	Background

In prior reports, we found that a higher percentage of FCCs than USCCs  reported no U.S. income tax from 1987 through 1995. To compare FCCs and USCCs based on the tax liabilities they reported on  their U.S. income tax returns, we made estimates for a variety of measures  of tax liability. We also used the model to compare large FCCs and USCCs— corporations with at least $250 million in assets or $50 million in gross  receipts. Our comparisons highlight three measures: (1) the  percentage of corporations reporting no tax liability, (2) the percentage of  corporations reporting tax liabilities less than 5 percent of their total  income, and (3) reported tax liabilities per $1,000 of gross receipts. A Higher Percentage of FCCs Than USCCs Reported No Tax Liabilities

Similar to our 1999 report, a majority of corporations, both FCCs and  USCCs, reported no tax liability from 1996 through 2000. However, among large corporations, which owned a majority of assets  reported by all corporations, the results were reversed. The relationship was the  same for large corporations. Age and Industry Concentration May Explain Some Differences in FCCs and USCCs Reporting No or Little Tax Liability

FCCs and USCCs differ in terms of age and industry concentration. These  factors could possibly explain some of the differences in the tax liabilities  reported by FCCs and USCCs. However, not all the differences were statistically significant. FCCs and USCCs Were Concentrated in Different Industries

FCCs and USCCs differed in their concentration among industries. In 2000,  FCCs were more concentrated in the wholesale trade and financial services  industries while USCCs were more concentrated in the nonfinancial  services industry. With respect to reporting tax liabilities  of less than 5 percent, large FCCs were significantly more likely than  USCCs to have reported less than 5 percent in tax liability, after adjusting  for age and industry sector, in 1 year (1996), significantly less likely in 2  years (1999 and 2000), and no different than USCCs in the other 2 years  (1997 and 1998).
Why GAO Did This Study

In prior reports, GAO found differences in the percentages of foreign-controlled corporations (FCC) and U.S.-controlled corporations (USCC) reporting no tax liability. Based on concerns that FCCs could be avoiding taxes by improperly shifting income to lower tax countries, GAO was asked to compare, for the years 1996 through 2000, (1) FCCs and USCCs, based on the tax liabilities they reported on their U.S. income tax returns--including the percentages reporting zero liabilities--and (2) the differences in FCCs and USCCs in terms of age and industry concentration and the extent to which these differences might explain tax reporting patterns. The report provides information separately for large corporations--those with at least $250 million in assets or $50 million in gross receipts--because, while they account for only 1 percent of all corporations, they own over 93 percent of all assets reported on corporate returns.

What GAO Found

Comparisons of the tax liabilities of FCCs and USCCs from 1996 to 2000 varied depending on the measure. A majority of all corporations reported no tax liabilities during these years, with a higher percentage of FCCs doing so than USCCs. However, the results were reversed for large corporations. A higher percentage of USCCs than FCCs reported tax liabilities of less than 5 percent of their total income, with similar results for large corporations. FCCs reported a lower amount of tax liability per $1,000 in gross receipts than USCCs. The relationship was similar for large corporations. FCCs and USCCs differ with respect to their age and industry concentrations. A greater percentage of FCCs than USCCs were new--incorporated for less than 3 years. FCCs were more concentrated in wholesale trade and financial services while USCC were more concentrated in nonfinancial services. Large FCCs and USCCs also differed in their age and industry concentrations. Age and industry concentration have been cited as possible explanations for the differences in tax liabilities reported by FCCs and USCCs. However, after controlling for age and industry concentration using a simple statistical model, the differences in taxes reported by FCCs and USCCs were not fully explained by these factors.