a

GAO

United States General Accounting Office

Report to Congressional Requesters

February 2004 TAX 

ADMINISTRATION

Comparison of the 

Reported Tax 

Liabilities of Foreignand U.S.-Controlled 

Corporations, 

1996-2000

GAO-04-358
www.gao.gov/cgi-bin/getrpt?GAO-04-358.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim White at 

(202) 512-9110 or whitej@gao.gov. 

Highlights of GAO-04-358, a report to 

congressional requesters 

February 2004

TAX ADMINISTRATION

Comparison of the Reported Tax 

Liabilities of Foreign- and U.S.-Controlled 

Corporations, 1996-2000 

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. 

Estimated Percentages of FCCs and USCCs Reporting No Tax Liability, Tax Years 1996-2000

0

10

20

30

40

50

60

70

80

100

1996 1997 1998 1999 2000

Tax year

Percentage

FCCs USCCs Large FCCs Large USCCs

Source: GAO analysis of Internal Revenue Service data.

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. 
Page i GAO-04-358 Foreign- and U.S.-Controlled Corporations

Contents

Letter 1

Results in Brief 2

Background 3

Scope and Methodology 4

Comparisons of the Tax Liabilities of FCCs and USCCs Depend on 

the Measure Used 5

Age and Industry Concentration May Explain Some Differences in 

FCCs and USCCs Reporting No or Little Tax Liability 9

Agency Comments 14

Appendixes

Appendix I: Additional Tables 15

Appendix II: Statistical Analysis Using Logistic Regression 27

Appendix III: GAO Contacts and Staff Acknowledgments 32

GAO Contacts 32

Acknowledgments 32

Tables Table 1: Estimated Percentage of Returns and Tax Liability Per 

$1,000 in Gross Receipts for All and Large FCCs and 

USCCs, Tax Year 2000 9

Table 2: Estimated Percentage Distribution of FCCs and USCCs by 

Major Industry, Tax Year 2000 12

Table 3: Estimated Percentage Distribution of Large FCCs and 

USCCs by Major Industry, Tax Year 2000 13

Table 4: Estimated Number and Percentage of Returns for FCCs 

and USCCs Reporting No Tax Liability 15

Table 5: Estimated Percentage Distribution of FCCs and USCCs by 

Tax Liability as Share of Total Income, Tax Years 

1996-2000 16

Table 6: Estimated Percentage Distribution of Large FCCs and 

USCCs by Tax Liability as Share of Total Income, Tax Years 

1996-2000 17

Table 7: Estimated Average Tax Liability Per $1,000 of Gross 

Receipts for All and Large FCCs and USCCs, Tax Years 

1996-2000 18

Table 8: Profile of FCCs and USCCs by Estimated Amount of 

Income Tax Liability, Tax Year 2000 18

Table 9: Profile of Large FCCs and USCCs by Estimated Amount of 

Income Tax Liability, Tax Year 2000 19
Contents

Page ii GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 10: Estimated FCCs and USCCs Reporting No Tax Liability 

That Are Large and Small as a Percentage of All FCCs and 

USCCs, Tax Years 1996-2000 20

Table 11: Estimated Percentages of FCCs and USCCs That Were 

New, Tax Years 1996-2000 21

Table 12: Estimated Percentages of Large FCCs and USCCs That 

Were New, Tax Years 1996-2000 21

Table 13: Estimated Percentage Distribution of FCCs and USCCs by 

Major Industry, Tax Years 1996-2000 22

Table 14: Estimated Percentage Distribution of FCCs and USCCs 

Reporting No Tax Liability by Major Industry, Tax Years 

1996-2000 23

Table 15: Estimated Percentage Distribution of Large FCCs and 

USCCs by Major Industry, Tax Years 1996-2000 23

Table 16: Estimated Percentage Distribution of Large FCCs and 

USCCs Reporting No Tax Liability by Major Industry, Tax 

Years 1996-2000 24

Table 17: Estimated Percentage of FCCs and USCCs That Reported 

No Tax Liability in Each Industry, Tax Years 1996-2000 24

Table 18: Estimated Percentage of Large FCCs and USCCs That 

Reported No Tax Liability in Each Industry, Tax Years 

1996-2000 25

Table 19: Estimated Cost Ratios for All FCCs and USCCs by Major 

Industry, Tax Year 2000 25

Table 20: Estimated Cost Ratios for Large FCCs and USCCs by Major 

Industry, Tax Year 2000 26

Table 21: Estimated Percentages and Odds on Reporting No Tax 

Liability and Tax Liability of Less Than 5 Percent of Total 

Income, between All FCCs and USCCs and Odds Ratios 

Indicating the Difference between FCCs and USCCs, 

before and after Controlling for Age and Industry Sector, 

Tax Years 1996-2000 29

Table 22: Estimated Percentages and Odds on Reporting No Tax 

Liability and Tax Liability of Less Than 5 Percent of Total 

Income, between Large FCCs and USCCs and Odds Ratios 

Indicating the Difference between Large FCCs and USCCs, 

before and after Controlling for Age and Industry Sector, 

Tax Years 1996-2000 30

Figures Figure 1: Estimated Percentages of FCCs and USCCs That 

Reported No Tax Liability, Tax Years 1996-2000 6
Contents

Page iii GAO-04-358 Foreign- and U.S.-Controlled Corporations

Figure 2: Estimated Percentages of FCCs and USCCs Reporting 

Less Than 5 Percent in Tax Liability Relative to Total 

Income, Tax Years 1996-2000 7

Figure 3: Estimated Percentages of FCCs and USCCs That Were 

New, Tax Years 1996-2000 10

Figure 4: Estimated Percentages of Large FCCs and USCCs That 

Were New, Tax Years 1996-2000 11

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Page 1 GAO-04-358 Foreign- and U.S.-Controlled Corporations

United States General Accounting Office

Washington, D.C. 20548

A

February 27, 2004 Letr

The Honorable Byron Dorgan

Ranking Minority Member

Subcommittee on Competition, Foreign Commerce 

and Infrastructure 

Committee on Commerce, Science and Transportation

United States Senate

The Honorable Carl Levin

Ranking Minority Member

Permanent Subcommittee on Investigations

Committee on Governmental Affairs

United States Senate

In response to congressional requests, we have previously reported on the 

tax liabilities reported by foreign- and U.S.-controlled corporations. Most 

recently, in March 1999, we reported on differences in the percentages of 

foreign-controlled corporations (FCC) and U.S.-controlled corporations 

(USCC) reporting no income tax liability. We found that for each year from 

1989 through 1995, FCCs were more likely to report zero tax liability than 

USCCs, though for large corporations the distinction was not as clear-cut. 

We said that transfer pricing abuses1

 and other factors such as age and 

industry concentration of corporations were possible explanations for the 

differences in the percentages of FCCs and USCCs reporting zero tax 

liabilities.2

You asked us to update our 1999 report. For the years 1996 through 2000 

(the last year with data available), we agreed to compare (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. 

1

Transfer pricing is the pricing of intercompany transactions that affects the distribution of 

profits and, therefore, taxable income among related companies and sometimes across tax 

jurisdictions.

2

U.S. General Accounting Office, Tax Administration: Foreign- and U.S.-Controlled 

Corporations That Did Not Pay U.S. Income Taxes, 1989-95, GAO/GGD-99-39

(Washington, D.C.: Mar. 23, 1999).
Page 2 GAO-04-358 Foreign- and U.S.-Controlled Corporations

To meet these objectives, we analyzed data from the Internal Revenue 

Service’s (IRS) Statistics of Income (SOI) samples of corporate tax returns 

for tax years 1996 through 2000. These samples were based on returns as 

filed and did not reflect IRS audit results or any net operating loss 

carrybacks from future years. The statistics in the report are estimates 

based on the SOI sample. Sampling errors are reported in appendix I. 

Caution should be used when comparing estimates because not all 

differences between estimates are statistically significant. We also used 

statistical modeling to estimate the likelihood of FCCs and USCCs 

reporting little or no U.S. income tax liability, holding age and industry 

sector constant. We report 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 make up over 93 

percent of all assets reported on corporate returns. We did not attempt to 

determine whether corporations were abusing transfer prices. 

Results in Brief Comparisons of the tax liabilities of FCCs and USCCs from 1996 through 

2000 varied depending on the measure.

• A majority of all corporations reported no liabilities during these years 

with a higher percentage of FCCs doing so than USCCs, an estimated 

average of 71 percent and 61 percent, respectively. However, the results 

were reversed for large corporations with a greater percentage of large 

USCCs reporting no tax liability. 

• A greater percentage of USCCs than FCCs reported tax liabilities of less 

than 5 percent of their total income, an estimated 94 percent and 89 

percent, respectively, in 2000. The results were similar for large 

corporations. In 2000, an estimated 82 percent of large USCCs and 76 

percent of large FCCs reported taxes of less than 5 percent of their total 

income.

• However, FCCs reported less tax liability per gross receipts than USCCs; 

in 2000, an estimated average of $11.88 in tax liability per $1,000 in gross 

receipts compared with an estimated $14.75 reported by USCCs. A 

similar relationship held for large corporations. 

Differences in age and industry concentration have been cited as possible 

explanations for differences in the tax liabilities reported between FCCs 

and USCCs. Compared with USCCs, a greater percentage of FCCs were 

new—incorporated for less than 3 years—for every year from 1996 through 
Page 3 GAO-04-358 Foreign- and U.S.-Controlled Corporations

2000. New firms may have greater expenses relative to receipts and, 

therefore, lower taxable income. A comparison of industry concentrations 

showed that FCCs were concentrated in different industries compared with 

USCCs. Large FCCs and USCCs also exhibited differences in age and 

industry concentration. Our analysis using a simple regression model 

showed that age and industry do not fully explain the differences between 

FCCs and USCCs in reporting no tax liabilities or tax liabilities less than 5 

percent of total income. 

Background In prior reports, we found that a higher percentage of FCCs than USCCs 

reported no U.S. income tax from 1987 through 1995. 3

 Some of the reasons 

why FCCs and USCCs may not report U.S. income tax include current-year 

operating losses, losses carried forward from preceding tax years, 

sufficient tax credits available to offset tax liabilities, and improper pricing 

of intercompany transactions. Any company that has a related company 

with which it transacts business needs to establish transfer prices for those 

intercompany transactions. The pricing of intercompany transactions 

affects the distribution of profits and ultimately the taxable income of the 

companies. Transfer pricing abuse occurs when income and expenses are 

improperly allocated among interrelated companies for the purpose of 

reducing taxable income in a high-tax jurisdiction. 

As we noted in our two earlier reports, researchers have attempted to 

explain why FCCs report lower tax liabilities than USCCs. Generally, the 

research has recognized that some of the nontax characteristics of firms, 

such as age and industry classification, may explain some of the 

differences in reported tax liabilities. At the same time, researchers have 

acknowledged that transfer pricing abuses may explain some of the 

differences, but they have not been able to determine the extent to which 

transfer pricing abuses explain the differences in the taxes reported by 

FCCs and USCCs. 

For the purposes of this report, an FCC is either a foreign corporation or a 

U.S. corporation with 50 percent or more of its voting stock owned by a 

foreign person or entity. Foreign ownership or control of a U.S. corporation 

exists when a foreign investor gains control of an existing U.S. company or 

3

GAO/GGD-99-39 and U.S. General Accounting Office, International Taxation: Transfer 

Pricing and Information on Nonpayment of Tax, GAO/GGD-95-101 (Washington, D.C.: 

Apr. 13, 1995).
Page 4 GAO-04-358 Foreign- and U.S.-Controlled Corporations

creates a new company and incorporates it in the United States. Both FCCs 

and USCCs are subject to U.S. income tax laws although the tax treatment 

of some income may differ. 

Scope and 

Methodology

For both of our objectives, we used data from IRS’s SOI files on corporate 

tax returns for 1996 through 2000 to make estimates for the population of 

FCCs and USCCs. The SOI corporation data we used for our analyses 

included all types of corporations except for subchapter S corporations,4

which are treated similarly to partnerships for federal income tax 

purposes. The SOI data in this report are based on SOI’s probability sample 

of corporate tax returns and thus are subject to some imprecision owing to 

sampling variability. Using SOI’s sampling weights, we estimated sampling 

errors for our estimates, which are reported in appendix I. Caution should 

be used when comparing estimates because not all differences between 

estimates are statistically significant. Differences between all FCCs and 

USCCs, between FCCs and USCCs reporting no tax liability, between large 

FCCs and USCCs, and between large FCCs and USCCs reporting no tax 

liability are statistically significant unless noted at the bottom of each 

figure or table. To ensure that the data were comparable across years, we 

converted all dollar-based data to 2000 dollars. These data included tax 

liabilities, total income, gross receipts, assets, cost of goods sold, interest, 

and purchases reported. 

SOI is a data set widely used for research purposes. IRS performs a number 

quality control steps to verify the internal consistency of SOI sample data. 

For example, it performs computerized tests to verify the relationships 

between values on the returns selected as part of the SOI sample, and 

manually edits data items to correct for problems, such as missing items. 

We conducted several reliability tests to ensure that the data excerpts we 

used for this report were complete and accurate. For example, we 

electronically tested the data and used published data as a comparison to 

ensure that the data set was complete. To ensure accuracy, we reviewed 

related documentation and electronically tested for obvious errors. We 

4

Consistent with our 1999 report, we included the following types of corporate tax returns in 

our analyses: 1120, U.S. Corporation Income Tax Return; 1120A, U.S. Corporations ShortForm Income Tax Return; 1120L, U.S. Life Insurance Company Income Tax Return; 1120PC, 

U.S. Property and Casualty Insurance Company Income Tax Return; 1120REIT, U.S. Income 

Tax Return for Real Estate Investment Trusts; 1120-RIC, U.S. Income Tax Return for 

Regulated Investment Companies; and 1120F, U.S. Income Tax Return of a Foreign 

Corporation. 
Page 5 GAO-04-358 Foreign- and U.S.-Controlled Corporations

concluded that the data were sufficiently reliable for the purposes of this 

report. 

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 SOI data to analyze differences in FCCs and USCCs by age 

and industry sector, the same factors we used in the 1999 report. We 

defined new corporations as those for which income tax returns showed 

incorporation dates within 3 years of the tax year date; all others were 

considered old corporations. For example, for tax year 2000, new 

corporations are those with incorporation dates no earlier than 1998. Next, 

we used a simple logistic regression model to estimate the likelihood of 

FCCs and USCCs reporting no tax liability or less than 5 percent in tax 

liability relative to total income, after controlling for age and industry 

sector. 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. The simple model allowed us to compare FCCs and USCCs while 

holding age and industry constant. Our simple model did not control for 

other possible influences. For a further explanation of the regression 

model, see appendix II. 

We requested comments on a draft of this report from the Commissioner of 

Internal Revenue. We conducted our review from July 2003 through 

February 2004 in accordance with generally accepted government auditing 

standards. 

Comparisons of the 

Tax Liabilities of FCCs 

and USCCs Depend on 

the Measure Used

Comparisons of the tax liabilities of FCCs and USCCs vary and depend 

upon the measure used. 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. The 

first and third measures were highlighted in our 1999 report. We added the 

second measure to provide more information about corporations reporting 

little or no tax liability. 
Page 6 GAO-04-358 Foreign- and U.S.-Controlled Corporations

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. During this time, 

there was a higher percentage of FCCs compared with USCCs that reported 

no tax liability. Overall, an estimated average of 71 percent of FCCs and 61 

percent of USCCs reported no tax liability during this period. (See fig. 1 and 

table 4 in app. I.) 

However, among large corporations, which owned a majority of assets 

reported by all corporations, the results were reversed. A higher 

percentage of large USCCs compared to large FCCs reported no tax 

liability during the same period. (See fig. 1 and table 6 in app. I.)

Figure 1: Estimated Percentages of FCCs and USCCs That Reported No Tax 

Liability, Tax Years 1996-2000

0

10

20

30

40

50

60

70

80

100

1996 1997 1998 1999 2000

Tax year

Percentage

FCCs

USCCs

Large FCCs

Large USCCs

Source: GAO analysis of IRS data. 
Page 7 GAO-04-358 Foreign- and U.S.-Controlled Corporations

A Larger Percentage of 

USCCs Than FCCs Reported 

Tax Liabilities of Less Than 

5 Percent of Total Income

For each year from 1996 through 2000, a higher percentage of USCCs than 

FCCs reported tax liability of less than 5 percent of their total income.5 For 

example, in 2000, an estimated 94 percent of USCCs and 89 percent of 

FCCs reported less than 5 percent in tax liability. The relationship was the 

same for large corporations. In 2000, an estimated 82 percent of large 

USCCs and 76 percent of large FCCs reported tax liability of less than 5 

percent of their income. (See fig. 2 and tables 5 and 6 in app. I.) 

Figure 2: Estimated Percentages of FCCs and USCCs Reporting Less Than 5 

Percent in Tax Liability Relative to Total Income, Tax Years 1996-2000

Note: Differences between large FCCs and large USCCs are not statistically significant in 1996.

5

Total income is income prior to subtracting deductions for allowable expenses.

0

10

70

80

90

100

1996 1997 1998 1999 2000

Tax year

Percentage

FCCs

USCCs

Large FCCs

Large USCCs

Source: GAO analysis of IRS data. 
Page 8 GAO-04-358 Foreign- and U.S.-Controlled Corporations

FCCs Reported Less Tax 

Liability Relative to Gross 

Receipts Than USCCs

FCCs reported less tax liability as a percentage of gross receipts6 than 

USCCs. Overall, in 2000, FCCs reported an estimated $11.88 in tax liability 

per $1,000 in gross receipts compared with an estimated $14.75 reported by 

USCCs. (See table 1.) Among large corporations, FCCs also reported less 

tax liability relative to gross receipts than USCCs. These data were 

consistent across all years in the reporting period for both all corporations 

and for large corporations. (See table 7 in app. I.) Another way of 

comparing tax liabilities is by the percentage of corporations reporting a 

tax liability below an arbitrary amount. For example, in 2000, an estimated 

92 percent of all FCCs and an estimated 98 percent of all USCCs reported 

less than $100,000 in tax liability. The percentages were not as high for 

large corporations: an estimated 46 percent of large FCCs and 53 percent of 

large USCCs reported less than $100,000 in tax liability. (See tables 8 and 9 

in app. I.)

6

Gross receipts is one measure of income, but does not include subtracting cost of goods 

sold or adding other types of income, such as dividends or interest income.
Page 9 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 1: Estimated Percentage of Returns and Tax Liability Per $1,000 in Gross Receipts for All and Large FCCs and USCCs, Tax 

Year 2000

Source: GAO analysis of IRS data. 

Note: Columns may not sum to 100 because of rounding. 

a

Not applicable.

b

Differences between large FCCs and large USCCs are not statistically significant.

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, when we used a simple statistical 

model to control for age and industry sector, differences remained in the 

percentages of FCCs and USCCs reporting no or little tax liability. 

A Larger Percentage of 

FCCs Were New Compared 

to USCCs

For every year from 1996 through 2000, a greater estimated percentage of 

FCCs compared to USCCs were new (incorporated for 3 years or less). 

New firms may have greater expenses relative to receipts and, therefore, 

lower taxable income. Among corporations reporting no tax liability, the 

Distribution by income tax liability

Percentage of 

returns (all)

Percentage of 

returns (large)

Tax liability/$1,000 

receipts (all) 

Tax liability/$1,000 

receipts (large)

FCCs

No tax liability 73.3 37.5 a a

$1 or more but less than $100,000 18.2 8.7 $2.70 $0.29b

$100,000 or more but less than $1 million 6.1 18.9 7.18 1.75

$1 million or more 2.4 34.9 20.25 19.39

Total 100.0 100.0 $11.88 $11.52

USCCs

No tax liability 63.0 45.3 a a

$1 or more but less than $100,000 35.0 8.0 $4.11 $0.29b

$100,000 or more but less than $1 million 1.6 17.1 12.16 2.95

$1 million or more 0.3 29.5 21.96 21.50

Total 99.9 99.9 $14.75 $16.65
Page 10 GAO-04-358 Foreign- and U.S.-Controlled Corporations

differences in age between FCCs and USCCs were not always statistically 

significant. (See fig. 3 and table 11 in app. I.)

Figure 3: Estimated Percentages of FCCs and USCCs That Were New, Tax Years 

1996-2000

Notes: “New” includes FCCs and USCCs incorporated within 3 years. Differences between FCCs and 

USCCs that reported no tax liability were not statistically significant in 1997, 1998, 1999, and 2000.

When comparing large corporations, the percentage that was new was also 

higher for large FCCs than USCCs. Among large corporations reporting no 

tax liability, a larger percentage of FCCs were new compared with USCCs. 

However, not all the differences were statistically significant. (See fig. 4 

and table 12 in app. I.)

0

5

10

15

20

25

30

35

100

1996 1997 1998 1999 2000

Tax year

Percentage

FCCs, all

USCCs, all

FCCs, no tax

USCCs, no tax

Source: GAO analysis of IRS data.
Page 11 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Figure 4: Estimated Percentages of Large FCCs and USCCs That Were New, Tax 

Years 1996-2000 

Notes: Differences between all large FCCs and all large USCCs are not statistically significant in 1996. 

Differences between large FCCs and large USCCs reporting no tax liability are not statistically 

significant in 1996 and 1997.

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. Industry concentration did not change much when 

looking at only corporations reporting no tax liability. (See table 2.) 

0

2

4

6

8

10

12

14

16

18

20

100

1996 1997 1998 1999 2000

Tax year

Percentage

FCCs, all

USCCs, all

FCCs, no tax

USCCs, no tax

Source: GAO analysis of IRS data. 
Page 12 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 2: Estimated Percentage Distribution of FCCs and USCCs by Major Industry, 

Tax Year 2000 

Source: GAO analysis of IRS data. 

Note: Columns may not sum to 100 because of rounding. 

a

Differences between FCCs and USCCs reporting no tax liability are not statistically significant. 

b

Other includes transportation and public utilities; mining; construction; agriculture, forestry, and 

fishing; and other trades.

The concentration across industries did not vary much from year to year 

during the reporting period. (See tables 13 and 14 in app. I for year-to-year 

comparison.)

In 2000, all large FCCs and large FCCs reporting no tax liability were 

concentrated in the wholesale trade and manufacturing sector. In contrast, 

large USCCs were concentrated in the financial services industry. (See 

table 3.) The distribution of large FCCs and USCCs among industry sectors 

across the years 1996 through 1999 reflects that of 2000. (See tables 15 and 

16 in app. I.)

Industry FCCs, all FCCs, no tax USCCs, all USCCs, no tax

Manufacturing 10.6 7.5a 6.7 6.6a

Wholesale trade 22.2 20.5 8.2 7.4

Financial services 31.8 34.6 15.2 14.3

Nonfinancial 

services

18.5 18.5 37.5 40.5

Retail 4.8 4.9 12.2 11.5

Otherb 12.1 14.0 20.2 19.7

Total 100.0 100.0 100.0 100.0
Page 13 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 3: Estimated Percentage Distribution of Large FCCs and USCCs by Major 

Industry, Tax Year 2000 

Source: GAO analysis of IRS data. 

Note: Columns may not sum to 100 because of rounding. 

a

Differences between large FCCs and large USCCs reporting no tax liability are not statistically 

significant. 

b

Other includes transportation and public utilities; mining; construction; agriculture, forestry, and 

fishing; and other trades.

Differences in cost ratios across industries are possible explanations for 

why industry concentration might affect the reported tax liabilities of FCCs 

and USCCs. Cost differences could affect profits and thus tax liabilities. 

For example, higher cost of goods sold relative to receipts could contribute 

to lower taxable income relative to receipts and, consequently, to lower tax 

liability relative to receipts. Tables 19 and 20 in appendix I show several 

types of cost ratios by major industry groups for 2000. 

After Controlling for Age 

and Industry, Differences 

Remained in FCCs and 

USCCs

After controlling for age and industry concentration, we estimate that all 

FCCs remained more likely than all USCCs to have reported no tax liability 

from 1996 through 2000. However, consistent with our earlier comparisons, 

all FCCs were significantly less likely than all USCCs to have reported tax 

liabilities of less than 5 percent of their total incomes, after controlling for 

the same factors. For an explanation of the simple statistical model used to 

control for age and industry concentration or for details of the regression 

results, see appendix II.

For large corporations, estimated differences in tax liabilities between 

FCCs and USSCs after controlling for age and industry were generally 

smaller than the comparisons without controlling for these two factors. 

These results imply that age and industry may explain some of the 

Industry FCCs, all FCCs, no tax USCCs, all USCCs, no tax

Manufacturing 38.5 38.9 19.5 14.6

Wholesale trade 26.4 21.2 11.1 6.3

Financial services 14.1 15.5 37.2 51.8

Nonfinancial 

services

9.0 11.1a 11.4 12.0a

Retail 3.6 3.6 10.6 7.0

Otherb 8.4 9.7 10.3 8.2

Total 100.0 100.0 100.1 99.9
Page 14 GAO-04-358 Foreign- and U.S.-Controlled Corporations

differences between large FCCs and large USCCs in reporting no tax 

liability or less than 5 percent of tax liability relative to total income. As 

reported in the earlier in this report, large FCCs were in all years less likely 

than large USCCs to report no tax liability or less than 5 percent in tax 

liability. After controlling for age and industry concentration, there are less 

systematic differences between FCCs and USCCs in their likelihood of 

reporting either no tax liability or tax liability of less than 5 percent. 

Agency Comments We provided a draft of this report to the IRS for its comments. On 

February 18, IRS provided comments via e-mail on technical issues, which 

we incorporated into this report where appropriate. 

As arranged with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

date. At that time, we will then send copies to the Commissioner of Internal 

Revenue and other interested parties. We will also make copies available to 

others on request. In addition, this report will be available at no charge on 

GAO’s Web site at http://www.gao.gov.

If you have any questions concerning this report, please contact me at (202) 

512-9110 or at whitej@gao.gov or Ralph Block at (415) 904-2150. Key 

contributors to this report are listed in appendix III.

James R. White

Director, Tax Issues
Page 15 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Appendix I

Additional Tables ApApenednxidexiIs

The tables in this statistical appendix supplement those in the letter. All the 

data were obtained from Internal Revenue Service’s (IRS) Statistics of 

Income (SOI) corporate data samples for tax years 1996 through 2000. The 

tables in this appendix provide population estimates. After each table, 

notes indicate the sampling errors. We are confident the true estimates 

would be within these percentage points in 95 out of every 100 samples. 

Finally, we conducted tests to determine if there were significant 

differences between all FCCs and USCCs, between FCCs and USCCs 

reporting no tax liability, between large FCCs and USCCs, and between 

large FCCs and USCCs reporting no tax liability. The comparisons that 

were not statistically significant are noted in each table.

Table 4: Estimated Number and Percentage of Returns for FCCs and USCCs 

Reporting No Tax Liability 

Source: GAO analysis of IRS data. 

Notes: The number of returns consists of population estimates based on IRS’s sample of corporate tax 

returns. Percentages are the ratio of FCCs and USCCs reporting no tax liability to all (those reporting 

positive and no tax liability) FCCs and USCCs, respectively. Percentage estimates for FCCs have 

sampling errors of less than (+/-) 4 percentage points; percentage estimates of USCCs have sampling 

errors of less than (+/-) 1 percentage points.

Tax year

FCC returns USCC returns

Number Percentage Number Percentage 

1996 46,791 67.6 1,360,566 60.3

1997 50,625 71.7 1,331,638 60.9

1998 50,671 71.8 1,335,000 61.0

1999 50,149 72.3 1,310,280 61.2

2000 50,688 73.3 1,332,239 63.0

Total 248,924 71.3 6,669,723 61.3
Appendix I

Additional Tables 

Page 16 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 5: Estimated Percentage Distribution of FCCs and USCCs by Tax Liability as Share of Total Income, Tax Years 1996-2000

Source: GAO analysis of IRS data. 

Notes: Columns may not sum to 100 because of rounding. All percentage estimates have sampling 

errors of less than (+/-) 4 percentage points. 

a

Differences between FCCs and USCCs are not statistically significant. 

1996 1997 1998 1999 2000

FCCs

No tax liability 67.6 71.7 71.8 72.3 73.3

Greater than 0% but lower than 5% 21.0 16.8 17.4 18.0 15.2

5% or more but less than 10% 5.0 5.0a 4.5a 4.4a 4.2a

10% or more but less than 15% 3.0 3.6 3.3 2.5a 3.4

15% or more but less than 30% 2.9 2.6 2.2 2.5 3.0

30% or more 0.6 0.3 0.8 0.4 0.8

Total 100.1 100.0 100.0 100.1 99.9

USCCs

No tax liability 60.3 60.9 61.0 61.2 63.0

Greater than 0% but lower than 5% 33.7 32.7 32.4 32.2 30.9

5% or more but less than 10% 3.5 3.8a 3.9a 3.7a 3.4a

10% or more but less than 15% 1.7 1.8 1.8 2.1a 1.8

15% or more but less than 30% 0.6 0.7 0.8 0.7 0.7

30% or more 0.1 0.1 0.1 0.1 0.1

Total 99.9 100.0 100.0 100.0 99.9
Appendix I

Additional Tables 

Page 17 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 6: Estimated Percentage Distribution of Large FCCs and USCCs by Tax Liability as Share of Total Income, Tax Years 1996-

2000

Source: GAO analysis of IRS data. 

Notes: “Large” FCCs or USCCs are those with assets of at least $250 million or gross receipts of at 

least $50 million in constant 2000 dollars. Columns may not sum to 100 because of rounding. All 

percentage estimates have sampling errors of less than (+/-) 2 percentage points.

1996 1997 1998 1999 2000

Large FCCs

No tax liability 29.1 28.2 31.3 33.8 37.5

Greater than 0% but lower than 5% 45.5 43.9 43.3 40.7 38.1

5% or more but less than 10% 15.6 16.3 15.5 14.7 13.9

10% or more but less than 15% 5.6 7.7 5.9 6.0 5.8

15% or more but less than 30% 3.7 3.8 3.6 4.4 4.2

30% or more 0.3 0.2 0.4 0.4 0.5

Total 99.8 100.1 100.0 100.0 100.0

Large USCCs

No tax liability 32.7 35.5 37.8 40.9 45.3

Greater than 0% but lower than 5% 42.9 40.0 39.9 38.4 36.7

5% or more but less than 10% 17.7 17.8 16.5 15.4 13.1

10% or more but less than 15% 4.8 4.9 4.1 3.6 3.2

15% or more but less than 30% 1.8 1.7 1.5 1.4 1.4

30% or more 0.2 0.2 0.2 0.3 0.3

Total 100.1 100.1 100.0 100.0 100.0
Appendix I

Additional Tables 

Page 18 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 7: Estimated Average Tax Liability Per $1,000 of Gross Receipts for All and 

Large FCCs and USCCs, Tax Years 1996-2000

Source: GAO analysis of IRS data. 

Notes: Estimates in the first, third, and fourth columns have sampling errors of less than (+/-) $0.30; 

estimates in the second column have sampling errors of less than (+/-) $0.20.

Table 8: Profile of FCCs and USCCs by Estimated Amount of Income Tax Liability, Tax Year 2000

Source: GAO analysis of IRS data. 

Notes: Columns may not sum to 100 because of rounding. Estimates in the second column have 

sampling errors of less than (+/-) 2 percentage points; estimates in the third column have sampling 

errors of less than (+/-) $3 million dollars except where noted; estimates in the fourth column have 

sampling errors of less than (+/-) $.03 million dollars except where noted.

a

Data not applicable. 

b

Sampling errors may be as high as (+/-) $13 million dollars.

c

Sampling errors may be as high as (+/-) $0.2 million dollars.

Tax year FCCs, all USCCs, all FCCs, large USCCs, large

1996 $10.62 $16.11 $10.06 $18.82

1997 12.23 16.28 11.79 18.76

1998 10.77 15.67 10.24 17.91

1999 12.49 15.02 12.09 16.99

2000 11.88 14.75 11.52 16.65

Distribution by income tax liability

Number of 

returns

Percentage of 

returns

Average gross 

receipts (dollars in 

millions)

Average income tax 

liability (dollars in 

millions)

FCCs

No tax liability 50,688 73.3 $15 a

$1 or more but less than $100,000 12,577 18.2 6 $0.02

$100,000 or more but less than $1 million 4,193 6.1 48b 0.35

$1 million or more 1,681 2.4 741b 15.01c

Total 69,139 100 $33 $0.39

USCCs

No tax liability 1,332,239 63.0 $2 a

$1 or more but less than $100,000 740,639 35.0 2 $0.01

$100,000 or more but less than $1 million 33,423 1.6 24 0.29

$1 million or more 7,387 0.3 980b 21.53c

Total 2,113,689 99.9 $6 $0.08
Appendix I

Additional Tables 

Page 19 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 9: Profile of Large FCCs and USCCs by Estimated Amount of Income Tax Liability, Tax Year 2000 

Source: GAO analysis of IRS data. 

Notes: Columns may not sum to 100 because of rounding. Estimates in the second column have 

sampling errors of less than (+/-) 1 percentage point; estimates in the third column have sampling 

errors of less than (+/-) $17 million dollars except where noted; estimates in the fourth column have 

sampling errors of less than (+/-) $0.3 million dollars except where noted.

a

Data not applicable. 

b

Differences between large FCCs and large USCCs are not statistically significant.

Distribution by income tax liability

Number of 

returns

Percentage of 

returns

Average gross 

receipts 

(dollars in 

millions)

Average income 

tax liability 

(dollars in 

millions)

Large FCCs

 No tax liability 1,251 37.5 $532 a

$1 or more but less than $100,000 289 8.7 143b $0.04

$100,000 or more but less than $1 million 630 18.9 260 0.45

$1 million or more 1,165 34.9 1,061 20.57

Total 3,335 100.0 632 7.28

Large USCCs

 No tax liability 8,335 45.3 $182 a

$1 or more but less than $100,000 1,476 8.0 132b $0.04

$100,000 or more but less than $1 million 3,152 17.1 149 0.44

$1 million or more 5,427 29.5 1,328 28.54

Total 18,390 99.9 $511 $8.50
Appendix I

Additional Tables 

Page 20 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 10: Estimated FCCs and USCCs Reporting No Tax Liability That Are Large and 

Small as a Percentage of All FCCs and USCCs, Tax Years 1996-2000 

Source: GAO analysis of IRS data. 

Notes: “Small” FCCs or USCCs are those with assets of less than $250 million or gross receipts of less 

than $50 million in constant 2000 dollars. Percentages are the ratio of large FCCs and large USCCs 

reporting no tax liability to all (large and small) FCCs and USCCs, respectively, and of small FCCs and 

small USCCs reporting no tax liability to all FCCs and USCCs, respectively. Percentage estimates for 

FCCs have sampling errors of less than (+/-) .5 percentage points; percentages estimates for USCCs 

have sampling errors of less than (+/-) .05 percentage points. 

Tax year

Number Percentage Number Percentage 

Large FCCs Large USCCs

1996 841 1.8 5,520 0.4

1997 818 1.6 6,247 0.5

1998 944 1.9 6,674 0.5

1999 1,060 2.1 7,435 0.6

2000 1,251 2.5 8,335 0.6

Total 4,913 2.0 34,210 0.5

 Small FCCs Small USCCs

1996 45,951 98.2 1,355,046 99.6

1997 49,807 98.4 1,325,390 99.5

1998 49,727 98.1 1,328,327 99.5

1999 49,089 97.9 1,302,845 99.4

2000 49,437 97.5 1,323,904 99.4

Total 24,401 98.0 6,635,513 99.5
Appendix I

Additional Tables 

Page 21 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 11: Estimated Percentages of FCCs and USCCs That Were New, Tax Years 

1996-2000

Source: GAO analysis of IRS data. 

Notes: "New" includes FCCs and USCCs incorporated within 3 years. Estimates in the second column 

have sampling errors of less than (+/-) 1 percentage point; estimates in the fourth column have 

sampling errors of less than (+/-) 2 percentage points; estimates in the first and third columns have 

sampling errors of less than (+/-) 6 percentage points.

a

Differences between FCCs and USCCs reporting no tax liability are not statistically significant.

Table 12: Estimated Percentages of Large FCCs and USCCs That Were New, Tax 

Years 1996-2000

Source: GAO analysis of IRS data. 

Note: Estimates have sampling errors in the third column of less than (+/-) 2 percentage points; the 

first, second, and fourth columns have sampling errors of less than (+/-) 1 percentage point.

a

Differences between FCCs and USCCs reporting no tax liability are not statistically significant.

Tax year FCCs, all USCCs, all FCCs, no tax USCCs, no tax

1996 30.2 21.8 29.9 23.4

1997 25.3 21.0 24.9a 23.0a

1998 24.3 20.3 25.0a 22.3a

1999 23.6 19.5 22.6a 21.8a

2000 22.3 18.5 21.8a 20.6a

Tax year FCCs, all USCCs, all FCCs, no tax USCCs, no tax

1996 8.8a 8.6a 12.9a 12.2a

1997 11.0 9.2 13.8a 12.8a

1998 12.4 10.7 16.1 14.5

1999 13.4 10.8 18.1 15.2

2000 13.6 9.5 16.8 12.6
Appendix I

Additional Tables 

Page 22 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 13: Estimated Percentage Distribution of FCCs and USCCs by Major Industry, Tax Years 1996-2000 

Source: GAO analysis of IRS data. 

Notes: Columns may not sum to 100 because of rounding. Estimates have sampling errors for FCCs of 

less than (+/-) 4 percentage points; estimates for USCCs have sampling errors of less than (+/-) 1 

percentage point. 

a

Differences between FCCs and USCCs are not statistically significant.

b

Other includes transportation and public utilities; mining; construction; agriculture, forestry, and 

fishing; and other trades.

Industry

1996 1997 1998 1999 2000

FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs

Manufacturing 9.2a 7.9a 10.3 7.5 9.9 7.5 9.7 7.2 10.6 6.7

Wholesale trade 24.8 8.8 22.3 8.7 21.6 8.0 22.5 8.1 22.2 8.2

Financial services 36.4 15.1 37.0 15.4 34.7 15.1 33.7 15.3 31.8 15.2

Nonfinancial 

services

16.3 32.4 16.9 32.9 17.0 36.9 16.2 36.9 18.5 37.5

Retail 4.8 16.1 6.1 16.1 5.7 12.5 4.7 12.2 4.8 12.2

Otherb 8.5 19.7 7.4 19.3 11.1 19.9 13.3 20.4 12.1 20.2

Total 100.0 100.0 100.0 99.9 100.0 99.9 100.1 100.1 100.0 100.0
Appendix I

Additional Tables 

Page 23 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 14: Estimated Percentage Distribution of FCCs and USCCs Reporting No Tax Liability by Major Industry, Tax Years 1996-

2000

Source: GAO analysis of IRS data. 

Notes: Columns may not sum to 100 because of rounding. Estimates for FCCs have sampling errors of 

less than (+/-) 6 percentage points; estimates for USCCs have sampling errors of less than (+/-) 2 

percentage points.

a

Differences between FCCs and USCCs are not statistically significant.

b

Other includes transportation and public utilities; mining; construction; agriculture, forestry, and 

fishing; and other trades.

Table 15: Estimated Percentage Distribution of Large FCCs and USCCs by Major Industry, Tax Years 1996-2000 

Source: GAO analysis of IRS data. 

Notes: Columns may not sum to 100 because of rounding. Estimates for FCCs have sampling errors of 

less than (+/-) 2 percent; estimates for USCCs have sampling errors of less than (+/-) 1 percent.

a

Other includes transportation and public utilities; mining; construction; agriculture, forestry, and 

fishing; and other trades.

Industry

1996 1997 1998 1999 2000

FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs

Manufacturing 6.5a 7.4a 8.2a 7.0a 7.7a 7.0a 7.0a 6.7a 7.5a 6.6a 

Wholesale trade 23.6 8.0 20.8 7.8 19.6 7.4 20.1 7.2 20.5 7.4

Financial services 40.8 14.3 40.9 14.5 37.5 14.8 37.7 14.7 34.6 14.3

Nonfinancial 

services

14.7 35.1 15.0 35.8 16.9 40.3 16.6 40.0 18.5 40.5

Retail 5.4 16.2 7.4 16.3 6.2 11.4 4.9 11.3 4.9 11.5

Otherb 9.1 19.0 7.6 18.7 12.1 19.0 13.7 20.1 14.0 19.7

Total 100.1 100.0 99.9 100.1 100.0 99.9 100.0 100.0 100.0 100.0

Industry

1996 1997 1998 1999 2000

FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs

Manufacturing 39.0 24.1 40.0 23.2 40.0 21.8 39.5 20.3 38.5 19.5

Wholesale trade 28.5 12.7 28.1 11.9 26.2 10.7 26.1 11.1 26.4 11.1

Financial services 14.1 32.5 13.7 33.9 14.4 36.0 14.4 36.9 14.1 37.2

Nonfinancial 

services

7.4 8.1 7.1 9.0 7.3 9.8 8.2 11.0 9.0 11.4

Retail 3.7 12.2 3.7 11.6 4.3 11.3 3.6 10.7 3.6 10.6

Othera 7.3 10.4 7.3 10.3 7.7 10.4 8.1 10.1 8.4 10.3

Total 100.0 100.0 99.9 99.9 99.9 100.0 99.9 100.1 100.0 100.1
Appendix I

Additional Tables 

Page 24 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 16: Estimated Percentage Distribution of Large FCCs and USCCs Reporting No Tax Liability by Major Industry, Tax Years 

1996-2000

Source: GAO analysis of IRS data. 

Notes: Columns may not sum to 100 because of rounding. Estimates for FCCs have sampling errors of 

less than (+/-) 3 percent; estimates for USCCs have sampling errors of less than (+/-) 2 percent.

a

Differences between FCCs and USCCs are not statistically significant.

b

Other includes transportation and public utilities; mining; construction; agriculture, forestry, and 

fishing; and other trades.

Table 17: Estimated Percentage of FCCs and USCCs That Reported No Tax Liability in Each Industry, Tax Years 1996-2000

Source: GAO analysis of IRS data. 

Note: All estimates have sampling errors of less than (+/-) 10 percent except where noted.

a

Differences between FCCs and USCCs are not statistically significant.

b

Sampling errors may be as high as (+/-) 14 percentage points.

c

Sampling errors may be as high as (+/-) 23 percentage points.

Industry

1996 1997 1998 1999 2000

FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs

Manufacturing 34.5 15.0 35.4 14.2 35.1 14.6 37.1 13.9 38.8 14.6

Wholesale trade 27.8 7.7 26.1 7.5 24.8 5.7 22.5 5.6 21.2 6.3

Financial services 16.3 54.4 16.1 54.7 16.7 56.8 17.4 55.9 15.5 51.8

Nonfinancial 

services

7.5a 7.1a 8.6a 8.7a 8.3a 9.0a 9.2 11.6 11.1a 12.0a

Retail 4.5 9.1 5.0 7.7 5.9a 6.1a 3.5 5.5 3.6 7.0

Otherb 9.5 6.7 8.8 7.1 9.1 7.8 10.4 7.6 9.7 8.2

Total 100.1 100.0 100.0 99.9 99.9 100.0 100.1 100.1 99.9 99.9

Tax year

Manufacturing Wholesale trade Financial services

Nonfinancial 

services Retail

FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs

1996 47.4ab 56.8a 64.4 54.7 75.6 56.8 60.8ab 65.5a 76.6ac 60.7a

1997 57.3a 56.8a 66.9 54.4 79.2 57.4 63.8ab 66.2a 87.3b 61.5

1998 56.1a 57.4a 65.1 56.2 77.6 59.8 71.0a 66.6a 78.4b 55.7

1999 51.9a 57.3a 64.5 54.0 81.0 58.7 74.4 66.5 75.0c 57.0

2000 51.4 61.7 67.7 56.8 79.8 59.3 73.6a 68.2a 73.8ac 59.4a
Appendix I

Additional Tables 

Page 25 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 18: Estimated Percentage of Large FCCs and USCCs That Reported No Tax Liability in Each Industry, Tax Years 1996-2000

Source: GAO analysis of IRS data. 

Note: All estimates have sampling errors of less than (+/-) 6 percentage points.

a

Differences between FCCs and USCCs are not statistically significant.

Table 19: Estimated Cost Ratios for All FCCs and USCCs by Major Industry, Tax Year 2000 

Source: GAO analysis of IRS data. 

Note: All estimates have sampling errors of less than (+/-) 3 percentage points except where noted. 

a

Differences between FCCs and USCCs are not statistically significant.

b

Sampling errors may be as high as (+/-) 5 percentage points.

c

Sampling errors may be as high as (+/-) 24 percentage points.

Tax year

Manufacturing Wholesale trade Financial services

Nonfinancial 

services Retail

FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs FCCs USCCs

1996 25.7 20.3 28.3 19.9 33.7 54.7 29.6a 28.5a 35.1 24.3

1997 24.9 21.8 26.2a 22.5a 32.8 57.3 34.3a 34.3a 38.5 23.5

1998 27.5 25.3 29.6 20.0 36.5 59.7 35.6a 34.4a 42.6 20.5

1999 31.7 27.9 29.2 20.5 40.6 62.0 37.6 43.3 32.7 20.9

2000 37.9 34.1 30.1 25.7 41.3 63.2 46.0a 47.9a 37.8 30.0

Industry

Cost of goods sold as a 

percentage of gross receipts

Purchases as a percentage 

of gross receipts

Interest as a percentage of 

gross receipts

No tax All No tax All No tax All

FCCs

 Manufacturing 76.3 71.6 56.7 56.8 5.2 4.5a

Wholesale trade 86.3 83.3 80.2 80.2 1.6 1.7

Financial services 43.0b 49.2 3.4 1.7 118.8c 74.9 c

Nonfinancial services 50.7 46.0 19.4 16.7 5.1 7.8

Retail trade 69.1 71.4 60.6 63.1 2.7 2.3

Other 57.0 59.7 17.7 20.0 6.5 7.2

USCCs

Manufacturing 69.2 67.8 45.0 43.8 4.6 4.5a

Wholesale trade 81.0 81.7 73.9 78.1 1.8 1.4

Financial services 56.4b 53.5 1.9 1.1 19.1 41.1

Nonfinancial services 26.0 30.8 11.3 11.3 2.8 3.1

Retail trade 73.5 73.1 68.3 69.7 1.7 1.4

Other 49.8 53.4 21.1 22.2 7.3 5.3
Appendix I

Additional Tables 

Page 26 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 20: Estimated Cost Ratios for Large FCCs and USCCs by Major Industry, Tax Year 2000 

Source: GAO analysis of IRS data. 

Note: All estimates have sampling errors of less than (+/-) 3 percentage points except where noted.

a

Differences between large FCCS and USCCs are not statistically significant.

b

Sampling errors may be as high as (+/-) 6 percentage points.

c

Sampling errors may be as high as (+/-) 23 percentage points.

Industry

Cost of goods sold as a 

percentage of gross receipts

Purchases as a percentage 

of gross receipts

Interest as a percentage of 

gross receipts

No tax All No tax All No tax All

FCCs

Manufacturing 76.4 71.7 56.9 57.0 5.3 4.6

Wholesale trade 87.4 83.8a 81.1 80.9a 1.6 1.8

Financial services 45.0b 50.5 2.4 1.3 99.8c 68.7b

Nonfinancial services 52.8 47.3 19.2 16.8 5.4 8.7

Retail trade 70.2 71.9 60.9 63.4 2.9 2.4

Other 55.8 59.9 17.5a 20.3 6.7 7.5

USCCs

Manufacturing 70.0 68.0 45.9 44.0 5.1 4.7

Wholesale trade 84.6 84.0a 77.0 81.0a 2.0 1.6

Financial services 64.0b 56.2 1.3 0.9 18.3 42.4

Nonfinancial services 30.7 35.4 11.0 10.9 4.9 4.6

Retail trade 71.6 72.4 65.7 69.1 2.1 1.6

Other 44.0 51.2 18.5a 21.4 10.1 6.3
Page 27 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Appendix II

Statistical Analysis Using Logistic Regression ApendxiI

We used the SOI data from IRS’s sample of corporate tax returns to 

estimate the differences between FCCs and USCCs in reporting no U.S. 

income tax liability or tax liability of less than 5 percent relative to total 

income. We looked at all of the corporations and separately at large 

corporations in each tax year from 1996 through 2000, and calculated odds 

ratios to estimate the difference between FCCs and USCCs.1

 We used 

USCCs as the reference category in our calculations, so the odds ratios 

indicate how much more likely (when the ratios exceed 1.0) or less likely 

(when they are less than 1.0) the odds were of FCCs reporting to have no 

tax liability or tax liability of less than 5 percent compared with USCCs. We 

show these odds ratios in the tables 21 and 22 both before and after 

adjusting them to control for the age and industry sector of each 

corporation. While the unadjusted odds ratios can be derived directly from 

the unadjusted odds shown in these tables, the adjusted odds ratios are 

from logistic regression models that were used in each year to estimate the 

difference between FCCs and USSCs after the controls for age and industry 

sector were introduced.2

 The following explains how odds ratios are 

calculated and elaborates on the tables in this appendix.

The odds on whether FCCs and USCCs report no tax liability or tax liability 

less than 5 percent are somewhat different from, but related to, the 

percentage of each type of corporation reporting no tax liability or tax 

liability of less than 5 percent. The odds of reporting no tax liability equal 

the percentage reporting no tax liability divided by the percentage 

reporting positive tax liability. For the sample of all FCCs and USCCs in 

1996, for example, 67.6 percent of FCCs reported no tax liability. (See table 

21.) The odds of an FCC reporting no tax liability in that year was 2.08, 

which equals 67.6/32.43

 and implies that 2.08 of FCCs reported no tax 

liability for every FCC that reported some tax liability, or that 208 FCCs 

reported no tax liability for every 100 FCCs that reported some tax liability. 

Since 60.3 percent of USCCs reported no tax liability in 1996, the odds of 

USCCs reporting no tax liability was 1.52, which equals 60.3/39.7. The 

1

In all 5 years, 99 percent or more of all corporations were small, as we defined them. 

However, we reported separately on large corporations because they make up 93 percent of 

total assets of all corporations.

2

Logistic regression is an appropriate technique to use when the dependent variable is 

binary, or has two categories, such as whether a corporation reported no tax liability versus 

positive tax liability or whether a corporation reported less than 5 percent in tax liability 

versus 5 percent or more in tax liability.

3

Rounded values are used in this example to show how to simply calculate odds ratios.
Appendix II

Statistical Analysis Using Logistic 

Regression

Page 28 GAO-04-358 Foreign- and U.S.-Controlled Corporations

unadjusted ratio of these odds, which is 2.08/1.52 = 1.37, apart from 

rounding, implies that FCCs were more likely than USCCs to have reported 

no tax liability by a factor of 1.37. While odds are somewhat less familiar 

than percentages, the use of odds and odds ratios are unlike percentages 

and percentage differences, which are unaffected by whether we choose to 

look at the likelihood of whether an outcome does or does not occur, and 

by how likely or unlikely the outcome is across the subgroups we are 

comparing.

Table 21 shows how different all FCCs and USCCs were, using both 

percentage differences and odds ratios in each year, in terms or reporting 

no tax liability or tax liability of less than 5 percent of total income. Both 

before (unadjusted) and after (adjusted) controlling for age and industry 

sector, in every year FCCs were significantly more likely than USSCs to 

have reported no tax liability, with odds ratios ranging from roughly 1.37 to 

roughly 1.79. At the same time, FCCs were significantly less likely than 

USCCs to have reported tax liability of less than 5 percent in all years, with 

odds ratios ranging from roughly 0.49 to 0.78.
Appendix II

Statistical Analysis Using Logistic 

Regression

Page 29 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Table 21: Estimated Percentages and Odds on Reporting No Tax Liability and Tax Liability of Less Than 5 Percent of Total 

Income, between All FCCs and USCCs and Odds Ratios Indicating the Difference between FCCs and USCCs, before and after 

Controlling for Age and Industry Sector, Tax Years 1996-2000

Source: GAO analysis of IRS data. 

Note: Adjustments to control for age and industry sector involved the use of dummy variables to 

contrast corporations that were less than 3 years old with other corporations, and to distinguish 

corporations in the manufacturing, wholesale, financial services, nonfinancial services, retail, and 

“other” sectors.

a

Denotes odds ratios in each year that did not reflect differences between FCCs and USSCs. Those 

not denoted can reasonably, with 95 percent confidence, be assumed to be due to something other 

than chance or random fluctuations. (The significance of the difference in the averaged odds ratios 

was not tested, since over the 5 years some corporations contributed five observations, some 

contributed four, some three, etc.)

Table 22 shows how different large FCCs and USCCs were in each year in 

terms of reporting no tax liability or less than 5 percent of tax liability 

relative to income. The unadjusted odds ratios reveal that before 

controlling for age and industry sector, large FCCs were in every year 

significantly less likely than large USSCs to have reported no tax, and in all 

years except for 1996, they were significantly less likely to report less than 

5 percent in tax liability. After adjusting for age and industry, however, 

differences between large FCCs’ and USCCs’ likelihood of reporting no tax 

liability or less than 5 percent in tax liability were smaller except for one 

Tax year

All corporations

Percentage reporting no tax 

liability

Odds on reporting no tax 

liability Odds ratios

FCC USCC FCC USCC Unadjusted Adjusted

1996 67.6 60.3 2.08 1.52 1.37 1.47

1997 71.7 60.9 2.53 1.56 1.62 1.77

1998 71.8 61.0 2.55 1.56 1.63 1.71

1999 72.3 61.2 2.60 1.58 1.65 1.79

2000 73.3 63.0 2.75 1.70 1.61 1.74

5-year average 71.3 61.3 2.49 1.58 1.57 1.69

Tax year

Percentage reporting less 

than 5 percent in tax liability

Odds on reporting less than 5 

percent in tax liability Odds ratios

FCC USCC FCC USCC Unadjusted Adjusted

1996 88.6 94.0 7.77 15.80 0.49 0.69

1997 88.5 93.6 7.67 14.73 0.52 0.73

1998 89.2 93.4 8.27 14.16 0.58 0.78

1999 90.2 93.4 9.24 14.24 0.65 0.86a

2000 88.6 94.0 7.74 15.60 0.50 0.66

5-year average 89.0 93.7 8.10 14.88 0.54 0.74
Appendix II

Statistical Analysis Using Logistic 

Regression

Page 30 GAO-04-358 Foreign- and U.S.-Controlled Corporations

year (1996). Large FCCs were more likely than large USCCs to report no 

tax liability in 2 of the 5 years (1996 and 1998), less likely than large USCCs 

to report no tax liability in 1 year (2000), and no different than large USCCs 

in the other 2 years (1997 and 1999). 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). Most of the statistically significant differences between 

large FCCs and USSCs were quite modest, and the odds ratios indicate that 

the former were not very different from the latter in terms of reporting no 

tax liability or of reporting tax liability less than 5 percent of total income.

Table 22: Estimated Percentages and Odds on Reporting No Tax Liability and Tax Liability of Less Than 5 Percent of Total 

Income, between Large FCCs and USCCs and Odds Ratios Indicating the Difference between Large FCCs and USCCs, before 

and after Controlling for Age and Industry Sector, Tax Years 1996-2000

Source: GAO analysis of IRS data. 

Note: Adjustments to control for age and industry sector involved the use of dummy variables to 

contrast corporations that were less than 3 years old with other corporations, and to distinguish 

corporations in the manufacturing, wholesale, financial services, nonfinancial services, retail, and 

“other” sectors.

Tax year

Large corporations

Percentage reporting no tax 

liability Odds on reporting no tax liability Odds ratios

FCC USCC FCC USCC Unadjusted Adjusted

1996 29.1 32.7 0.41 0.49 0.85 1.15

1997 28.2 35.5 0.39 0.55 0.71 0.97a

1998 31.3 37.8 0.46 0.61 0.75 1.04

1999 33.8 40.9 0.51 0.69 0.74 1.02a

2000 37.5 45.3 0.60 0.83 0.72 0.95

5-year average 32.2 38.6 0.47 0.63 0.76 1.02

Tax year

Percentage reporting less than 

5 percent in tax liability

Odds on reporting less than 5 

percent in tax liability Odds ratios

FCC USCC FCC USCC Unadjusted Adjusted

1996 74.7 75.6 2.95 3.10 0.95a 1.14a

1997 72.0 75.5 2.57 3.08 0.84 1.00a

1998 74.6 77.7 2.94 3.48 0.84 1.00a

1999 74.5 79.3 2.92 3.84 0.76 0.92

2000 75.6 82.0 3.10 4.56 0.68 0.81

5-year average 74.3 78.1 2.90 3.56 0.81 0.97
Appendix II

Statistical Analysis Using Logistic 

Regression

Page 31 GAO-04-358 Foreign- and U.S.-Controlled Corporations

a

Denotes odds ratios in each year that do not reflect differences between FCCs and USSCs. Those not 

denoted can reasonably, with 95 percent confidence, be assumed to be due to something other than 

chance or random fluctuations. (The significance of the difference in the averaged odds ratios was not 

tested, since over the 5 years some corporations contributed five observations, some contributed four, 

some three, etc.) 
Page 32 GAO-04-358 Foreign- and U.S.-Controlled Corporations

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contacts James R. White, (202) 512-9110

Ralph T. Block, (415) 904-2150

Acknowledgments In addition to the individuals above, Jeff Arkin, Susan Baker, Amy 

Friedheim, Shirley Jones, Don Marples, John Mingus, Amy Rosewarne, Sam 

Scrutchins, Doug Sloane, Wendy Turenne, Jennifer Li Wong, and Jim Wozny 

made key contributions to this report.

(450229)
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