Using the information we obtained, we built a simple  qualitative model to explain the conditions under which a tax haven  company may have a tax cost advantage in competing for federal contracts  relative to other companies whose headquarters are not located in tax  haven countries. We  matched contractor data (name and taxpayer identification numbers) from  the GSA’s FPDS for 2000 and 2001 to tax and location data from the IRS’s  SOI corporation file. In this matched database, we analyzed information  about large corporations, those with at least $10 million in assets. There Are Conditions under Which Tax Haven Contractors May Have a Tax Cost Advantage

Contractors, including tax haven contractors, that have a lower marginal  tax rate on the income from a contract than other contractors would have a  tax cost advantage when competing for a contract. Furthermore, there is  some evidence that a tax haven contractor may be able to shift income  between the U.S. subsidiary and its tax haven parent in order to reduce U.S.  taxable income. A  contractor that pays less tax on additional income from a contract gains a  tax cost advantage compared to companies that pay higher tax. One way to  gain a tax cost advantage is by offsetting income earned on the contract  with losses from other activities. The contractors with a tax cost  advantage are not necessarily the successful competitors because the tax  cost savings may not be reflected in actual bid prices or price proposals,  and prices or costs are only one of several factors involved in awarding  contracts. Whether a contractor  with zero tax liability has a tax cost advantage when competing for a  particular contract depends on the tax liabilities of the other competitors. Taxable Income

Tax haven contractors may be more likely to have lower tax costs than  other contractors because they may be able to shift U.S. source income to  their tax haven parents, reducing U.S. taxable income. Tax Haven Contractors Were More Likely to Have a Tax Cost Advantage Than Domestic Contractors

Using tax liability as an indicator of ability to offset contract income, we  determined that large tax haven contractors were more likely to have a tax  cost advantage than large domestic contractors in both 2000 and 2001. As table 2 shows, in  2000, 56 percent of the 39 tax haven contractors reported no tax liability,  while 34 percent of the 3,253 domestic contractors reported no tax liability. In 2001, 66 percent of the 50 tax haven contractors and 46 percent of the  3,524 domestic contractors reported no tax liability. In this sense, tax liability is an indicator of the ability  to offset income from the contract.
Why GAO Did This Study

The federal government was involved in about 8.6 million contract actions, including new contract awards, worth over $250 billion in fiscal year 2002. Some of these contracts were awarded to tax haven contractors, that is, U.S. subsidiaries of corporate parents located in tax haven countries. Concerns have been raised that these contractors may have an unfair cost advantage when competing for federal contracts because they are better able to lower their U.S. tax liability by shifting income to the tax haven parent. GAO's objectives in this study were to (1) determine the conditions under which companies with tax haven parents have a tax cost advantage when competing for federal contracts and (2) estimate the number of companies that could have such an advantage. GAO matched federal contractor data with tax and location data for all large corporations, those with at least $10 million in assets, in 2000 and 2001, in order to identify those companies that could have an advantage.

What GAO Found

There are conditions under which a tax haven contractor may have a tax cost advantage (lower tax on additional income from a contract) when competing for a federal contract. The extent of the advantage depends on the relative tax liabilities of the tax haven contractor and its competitors. One way for a contractor to gain a tax cost advantage is by reducing its U.S. taxable income from other sources to less than zero and by using its losses to offset some or all of the additional income from a contract, resulting in less tax on the contract income. A company would thereby gain an advantage relative to those competitors with positive income from other sources and may be able to offer a lower price or cost for the contract. While some domestic corporations may also have a tax cost advantage, tax haven contractors may be better able to reduce U.S. taxable income to less than zero because of opportunities to shift income to their tax haven parents. Whether a contractor has a tax cost advantage in competing for a particular contract depends on the tax liabilities of other competitors. Also, the contractors with a tax cost advantage are not necessarily the successful competitors because the tax cost savings may not be reflected in actual prices, and prices may be only one of several factors involved in awarding contracts. Using tax liability as an indicator of ability to offset contract income, GAO found that large tax haven contractors in both 2000 and 2001 were more likely to have a tax cost advantage than large domestic contractors. In 2000, 56 percent of the 39 large tax haven contractors reported no tax liability, while 34 percent of the 3,253 large domestic contractors reported no tax liability. In 2001, 66 percent of large tax haven contractors and 46 percent of large domestic contractors reported no tax liability.