FCCs Were Less Likely Than USCCs to Pay U.S. Income Tax

In each year from 1989 through 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 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. Large FCCs Paid Less Income Tax Relative to Gross Receipts Than Large USCCs in 1995

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. Age Differences Between Large FCCs and USCCs

From 1989 to 1993, a greater percentage of large FCCs than large USCCs were new (i.e., incorporated for 3 years or less). 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. The Industrial Profile of Large FCCs Differed From That of Large USCCs

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. Cost Ratios Varied Significantly Across Industries

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. This pattern of differences in cost ratios across industries was similar for both all large FCCs and all large USCCs.
Why GAO Did This Study

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.

What GAO Found

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.