3 1991 57.6 a 58.2 39.5
24.9 71.0 57.6 40.7 24.7 1992 55.1 a 60.6 37.1 22.3 62.0 55.9 33.9
21.2 1993 54.9 57.5 29.8 20.4 67.0 54.4 28.1 18.5 1994 52.0 54.9
24.6 17.5 66.3 55.2 24.8 16.8 1995 53.1 57.5 27.2 19.2 64.0 55.3
27.0 18.4

Note: Percentages under the all category are the ratio of
nontaxpaying FCCs or USCCs to all FCCs and USCCs by industry.
Percentages under the large category are the ratio of nontaxpaying
large FCCs or USCCs to all large FCCs or USCCs by industry. These
estimates have sampling errors of (+/-) 10 percent or less except
where noted. a Sampling errors may be as high as (+/-) 13 percent.

Source: GAO compilation of IRS data.

Nonfinancial services Financial services All Large All Large Year
FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs

1989 71.1% a 63.1% 40.1% 27.9% 82.1% 56.3% 35.5% 40.3% 1990 83.8
63.8 35.7 24.5 84.5 58.7 37.6 41.9 1991 72.1 a 65.4 50.7 29.3 79.9
59.6 40.8 44.7 1992 69.5 a 65.0 46.4 26.8 79.6 57.7 41.6 45.7 1993
71.9 65.7 43.9 27.0 74.2 57.7 36.4 49.9 1994 64.4 b 66.4 39.7 28.3
79.5 59.1 35.6 51.7 1995 61.1 65.9 32.4 27.2 74.7 58.0 34.3 53.4

Note: Percentages under the all category are the ratio of
nontaxpaying FCCs or USCCs to all FCCs and USCCs by industry.
Percentages under the large category are the ratio of nontaxpaying
large FCCs or USCCs to all large FCCs or USCCs by industry. These
estimates have sampling errors of (+/-) 10 percent or less except
where noted. a Sampling errors may be as high as (+/-) 17 percent.

b Sampling error is 11 percent. Source: GAO compilation of IRS
data.

Table I. 6: All and Large Nontaxpaying FCC and USCC Manufacturers
and Wholesalers Table I. 7: All and Large Nontaxpaying FCCs and
USCCs in Nonfinancial and Financial Services

Appendix I Statistical Compendium

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

All Large Year FCCs USCCs FCCs USCCs

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

b Sampling errors may be as high as (+/-) 22 percent. c Sampling
errors may be as high as (+/-) 17 percent.

Source: GAO compilation of IRS data.

Table I. 8: All and Large Nontaxpaying FCCs and USCCs in Retail
Trade

Appendix II Major Contributors to This Report

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

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

Shirley A. Jones, Senior Attorney General Government

Division Office of General Counsel

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

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