The tax liabilities of foreign-controlled domestic corporations (FCDC) and US-controlled corporations (USCC)

Two out of every three US companies paid no federal income taxes from 1998 through 2005, according to a report issued Tuesday by the Government Accountability Office (GAO), the investigative unit of Congress. Among foreign corporations, 68 percent, did not pay taxes during the period covered — compared with 66 percent for United States corporations.

The report covers 1.3 million corporations of all sizes, most of them small, with a collective $2.5 trillion in sales and includes foreign corporations that do business in the United States.

US Senator Carl Levin said on Tuesday that“this report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

However, the GAO said that it did not have enough data to address the role of transfer pricing, which is seen as a crucial factor in profits sent overseas.

The report suggests that the almost 1,000 largest United States corporations were more likely than smaller ones to pay taxes.

In 2005, one in four large United States corporations paid no taxes on revenue of $1.1 trillion, compared with 66 percent overall. Large corporations have at least $250 million in assets or annual sales of at least $50 million.

The basic corporate tax rate is 35 percent but companies have several legal routes to reduce their liabilities.

In 2004, a GAO. study said that 7 in 10 of all foreign corporations doing business in the United States, or foreign-controlled corporations, paid no taxes from 1996 through 2000, compared with 6 in 10 United States corporations.

The GAO said that concerns about transfer pricing abuse have led researchers to compare the tax liabilities of foreign- and US-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 US-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 US-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.

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.

The GAO says that 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.

Ireland top location for US multinationals' profits

The US Treasury Department has requested the Irish Government to open discussions on updating a 1997 agreement on transfer pricing and the tax rules relating to US multinationals operating in Ireland.

The 1997 agreement covers a number of key areas, such as income tax, corporation tax and Capital Gains Tax. It also sets out the law in relation to the treatment of dividends between subsidiaries and parent companies, and company royalties.

The decision by US authorities to  renegotiate the agreement with Ireland is important and its outcome could have a profound effect on the taxation status of US multinationals operating in Ireland.