U.S. MULTINATIONAL CORPORATIONS Effective Tax Rates are Correlated with Where Income is Reported GAO-08-950

This study should not be confused with: TAX ADMINISTRATION Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005 GAO-08-957

Senate Finance Committee asked GAO to provide information on: the average effective tax rates that U.S.-based businesses pay on their domestic and foreign-source income [Separate analyses of U.S. taxes on large U.S. corporations and worldwide taxes on U.S. foreign affiliates] the location of the worldwide activity of U.S.-based businesses [Analysis of BEA data on operations of U.S. MNCs] the average effective tax rates that foreign-based businesses pay on their worldwide income [Brief literature review]

Effective Tax Rates of Schedule M-3 Filers - Methodology Population examined: Corporations that filed Schedule M-3 in 2004 (U.S. domestic corporations with total assets >= $10 million) Effective tax rates estimated: Actual federal income tax paid on domestic income / book value of domestic income Actual federal income tax paid on foreign income / book value of foreign income

Effective Tax Rates of Schedule M-3 Filers – Methodology, cont’d Domestic income = book income of the tax includible group – domestic equity method income – the majority interest reduction – includible foreign income Foreign income (broadest) = book income of majority-owned foreign subsidiaries + foreign partnership income + equity-method income from foreign subsidiaries + dividends and distributions from foreign subsidiaries Foreign income (narrowest) = book income of majority-owned foreign subsidiaries + foreign partnership income

Effective Tax Rates of Schedule M-3 Filers – Methodology, cont’d Precredit tax on domestic income = regular tax + AMT - foreign tax credit limit Postcredit tax on domestic income = regular tax + AMT - foreign tax credit limit - allocated share of other tax credits Precredit tax on foreign income = maximum (0, foreign tax credit limit - foreign tax credit) Postcredit tax on foreign income = maximum (0, foreign tax credit limit - foreign tax credit) - allocated share of other tax credits

Effective Tax Rates On Foreign Affiliates Of U.S. MNCs - Methodology Two different sets of data: IRS data from the 2004 information returns for U.S. CFCs BEA’s data on the majority owned foreign affiliates of U.S. MNCs Measurement of the effective tax rate: For CFC data: worldwide income taxes paid / positive pretax earnings and profits For BEA data: foreign income taxes paid / net income (excluding equity income)

Effective Tax Rates On Foreign Affiliates Of U.S. MNCs - Results Population Aggregate Effective Tax Rate for 2004 All CFCs 16.1% CFCs in Manufacturing 15.4% All Majority-Owned Foreign Affiliates 28.7%