GAO Analyzes Lack of Tax Liability Among Corporations


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The Government Accountability Office (GAO) issued a report earlier this week comparing the tax liability of foreign-controlled corporations operating in the United States with U.S.-controlled corporations between 1998 and 2005. It compares tax liability in a number of ways, including the percentage with no tax liability, the number of years with no tax liability, and tax liability as a percentage of gross receipts or assets.

The study was requested by Senators Carl Levin (D-MI) and Byron Dorgan (D-ND), out of concern that foreign-controlled corporations are able to manipulate transfer pricing to avoid U.S. taxes. Very generally, transfer pricing is the way a division of a corporation or family of corporations accounts for the "price" that they charge another division for the transfer of some good or service. If a foreign-controlled corporation has a parent corporation in the Cayman Islands, it might try to claim that it was charged a very high "price" for something it received from the parent, like the right to use a logo or trademark, thus wiping out its profits for U.S. corporate tax purposes.

The GAO report does not determine the extent to which transfer pricing is the explanation for the fact that many corporations studied have no or low tax liability. It does find that foreign-controlled corporations have lower tax liability by most measures used. But it also cautions that this could be explained by several other factors, like the fact that foreign-controlled corporations tend to be younger and younger businesses may be less likely to profit, and the fact that they are more likely to be in certain industries than are U.S. controlled corporations or vice versa.

Several newspapers reported that each year covered by the study saw around two-thirds of all the corporations paying no taxes, while the percentage for large corporations (defined as having income of $50 million or assets of $250 million) was lower but still seems high at around 28 percent.

There are actually many limitations on what exactly can be concluded from the study, since many of the corporations that did not pay taxes may simply have earned no profits on which they could be taxed. Also, the study relies on IRS data, meaning that it relied on what corporations tell the tax collector.

A 2004 study from Citizens for Tax Justice examined tax liability for a period of years (2001-2003) contained within the window covered by the GAO report. It focused on 275 of the largest corporations and includes only corporations that were profitable in each of the three years. It is also based on information gleaned from the financial statements that corporations make for their shareholders to see, with adjustments to account for certain gimmicks (like accounting for the tax savings corporations receive when stock options are exercised, which they do not include in their financial statements).

CTJ's report found that the average effective tax rate for these corporations had fallen to less than half the statutory rate of 35 percent. The average rate fell from 21.4 percent in 2001 to 17.2 percent in 2002-2003. Nearly a third of the corporations paid no taxes in at least one of the three year.

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