The researchers have also found that  transfer pricing abuses may play a role in explaining the differences. 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. 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. 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. 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. 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. 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. 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. FCDCs and USCCs Were Concentrated in Different Industries

In 2005, FCDCs and USCCs differed in their distribution across industries. 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. 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. 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. We requested comments on a draft of this report from the Commissioner  of Internal Revenue.
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.