U.S. Multinational Corporations
Effective Tax Rates Are Correlated with Where Income Is Reported
Gao ID: GAO-08-950 August 12, 2008
U.S. and foreign tax regimes influence decisions of U.S. multinational corporations (MNC) regarding how much to invest and how many workers to employ in particular activities and in particular locations. Tax rules also influence where corporations report earning income for tax purposes. The average effective tax rate, which equals the amount of income taxes a business pays divided by its pretax net income (measured according to accounting rules, not tax rules), is a useful measure of actual tax burdens. In response to a request from U.S. Senate Committee on Finance, this report provides information on the average effective tax rates that U.S.-based businesses pay on their domestic and foreign-source income and trends in the location of worldwide activity of U.S.-based businesses. GAO analyzed Internal Revenue Service (IRS) data on corporate taxpayers, including new data for 2004 and Bureau of Economic Analysis data on the domestic and foreign operations of U.S. MNCs. Data limitations are noted where relevant. GAO is not making any recommendations in this report.
The average U.S. effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was an estimated 25.2 percent. There was considerable variation in tax rates across these taxpayers. The average U.S. effective tax rate on the foreign-source income of these large corporations was around 4 percent, reflecting the effects of both the foreign tax credit and tax deferral on this type of income. Effective tax rates on the foreign operations of U.S. MNCs vary considerably by country. According to estimates for 2004, Bermuda, Ireland, Singapore, Switzerland, the United Kingdom (UK) Caribbean Islands, and China had relatively low rates among countries that hosted significant shares of U.S. business activity, while Italy, Japan, Germany, Brazil, and Mexico had relatively high rates. U.S. business activity (measured by sales, value added, employment, compensation, physical assets, and net income) increased in absolute terms both domestically and abroad from 1989 through 2004, but the relative share of activity that was based in foreign affiliates increased. Nevertheless, as of 2004, over 60 percent of the activity (by all six measures) of U.S. MNCs remained located in the United States. The U.K., Canada, and Germany are the leading foreign locations of U.S. businesses by all measures except income. Reporting of the geographic sources of income is susceptible to manipulation for tax planning purposes and appears to be influenced by differences in tax rates across countries. Most of the countries studied with relatively low effective tax rates have income shares significantly larger than their shares of the business measures least likely to be affected by income shifting practices: physical assets, compensation, and employment. The opposite relationship holds for most of the high tax countries studied.
GAO-08-950, U.S. Multinational Corporations: Effective Tax Rates Are Correlated with Where Income Is Reported
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Report to the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
August 2008:
U.S. Multinational Corporations:
Effective Tax Rates Are Correlated with Where Income Is Reported:
GAO-08-950:
GAO Highlights:
Highlights of GAO-08-950, a report to the Committee on Finance, U.S.
Senate.
Why GAO Did This Study:
U.S. and foreign tax regimes influence decisions of U.S. multinational
corporations (MNC) regarding how much to invest and how many workers to
employ in particular activities and in particular locations. Tax rules
also influence where corporations report earning income for tax
purposes.
The average effective tax rate, which equals the amount of income taxes
a business pays divided by its pretax net income (measured according to
accounting rules, not tax rules), is a useful measure of actual tax
burdens.
In response to a request from U.S. Senate Committee on Finance, this
report provides information on the average effective tax rates that
U.S.-based businesses pay on their domestic and foreign-source income
and trends in the location of worldwide activity of U.S.-based
businesses.
GAO analyzed Internal Revenue Service (IRS) data on corporate
taxpayers, including new data for 2004 and Bureau of Economic Analysis
data on the domestic and foreign operations of U.S. MNCs. Data
limitations are noted where relevant.
GAO is not making any recommendations in this report.
What GAO Found:
The average U.S. effective tax rate on the domestic income of large
corporations with positive domestic income in 2004 was an estimated
25.2 percent. There was considerable variation in tax rates across
these taxpayers, as shown in the figure below. The average U.S.
effective tax rate on the foreign-source income of these large
corporations was around 4 percent, reflecting the effects of both the
foreign tax credit and tax deferral on this type of income. Effective
tax rates on the foreign operations of U.S. MNCs vary considerably by
country. According to estimates for 2004, Bermuda, Ireland, Singapore,
Switzerland, the United Kingdom (UK) Caribbean Islands, and China had
relatively low rates among countries that hosted significant shares of
U.S. business activity, while Italy, Japan, Germany, Brazil, and Mexico
had relatively high rates.
U.S. business activity (measured by sales, value added, employment,
compensation, physical assets, and net income) increased in absolute
terms both domestically and abroad from 1989 through 2004, but the
relative share of activity that was based in foreign affiliates
increased. Nevertheless, as of 2004, over 60 percent of the activity
(by all six measures) of U.S. MNCs remained located in the United
States. The U.K., Canada, and Germany are the leading foreign locations
of U.S. businesses by all measures except income. Reporting of the
geographic sources of income is susceptible to manipulation for tax
planning purposes and appears to be influenced by differences in tax
rates across countries. Most of the countries studied with relatively
low effective tax rates have income shares significantly larger than
their shares of the business measures least likely to be affected by
income shifting practices: physical assets, compensation, and
employment. The opposite relationship holds for most of the high tax
countries studied.
Figure: U.S. Average Effective Tax Rates on U.S. Corporations‘ Domestic
Income, 2004:
[See PDF for image]
This figure is a multiple horizontal bar graph depicting the following
data:
Weighted average rate: 25.2%; and Median rate: 31.8%.
Average effective tax rate: Less than or equal to 5%:
Share of Population: 29.6%;
Share of Populations Total Positive Domestic Income Attributable to
Taxpayers: 31.7%.
Average effective tax rate: 5% < but
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