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

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

4. 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]

5. 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

6. 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

7. 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

10. 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)

11. 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%