International Taxation: Study Countries That Exempt Foreign-Source Income Face Compliance Risks and Burdens Similar to Those in the United States
Published: 2009-09-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: A debate is underway about how the United States should tax foreign-source, corporate income. Currently, the United States allows domestic corporations to defer tax on the earnings of their foreign subsidiaries and also gives credits for foreign taxes paid, while most other developed countries exempt the active earnings of their multinational corporations' foreign subsidiaries from domestic tax. The debate has focused on economic issues with little attention to tax administration. GAO was asked to describe for a group of study countries with exemption systems: (1) the rules for exempting foreign-source income, and (2) the compliance risk and taxpayer compliance burden, such as recordkeeping, of the rules. The study countries, selected to provide a range of exemption systems, are Australia, Canada, France, Germany, and the Netherlands. For these countries GAO reviewed documents; interviewed government officials, academic experts, and business representatives; and compared tax policies, compliance activities and taxpayer reporting requirements.
section_title: What GAO Found
paragraphs: The study countries exempt some corporate income, such as dividends received from foreign subsidiaries, from domestic tax. However, the study countries tax other types of foreign-source income such as royalties. Multinational corporations present a compliance risk because they can use subsidiaries to convert taxable income into tax-exempt or lower taxed income, eroding the domestic tax base. Although quantitative estimates of noncompliance do not exist, tax experts interviewed by GAO identified sources of compliance risk and taxpayer burden in each of the study countries. These issues, particularly the ones below, have also been identified as sources of compliance risk and burden in the United States. Transfer prices--the prices for transactions between related parties--can be manipulated to shift profits. Tax experts in the study countries said the growing importance of intangible property such as trademarks and patents is making international transactions more susceptible to transfer pricing abuse. In response, the study countries have all increased their scrutiny of transfer prices, including increased demands for documentation and more audits, resulting in increased compliance burden for taxpayers. Cooperative efforts between taxpayers and tax agencies to reduce audits, such as Advanced Pricing Agreements, received mixed reviews in the study countries. Anti-avoidance rules prevent taxpayers from moving passive income (interest and royalties are often passive income) to a foreign subsidiary in order to avoid domestic tax. Generally, the rules make such passive income, even if moved, taxable. Tax agencies and taxpayers reported difficulties in obtaining information from other countries to make complex determinations about whether the anti-avoidance rules apply or not. The United States does not report taxes paid on foreign-source income. Treasury officials said it would be feasible to do so. Such reporting would make more explicit the role international tax rules play in raising revenues and protecting the domestic tax base. All experts we spoke with on this topic agreed.

section_title: Letter
paragraphs: One hallmark of the global economy is greater mobility of income and  economic transactions. As technology advances and globalization  continues to eliminate barriers to conducting business across countries,  companies routinely earn income in several countries. For example, U.S.  corporations reported $205 billion in foreign-source income for tax year  2003, the latest year currently available. This is about half of the $425  billion of total worldwide income (foreign plus domestic) earned by U.S.  corporations in that year. Often income is not earned directly by a  domestic corporation, but rather through wholly or partially owned  subsidiaries incorporated in other countries.
Foreign-source income, especially when earned by multinational  corporations (MNC), presents challenges for income tax design and  administration. These challenges include ensuring tax law compliance,  minimizing tax induced distortions of businesses decisions about where to  locate investment, avoiding the double taxation of income earned in one  country by companies located in another country, and minimizing  unnecessary taxpayer compliance burden, such as recordkeeping.
There are two general approaches to taxing foreign-source corporate  income. Under both approaches, a corporation pays any tax due in the  foreign country where the income is earned. The approaches differ in how  the corporation is taxed domestically, that is, in the corporation’s home  country. One approach—called worldwide taxation—taxes all income  earned by a corporation regardless of where the income is derived. Under  this approach, double taxation is addressed through foreign tax credits  (FTC). The FTC is a credit, usually subject to limits, against domestic tax  for foreign taxes paid. A corporation would pay domestic tax on foreign- source income only to the extent that the domestic tax on that income  exceeds the foreign tax credit.
The other approach—called territorial taxation—only taxes the  corporation’s income derived within the taxing country’s borders,  irrespective of the residence of the taxpayer. Thus, unlike worldwide  taxation, foreign-source income earned by a domestic corporation is  exempt from residence-country tax. The exemption generally eliminates  the possibility of double taxation.
In practice, large developed countries do not use a pure worldwide or pure  territorial approach when taxing foreign-source corporate income.  Instead, they use hybrid approaches. Most developed countries, especially  after recent policy changes in Japan and the United Kingdom, now lean  toward a territorial approach but are not purely territorial—in part,  because they place significant limitations on what types of income are  eligible for exempt treatment. The United States and a few other  countries, on the other hand, lean toward a more worldwide approach but  are not purely worldwide—in part, because taxation can be deferred on  certain qualifying income until it is actually paid to the domestic  corporation by subsidiaries as dividends. Basic features of the U.S. tax  system result in the ability of some MNCs to defer domestic taxation until  it is actually paid to a domestic part of the MNC.
In the United States, proposals have been developed to reform the  taxation of foreign-source income. The proposals differ, with some  designed to move the United States toward more territoriality and others  intended to maintain a more worldwide approach. An extensive body of  literature debates the economic merits of these proposals, including the  effects of taxes on competitiveness and the location decisions of firms.  While some research shows that taxes change location incentives, the  existing research does not reach definitive conclusions about important  economic effects such as the impact of foreign investment by U.S.  corporations on U.S. employment.
Compared to the extensive examination of economic effects, little has  been done to study whether there are important differences between  worldwide and territorial systems in terms of tax administration and, more  specifically, in terms of compliance by taxpayers and taxpayers’  compliance burden (recordkeeping, reporting, and other costs). In the  context of foreign-source income, at least two broad compliance issues  exist. One is ensuring that domestic corporations pay the tax due on  foreign-source income. The other is ensuring corporations do not erode  the domestic tax base by illegally shifting domestic income abroad.
Because of the ongoing debate about the taxation of foreign-source  income and because of the limited information available on administering  a worldwide system versus a territorial system, you asked us to report on  other countries’ experience administering territorial systems. Based on  your request, our objectives are to (1) describe, for select case study  countries that take a territorial approach, what types of foreign-source  income the countries exempt and the rules governing those exemptions;  and (2) describe, to the extent information is available, the compliance  risks and taxpayer compliance burdens that the taxation of foreign-source  corporate income presents for each of these countries.
To address our objectives, we selected five countries—Australia, Canada,  France, Germany, and the Netherlands—to study based on several criteria,  including range of rules governing the taxation of foreign-source income,  unique tax system features, and Organization of Economic Cooperation  and Development (OECD) membership. To provide assurance that all of  the information used in this report is sufficiently reliable, we used data  from commonly used and cited sources of statistical data, such as the  OECD, and other publicly available reports from international government  agencies. Additionally, we performed an in-depth literature review on all  of the study countries, including government documents, private sector  studies, and academic publications. We collected and analyzed data on the  countries and their systems for taxing foreign-source corporate income,  including tax policies, administrative mechanisms, compliance activities,  and taxpayer reporting and documentation requirements. We interviewed  knowledgeable government officials from the study countries, including  officials from the tax agencies. We also interviewed U.S. tax agency  officials, international tax experts, including academic and private-sector  experts, and members of a number of professional services organizations  that represent and serve MNCs that have large numbers of foreign  subsidiaries under their control. We provided the tax agencies of our study  countries a copy of our report to verify data and specific factual and legal  statements about the tax treatment of foreign-source income in those  countries. We did not conduct a formal legal review of the tax laws and  rules in other countries, but relied on the information supplied by tax  agency officials in those countries. We made technical corrections to our  report based on these reviews. A more detailed discussion of our  methodology is in appendix I.
We conducted our work from June 2008 to September 2009 in accordance  with all sections of GAO’s Quality Assurance Framework that are relevant  to our objectives. The framework requires that we plan and perform the  engagement to obtain sufficient and appropriate evidence to meet our  stated objectives and to discuss any limitations in our work. We believe  that the information and data obtained, and the analysis conducted,  provide a reasonable basis for any findings and conclusions in this  product.
subsections: section_title: Background
subsections: section_title: Multinational Corporations and Foreign-Source Income
paragraphs: Corporate income tax is levied on business entities that organize and  operate as corporations, as defined by each individual country’s tax rules  and laws. Generally, corporations are individual business entities that  issue shares and can make distributions to shareholders, such as dividend  payments.
Corporations can be shareholders in other corporations, both domestic  and foreign. The amount of control the corporate shareholder has over the  other corporation can vary depending on the percentage of shares owned  and other factors. At the low range of corporate ownership, portfolio  shareholding allows a corporate shareholder to invest in a business but  does not involve maintaining a controlling stake in the firm. At greater  levels of ownership, corporations can own a sufficient percentage of  shares to gain partial or total control of major business decisions, such as  the level and timing of dividend distributions and investment and pricing  strategies. For this report, we will call the controlling firm a parent  corporation and the controlled firm a subsidiary. Parent-subsidiary  relationships can be complicated, involving a corporation owning multiple  subsidiaries, subsidiaries being controlled by multiple parents, or tiered  arrangements with subsidiaries owning subsidiaries of their own. When  these relationships involve entities in more than one country, these  corporations are referred to as multinational corporations (MNC).
MNCs are groups of separate legal entities, which can include  corporations, partnerships, trusts, and other legal entities, that operate  and generate income in multiple countries, and different parts of an MNC  may have different domestic jurisdictions. MNCs may also have  branches—domestic, foreign, or both—as part of a corporation’s internal  organizational structure. In general, each corporate entity that is part of  the MNC is taxed as an individual taxable entity by the relevant  governments, unless the corporation is allowed to and chooses to file a  consolidated return.
section_title: Different Types of Foreign- Source Income
paragraphs: Corporations can earn a variety of different types of income from foreign  sources. This income can be generated from transactions with either  unrelated parties, such as retail customers located abroad, or related  parties, such as foreign subsidiaries or other parts of the same MNC.  Corporations can earn foreign-source income from active and passive  activities with foreign parties. While countries vary somewhat in their  definitions of active and passive income, generally speaking, active income  is considered to be the income generated through the primary business  activities of the corporation. Passive income, in contrast, is income that is  not earned through primary business activities. Interest earned, rental  income, and royalty payments from foreign sources are generally  considered passive income. However, for some companies, such as  financial services companies, these types of income may constitute the  primary business and be considered active income under the tax laws of  some countries. Additionally, corporations can purchase shares of foreign  companies and receive dividend distributions based on the earnings of  those companies. Table 1 below lists some general examples of different  types of income that can be generated from foreign-sources.
section_title: Most Countries Take a Hybrid Approach to Taxing Foreign-Source Income
paragraphs: In practice, countries combine elements of worldwide and territorial  approaches to taxing foreign-source income. One approach, generally  referred to as deferral, deviates from the worldwide model and taxes the  domestic corporation on all of its income, including income and dividends  received from foreign subsidiaries, but defers taxation until the income is  repatriated. Another approach, generally referred to as dividend  exemption, is closer to the territorial model and permits the tax-exempt  repatriation of the dividends distributed by foreign subsidiaries, but may  limit the extent to which some income is exempt. In either system, foreign- source income is taxed first in the source country; under a deferral system,  a residual tax is then imposed only when the income is repatriated. Figure  1 shows a continuum of tax treatments for foreign-source corporate  income with hybrid systems ranging between the pure worldwide and  territorial models.
The current tax system in the United States is an example of a worldwide  system with deferral, which taxes domestic corporations on their  worldwide income, regardless of where the income is earned and gives  credits for foreign income taxes paid. Income unrelated to a U.S. trade or  business earned by foreign corporations is not taxed domestically until it  is distributed to a domestic shareholder, such as a domestic parent  corporation, which allows deferral of taxation on income of foreign  subsidiaries. Special rules may exist that tax certain shareholders, such as  a parent corporation, currently on the income of certain subsidiaries in  order to protect the domestic tax base. To reduce the double taxation of  income, corporate taxpayers can offset, in whole or in part, the domestic  tax owed on the foreign-source income through a FTC. In certain  circumstances, a parent corporation may claim FTCs for foreign taxes  paid by a subsidiary. Figure 2 shows how a dividend payment is generally  taxed under a worldwide tax approach that permits deferral.
Many OECD countries exempt some types of foreign-source corporate  income from domestic tax. Exemptions are commonly granted in these  countries for dividends paid by a foreign subsidiary. As shown in figure 3,  which is a simplified example of an exemption system, the domestic  corporation does not incur a tax liability by receiving the dividend income  from its foreign subsidiary. However, similar to the worldwide systems  with deferral that were described earlier, exemption systems may disallow  the tax advantages of foreign-source income under certain circumstances  to protect the domestic tax base.
section_title: Study Countries Vary in the Types of Foreign-Source Income Exempted from Domestic Tax and in the Rules Governing Those Exemptions
paragraphs: Our study countries—Australia, Canada, France, Germany, and the  Netherlands—have hybrid tax systems that exempt some types of foreign- source income and tax others. All of the study countries tax domestic  corporations on income earned through rental payments and royalties.  Such payments may be made by unrelated parties or by subsidiaries and  are generally expenses of the payee in the foreign country but are received  as income by the domestic corporation. Subject to an extensive list of  exceptions, the study countries generally exempt, but to varying extents,  income of domestic corporations received as foreign-source dividends  from foreign subsidiaries, sales by foreign branches, and the gains from  the sale of shares in foreign subsidiaries. For example, all of the study  countries permit domestic corporations to receive dividends that meet  certain qualifications as tax-exempt income, but differ in the rules they use  in determining which dividends are qualified. In addition, Canada does not  allow domestic corporations to earn tax-exempt, foreign-source income  through foreign branches and taxes up to half of the capital gains on the  sale of foreign subsidiary shares while the other study countries generally  exempt income from these sources.
In addition to the rules above covering income payments received by  domestic corporations, all study countries also have rules that tax  domestic corporations on some income at the time it is earned by foreign  subsidiaries, regardless of when or if the foreign subsidiary distributes a  dividend. These rules, generally referred to as anti-avoidance rules,  attribute certain earnings of related foreign entities to domestic  corporations in order to limit the tax benefits of holding certain types of  income offshore.
Table 2 presents a brief overview of the tax treatment for different types of  foreign-source income in our study countries. All rows except the last  show the tax treatment of income payments received by a domestic  corporation. The last row shows the tax treatment of income at the time it  is earned by a foreign subsidiary that is subject to certain anti-avoidance  rules regardless of whether the income was distributed as a dividend.
While data was not available for most of our study countries, in Canada, at  least 76 percent of foreign-source dividends received by Canadian  taxpayers from foreign affiliates from 2000 to 2005 were qualified foreign- source dividends and, therefore, were tax exempt.
subsections: section_title: Study Countries Use Different Criteria to Qualify Foreign-Source Dividends for Domestic Tax Exemption
paragraphs: Our study countries all have certain criteria that, when met, allow  domestic corporations to receive tax-exempt income in the form of  dividend payments, called qualified foreign-source dividends in table 2. In  each of the countries, all of the criteria must be met for the domestic  corporation to receive the foreign-source dividend tax-exempt. If any of  the conditions are not met, then the dividend does not qualify for the tax  exemption and is, therefore, taxable. Our study countries applied up to  three criteria when determining which income is tax-exempt: domestic  ownership type and level of foreign subsidiaries; the type of income  (active versus passive) distributed as a dividend; and the presence of a tax  treaty or similar agreement between the domestic and foreign government  where the subsidiary is located and income is earned.
All of our study countries except Germany require the domestic  corporation to have a minimum ownership stake in a foreign subsidiary in  order to qualify for the benefits of exemption. In general, these minimum  ownership level stakes mean that income from portfolio or portfolio-like  investment is not exempt. Each country takes a different approach in  determining the type of shares that qualify dividend income for exemption  with distinctions made on the type of shares and the length of time the  shares are held. For example, while Canada requires domestic  corporations to own 10 percent or more of any class of shares in the  foreign subsidiary, France requires its corporations to own at least 5  percent of a foreign subsidiary’s shares. The requirements for each  country are summarized in table 3.
In addition to the criteria above, Canada also makes a distinction between  dividends distributed from active and passive income, while the other  study countries do not, as shown in table 4.
Of all our study countries, currently only Canada requires that the foreign  subsidiary be located and earn active income in a designated treaty  country in order to qualify for the dividend tax exemption that was shown  in table 2. For Canada, a designated treaty country is a country with which  Canada either has a tax treaty or a tax information exchange agreement  (TIEA). As was noted earlier, at least 76 percent of dividends received by  Canadian taxpayers from foreign affiliates between 2000 and 2005 were  tax exempt.
section_title: Study Countries Limit Tax Advantages of Earning Foreign-Source Income under Certain Conditions
paragraphs: As was shown in the last row of table 2, all study countries have anti- avoidance rules that limit the tax advantages of earning certain types of  income abroad. In general, these rules are intended to protect the  domestic tax base by preventing taxpayers from avoiding domestic tax on  passive or other specific types of income by moving to or holding these  types of income in a foreign country. When triggered, these rules require a  domestic shareholder to be taxed currently on its pro rata share of certain  types of income earned by certain foreign subsidiaries, regardless of when  or if that income is distributed to the shareholder. Anti-avoidance rules  exist in both worldwide and territorial tax systems, and are in effect in  each of our study countries and the United States (commonly known as  Subpart F in the United States).
A prominent anti-avoidance rule used by all study countries except the  Netherlands applies to controlled foreign corporations (CFC). Each  country’s CFC rules vary, but they generally tax domestic shareholders,  including shareholding corporations, currently on certain types of income  earned by foreign corporations that qualify as controlled by domestic  shareholders. This is illustrated in figure 4. This means that the domestic  corporation may be taxed on income that it has not received from the  foreign corporation (called a deemed dividend in figure 4). This income is  taxable when earned by the subsidiary, although CFC rules generally  permit the domestic taxpayer to offset some or all of their domestic tax  liability through credits on the foreign taxes paid on the income.
Generally, study countries establish criteria in three areas that, when met,  define a domestic shareholder’s tax liability for certain types of income  earned by a foreign corporation under the CFC rules. First, countries  define when a foreign corporation is controlled by domestic shareholders.  For example, Australia defines a controlled foreign corporation as any  foreign corporation that meets either of the following definitions: (1)  where five or fewer Australian residents effectively control the foreign  corporation or own more than 50 percent of the foreign corporation; or (2)  where one Australian entity has an individual ownership of 40 percent or  more of the foreign corporation not controlled by another corporation.
Second, countries generally set a minimum level of ownership in the  foreign corporation that domestic shareholders must meet before being  taxed on the foreign corporation’s earnings. For example, under Canada’s  CFC rules, a Canadian shareholder must own at least 10 percent of the  foreign corporation to be taxed on certain types of income earned by the  foreign corporation. Third, the controlled foreign corporation generally  must earn certain types of income that are specified in each country’s CFC  rules. For example, Germany requires that a CFC earn passive income that  is taxed at an effective rate of 25 percent or less by the foreign country  before a domestic corporation is required to pay tax on the CFC’s  earnings.
Once the criteria above are met, domestic shareholders are taxed  currently on certain types of attributed income earned by the CFC. Some  countries, like Canada, generally limit the taxable foreign earnings to the  domestic corporation’s pro rata share of passive income. Other  countries, like France, tax domestic corporations on their pro rata sh all earnings by the foreign corporation. Table 5 presents a simplified  overview of the CFC rules used by our study countries. Additional details  on other types of anti-avoidance rules can be found in appendix IV.
section_title: Study Countries Face Areas of Compliance Risk and Burden Known to Exist in the United States
paragraphs: Differences in tax rates across countries and differences in the taxation of  different types of income may create incentives to avoid tax by shifting  income from a high tax jurisdiction to a lower taxed jurisdiction or by  converting income from a taxable type to tax-exempt type. Such efforts to  reduce taxes may sometimes be legal tax avoidance, but may also be  illegal noncompliance.
Tax experts identified four areas as sources of compliance risk or  taxpayer compliance burden in our study countries. None of our study  countries were able to provide quantitative estimates of the extent of  noncompliance with their tax laws governing foreign-source income or the  amount of compliance burden placed on taxpayers. Furthermore, an  exhaustive list of all sources of compliance risk and burden does not exist.  However, four areas that tax experts, including tax agency officials, tax  practitioners, and academics identified were:  transfer pricing,  anti-avoidance rules,  foreign tax credits, and    domestic expense deductions.
These areas are also viewed by the Internal Revenue Service (IRS) or  other tax experts as sources of compliance risk or compliance burden in  the United States.
While countries establish rules in these four areas to serve a variety of  policy goals, including maintaining economic competitiveness and  avoiding double taxation, one important consideration is protecting the  domestic tax base. One unique tax administration challenge that MNCs  present is that they can shift income and assets among related entities in  different countries to convert taxable income, either foreign or domestic,  to tax-exempt or lower-taxed foreign-source income. The laws and  regulations in these four areas are intended, in part, to protect the  domestic tax base by preventing MNCs from mispricing transactions,  relocating domestic passive income, misusing foreign tax credits, or  reallocating expenses in ways that inappropriately reduce domestic taxes.  These laws also create compliance burden, often requiring taxpayers to  maintain detailed records and conduct complex analyses of international  transactions.
subsections: section_title: Transfer Pricing, Particularly for Intangible Property, Is a Major Compliance Risk and Source of Compliance Burden in all of the Study Countries
paragraphs: Many tax agency officials we met with stated that transfer pricing was the  most significant compliance risk they face in the area of international  taxation. Similarly, many business representatives said complying with  transfer pricing rules was often the most burdensome aspect of  international taxation. Transfer prices are the prices of goods and services  transferred among related entities within an MNC. These prices create  compliance risks because MNCs can sometimes deliberately manipulate  them to shift income from one related entity to another in order to reduce  tax liability. For example, a parent corporation that charges a foreign  subsidiary a below-market price for a good or service lowers the parent  corporation’s taxable income and raises the subsidiary’s taxable income.  Depending on tax rates and rules governing exemption and deferral,  shifting income in this way may reduce an MNC’s overall tax liability. An  above-market price would shift taxable profits from the subsidiary to the  parent.
Because transfer prices can shift taxable income from one country to  another, all of our study countries have focused attention on transfer  pricing with emphasis on stringent documentation requirements and  audits. Generally, the study countries require taxpayers to provide  evidence that transfer prices meet an arms-length standard, which means  pricing transactions as if they occurred between unrelated parties.  Establishing an arms-length price can be difficult when there is no  comparable market price, such as for a unique good, service, or intangible  property.
Although comprehensive data were not available, several experts,  including the OECD, have noted that a significant amount of trade occurs  between related parties. Trade in services in the United States, while not  a measure of overall U.S. trade, provides an example. According to the  U.S. Bureau of Economic Analysis, trade in services between CFCs and  related parties increased (in nominal dollars) from approximately $38.4  billion in 1999 to approximately $178.7 billion in 2006.
The changing nature of international trade, particularly the growing trade  in intangibles, is making international transactions more susceptible to  transfer pricing abuse. Tax experts repeatedly identified intangible  property as a particular challenge when attempting to establish a transfer  price that meets the arm’s length standard. The unique nature of many  intangible assets, such as patents, trademarks, copyrights, and brand  recognition, means that it is difficult or impossible to identify comparable  transactions for transfer pricing purposes. The revenue risk posed by  mispricing intangibles can be significant because it can result in a  company converting taxable income into tax-exempt or lower taxed  income. For example, a parent corporation can license a patented  computer technology to a foreign subsidiary and charge a below-market  royalty, which is taxed in the domestic country. The subsidiary, which is in  a low-tax country, uses the technology to generate a profit. The subsidiary  then pays a tax-exempt dividend to the parent corporation. The parent  corporation’s country loses tax revenues because the tax-exempt dividend  received is inflated and the taxable royalty is reduced. Conversely, the  subsidiary’s country receives additional tax revenues because the  subsidiary’s income is higher than it should be, as the smaller royalty  payment is a deductible expense. In the aggregate, however, the MNC  reduces its tax liability because the tax rate in the subsidiary’s country is  lower than the tax rate in the parent corporation’s country.
Because identifying comparable prices for intangibles is often difficult, tax  agencies and taxpayers often rely on a profit-split approach. The goal is to  determine the percentage of profit attributable to buyers and sellers in  different countries. Company officials consistently reported that making  these determinations often requires costly special studies done by outside  technical experts. In Australia, for example, to help protect against  penalties, it is recommended that companies document that they followed  a four-step process including selecting and justifying a transfer pricing  methodology and then conducting an analysis based on that methodology  to determine an arm’s-length price. Appendix II provides details on the  transfer pricing documentation and filing requirements for all of our study  countries. One company official further said that even after making these  investments, tax authorities may disagree with the results because of  differences in opinion about the assumptions that had to be made. A  number complained about transfer pricing reviews turning into disputes  between countries over the distribution of tax liabilities.  This can occur  because, in many transfer pricing disputes, there are at least three  interested parties, the taxpayers and two tax agencies. When a taxpayer  reaches an agreement with one government on a price it can result in a  lower tax payment for the other government.
On the other hand, tax agency officials repeatedly told us that they needed  detailed information on the pricing methodologies used in order to verify  that companies’ prices satisfy the arm’s-length standard. Tax agency  officials said documentation of the data used and analysis conducted are  critical to conducting independent determinations of the appropriateness  of transfer prices. As one example of the importance tax agencies place on  this documentation, the Australian Tax Office (ATO) has a system for  rating the documentation quality. Under this system, poorly documented  transfer pricing decisions are more systematically identified, allowing  better targeting of audits.
Transfer pricing abuse is also known to be a significant problem in the  United States. For example, IRS lists transfer pricing abuse as a high-risk  compliance area because of the large number of taxpayers and significant  dollar risk.
While there is agreement that transfer pricing is a major compliance risk in  both our study countries and the United States, there is no consensus  among the tax experts we met with about whether the compliance risks  are greater in our study countries’ exemption systems or in the United  States’ deferral system. Some argued that the tax benefits for an MNC  from manipulating transfer prices are potentially larger under an  exemption system than a deferral system. They argue that gains from  transfer pricing abuse are larger if income can be made tax-exempt rather  than tax-deferred. However, other experts pointed out that transfer pricing  abuse is already a significant problem in the United States. Some of these  experts noted that the incentives to avoid or evade tax under a deferral  system can be quite large because tax can be deferred indefinitely. One of  these experts also pointed out that there is no empirical evidence  supporting the claim that countries with exemption systems face greater  noncompliance with transfer pricing rules.
subsections: section_title: Study Countries Have Placed Greater Emphasis on Enforcing Transfer Pricing Rules
paragraphs: According to tax agency officials and outside tax experts, all study  countries are placing greater emphasis on transfer pricing when auditing  MNCs. For example, a tax practitioner in France said that the  overwhelming majority of the audit issues he faces are transfer-pricing  related. Another tax practitioner made the same observation about  Germany, saying that there is a general perception that the burden for  complying with transfer pricing has increased in recent years. These and  other company representatives we spoke with said that time spent  determining and documenting transfer prices in accordance with country  requirements is a primary source of burden. These findings are echoed in  the research of others. For example, according to a survey of 850 MNCs,  65 percent of respondents believe that transfer pricing documentation is  more important now than it was 2 years ago. Similarly, two-thirds of  those respondents said they increased their resources on transfer pricing  experts and studies in the last 3 years.
section_title: All Study Countries Use Advanced Pricing Agreements to Address Compliance Risks
paragraphs: All of the study countries have developed advanced pricing agreement  (APA) programs that allow taxpayers and tax agencies to resolve transfer  pricing issues before tax returns are filed and without the need for time  consuming and expensive audits. Tax experts’ opinions on APA  participation varied, but often these experts did not consider them an  efficient use of resources for addressing transfer pricing issues. Due to the  time and resources required to obtain an APA, some taxpayers only pursue  them for high-value transactions. Guidance provided by the Australian Tax  Office illustrates the time and extensive documentation that can be  required for an APA. The document, included in appendix III, lists  requirements such as numerous meetings with agency officials, details of  the transfer pricing methodology, and data supporting that methodology.  The amount of time needed to complete an APA can be greater when it  involves multiple countries. According to statistics from some of our study  countries, APAs may take a year, or multiple years, to finalize. Between  1992 and the end of 2007, Canada finalized 153 APAs.
Some tax practitioners said that the decision to use APAs can also depend  on the perceived risk that a transaction is likely to be subject to audit.  Some taxpayers determine that APAs are less burdensome than going  through an audit.
section_title: Complying with and Enforcing Anti-avoidance Rules, both CFC and Other Rules, Presents Challenges in All of Our Study Countries
paragraphs: According to taxpayers and tax officials we spoke with from the study  countries, rules limiting the tax advantages of earning certain types of  income offshore can serve as a source of taxpayer compliance burden and  can be subject to compliance risk. As shown earlier in table 5, all of our  study countries with the exception of the Netherlands use CFC rules as a  primary method to limit the exemption or tax-deferral of certain income  held offshore. In addition, all of our study countries, including the  Netherlands, have additional anti-avoidance rules that may apply and  disallow tax advantages on specific types of income earned offshore. See  appendix IV for details of other anti-avoidance rules in our study countries  and in the United States. The study countries were not able to provide us  with statistics on the number of subsidiaries subject to these anti- avoidance rules, the amount of income earned by them, or the residual tax  revenue they generated. Government officials we spoke with in several  countries estimated the revenue generated from these rules to be low.  However, some tax experts we spoke with stated that these rules played  an important role in preventing MNCs from avoiding domestic taxes by  earning income through CFCs.
When CFC rules are triggered, it can result in an increase in the MNC’s tax  liability. As a result, some of the tax practitioners we talked to said that  structuring subsidiaries to avoid CFC rules requires careful planning and  continuous monitoring. It is even possible that the actions of others could  change a foreign subsidiary’s CFC status. For example, as shown in table  5, one way a subsidiary of an Australian MNC can be a CFC is if five or  fewer Australian investors own more than 50 percent of its shares.  Consequently, a subsidiary that is not currently a CFC could become one if  other Australian investors increase their ownership share.
Some tax practitioners told us that the complexity of the requirements for  determining whether CFC rules applied and the amount of information  needed to support a determination created considerable burden. For  example, a French tax professional said that France’s CFC rules are  burdensome because they require the taxpayer to make a series of  complex determinations (these were summarized in table 5)—such as  whether the foreign tax liability of a subsidiary is greater or less than 50  percent of what it would be had the income been earned in France—in  order to decide whether the subsidiary is a CFC. Given differences in  accounting and tax rules between France and a foreign subsidiary’s home  country, these calculations can become complicated. German CFC rules  require similar comparisons of actual taxes paid to theoretical taxes owed  in determining whether the subsidiary will be taxed as a CFC. Australia  takes a different approach, providing a list of countries where CFCs can be  located and have fewer types of income that may be attributed to domestic  corporations. It is not clear the extent to which this reduces burden in  comparison to the other study countries.
Tax experts in Canada also said that acquiring information for  documentation requirements related to CFC rules is particularly  burdensome. For example, a Canadian firm with a 10 percent holding in a  foreign subsidiary is required to provide the Canada Revenue Agency  (CRA) with detailed tax and operations information from the foreign  subsidiary. With only a 10 percent ownership stake, the Canadian firm may  find it challenging to obtain such information in a timely manner, or at all.
Generally, CFC rules intend to limit an MNC’s ability to shift income,  especially passive income, to foreign jurisdictions to avoid or postpone  domestic tax. Enforcing these rules could be difficult if the tax agency is  not present in the foreign jurisdictions. For example, some officials in  France and Canada said they may not be able to obtain and validate  information needed to enforce these rules. One French official stated that  it is difficult to see if a foreign subsidiary located in a low-tax jurisdiction  thousands of miles away was an active business or being used to shelter  income.
While the Netherlands does not have specific CFC rules, taxpayers and tax  officials stated that the compliance burden associated with other anti- avoidance rules can be significant. According to tax professionals we  spoke with, the Netherlands has low-taxed passive shareholding rules,  another type of anti-avoidance rule. Overall, the tax practitioners and  experts we spoke with agreed that the compliance burden related to anti- avoidance rules in the Netherlands could be significant.
section_title: Exemption of Foreign- Source Income Reduces the Need for Foreign Tax Credits, but They Can Still Serve as a Compliance Risk
paragraphs: The study countries all have FTC systems; however, according to both tax  agency officials and tax practitioners FTCs play less of a role in these  countries than in the United States because of the extent to which foreign- source income is exempt. For exempt income, taxpayers do not have to  track and report foreign taxes paid. However, FTCs still exist as the study  countries use them to avoid double taxation on foreign-source income that  is not exempt, such as income subject to anti-avoidance rules. Most study  countries were not able to supply data on the amount of FTCs that are  claimed by domestic parent corporations in their countries. However,  some tax experts said that the extent to which FTCs are generated varies  by country, the type of industry in which the MNC conducts business, and  the overall structure and location of the MNC’s subsidiaries. For example,  according to one German tax practitioner we spoke with, FTCs in that  country tend to be generated mainly by businesses in the financial and  insurance industries or where CFCs are involved.
As shown in table 6, the study countries vary in the rules they apply to  FTCs. Many of these rules address the extent to which companies are  allowed to accumulate FTCs and use them to offset other types of income.  For example, Australia requires that all FTCs must be used in the taxable  period in which they are recognized by the taxpayer on their tax filing. Any  FTCs that a company has accumulated that are in excess of the amount of  domestic tax actually paid on that income are lost. Canada, on the other  hand, allows companies to carry excess FTCs back into the previous 3  years or forward up to 10 years. The United States allows companies to  apply accumulated FTCs across different types of foreign-source incomes,  across multiple countries, and over multiple years. For example, FTCs  accumulated for foreign taxes paid on royalty income can be combined  with FTCs accumulated on dividend income.
Some practitioners said there was some burden in tracking FTCs, but  generally these rules were much less burdensome than complying with  transfer pricing and anti-avoidance rules. One tax practitioner from  Germany pointed out that in instances where MNCs have numerous  subsidiaries subject to anti-avoidance rules it generally results in more  instances where income is subject to tax in two countries, thus creating  additional burden to identify and track FTCs.
subsections: section_title: Canada’s Rules for Determining if Dividend Income Is Taxable, with FTCs Allowed, or Exempt Is a Compliance Challenge and Imposes Significant Taxpayer Burden
paragraphs: Tax agency officials, taxpayers, and tax experts agreed that Canada’s rules  for tracking foreign-source income and determining whether the income  qualifies for tax exemption are complex and challenging for taxpayers and  tax officials. As discussed earlier in this report, Canada’s rules for  determining whether or not dividend income received from foreign  subsidiaries is exempt from domestic taxation include ownership  requirements, location and business activities in a treaty country, and  evaluating what type of earnings (e.g., capital gains, passive income, or  active income) the subsidiary is distributing as a dividend. Canadian  corporations receiving dividend income that does not qualify for  exemption are taxed on that income, although FTCs may be applied to  offset domestic tax. Canadian corporations are responsible for tracking all  foreign earnings to ensure appropriate taxation once the income is  received by the Canadian corporation. Taxpayers said these rules are  burdensome, in part, because they require information only available from  foreign subsidiaries, complex calculations and adjustments to income  based on Canadian rules, and monitoring ownership changes for the  foreign subsidiary. Tax agency officials said the rules are a compliance  risk because of their complexity and difficulty of validating adherence.
section_title: The Generation of Inappropriate Foreign Tax Credits Was Identified as a Compliance Risk in Canada but the Risk Was Uncertain for the Other Study Countries
paragraphs: One area identified by tax officials as a source of compliance risk in  Canada is the generation of abusive FTCs to offset overall tax liability.  Often termed FTC generators, these activities, for example, allow  taxpayers to take advantage of definitions of debt and equity in two  countries by setting up a subsidiary for the purpose of holding assets and  generating an income stream in such a way that the income stream is  subject to foreign tax but also receives an offsetting deduction so that  there is no net foreign tax. The taxpayer then tries to claim a domestic tax  credit against this foreign tax paid while ignoring the offset.
Tax agency officials in Canada told us that FTC generators are considered  a significant compliance risk in their country. CRA officials said they were  currently auditing a number of domestic corporations to determine the  extent to which Canadian companies are participating in these types of  schemes. Because there is often no economic purpose to such a  transaction, one company generally pays the other a fee for participating  in the transaction. CRA officials said, so far, they have identified a  substantial amount in avoided Canadian tax from 2001 to 2005.
Several experts we spoke to with knowledge of the other study countries  said they did not think FTC generators were a significant issue in those  countries. For example, a tax practitioner in Germany told us that since  the majority of repatriated income to Germany is tax exempt FTCs are not  produced in many instances. Similarly, Australian tax agency officials said  that since Australian rules require FTCs to be used immediately in the year  they are recognized, it reduces the ability to exploit the FTC generator  scheme. However, some experts also pointed out that there is always a  possibility that taxpayers could structure specific transactions to produce  improper FTCs.
FTC generators are also known to be a significant problem in the United  States. For example, IRS lists them as a high-risk compliance area because  of the large number of taxpayers and significant dollar risk that these  types of schemes present.
section_title: Study Countries Differ in How They Limit Domestic Deductions for Expenses in Order to Prevent Erosion of the Domestic Tax Base
paragraphs: Using sometimes indirect methods, all study countries limit the domestic  deductibility of some expenses associated with earning foreign-source  income. Tax experts said that methods resulted in fewer compliance risks  and burdens as compared to more direct methods.  The deductibility of  expenses incurred to earn foreign-source income is an issue because of  the effect on revenue. If domestic deductibility is allowed under an  exemption system, then MNCs are able to deduct expenses even though  the resulting income is not subject to domestic tax.
France and Germany provide an example of an indirect approach to  limiting expense deductions. As shown in table 2, they require  corporations to add 5 percent of their gross tax-exempt dividends to their  domestic taxable income (making dividends effectively 95 percent  exempt) as an offset for deductible expenses incurred to earn the  dividends. In our interviews with tax officials and members of the business  community, this approach was cited as being less burdensome than  tracing or allocating domestic expenses to tax-exempt income. Tracing  would involve matching specific expenses to actual income generated.  Some tax experts that we spoke to generally agreed that tracing would be  ineffective. Many of the domestic expenses incurred by domestic  corporations to invest or maintain an investment in a foreign subsidiary  are general to the domestic corporation. These expenses include general  management expenses, interest expense on borrowed money, and other  administrative expenses. Because these expenses are general to the  corporation, they are difficult to trace to the income items.
One alternative to tracing, mentioned by several experts we talked to, is  allocating overhead expenses to income sources according to formulas.   Rather than tracing expenses to actual income items, this alternative  would allocate expenses according to a rule. Although not used in our  study countries, allocating overhead expenses in this way could be made  less burdensome than tracing.  However, some experts stated that this  approach would create compliance risks and burdens that do not currently  exist.  Several experts pointed to the United States as an example of this.   In general, the United States requires U.S. corporations to allocate their  expenses to a class of gross income and then, if a statutory provision  requires, apportion deductions between the statutory grouping and the  residual grouping.  IRS officials stated that these rules were a compliance  risk because corporations sometimes do not apply them appropriately.  Some tax experts said these rules were a significant compliance burden  because they are complex, requiring considerable time to conduct detailed  calculations.
Another approach taken by all of our study countries is to limit the amount  of interest expense that domestic corporations may deduct. Without limits  on interest rates and amounts, corporations could shift income offshore  and artificially increase domestic interest expenses, eroding the domestic  tax base. The rules vary by country and in many cases apply to all  corporations, not just multinationals. For example, Germany and France  require that interest rates be equivalent to arm’s-length terms; the amount  of expense that exceeds those terms is generally nondeductible.  Germany also has a rule disallowing interest expenses that exceed 30  percent of the corporation’s adjusted earnings. Canada has a rule that  targets interest paid to a foreign related-entity with a limit based on debt- to-equity ratios. With a few exceptions, tax professionals generally stated  that the general types of interest expense rules described above did not  pose much of a compliance burden.
The approaches taken by the study countries do not disallow all domestic  deductions for expenses incurred with respect to foreign-source dividend  income. However, some experts thought that the indirect approaches for  limiting the deductibility of overhead expenses were more administrable  and less burdensome than more targeted alternatives.
Australia, France, and Germany exempt active foreign-source income  earned through foreign branches, but generally disallow domestic  deductions for direct expenses attributable to earning the tax-exempt  income. Direct expenses, like the cost of inventory, can be traced more  easily to the income generated than more general expenses, like interest or  other overhead costs.
section_title: Study Countries and the United States Do Not Regularly Report Basic Information about the Revenues Generated by Taxing Foreign-Source Corporate Income
paragraphs: In addition to lacking data about compliance and compliance burden for  their foreign tax rules, our study countries lack data on the amount of tax  revenues generated from the foreign activities of domestic corporations.  This is also the case for the United States. Several federal agencies  consistently report on the business activities of U.S. MNCs, but tax  revenues are not included in these reports. For example, the Bureau of  Economic Analysis reports on the foreign direct investment activities of  U.S. MNCs and IRS reports data on the amount of income U.S. MNCs earn  through CFCs.
U.S. international tax experts, including noted academics with multiple  publications who we spoke to on this topic all agreed that regularly and  consistently reporting U.S. tax revenue from foreign-source corporate  income would be useful. They said that this information would help inform  the debate about how to tax foreign-source income and potentially  improve understanding of the role international tax rules play in the U.S.  tax system. For example, one of these experts pointed out that it was not  widely understood how little domestic revenue is actually raised from  taxing foreign-source income and that the tax regime governing foreign- source income plays a role in protecting the domestic tax base.
Treasury officials and the experts we talked to noted that producing  regular revenue reports is feasible. A few academic papers and a recent  release from the Secretary of the Treasury on international tax issues have  reported estimates. However, the experts said that these reports from  different sources are not as useful as they could be because they are  irregular, incomplete, and lack transparency. The experts felt that  consistent and transparent reporting by a reputable government source  that clearly describes the methodology used to produce the numbers and  any limitations would be superior to the current occasional reports that  sometimes lack much explanation. IRS and Treasury officials said IRS  already collects the necessary data through corporate income tax returns  to make the necessary calculations. Therefore, the tax experts said there  should not be significant additional cost to the government to provide this  information.
section_title: Conclusion
paragraphs: The United States, like our study countries, does not report the taxes  collected by the United States on foreign-source income. Such basic  information about the U.S. system would not be costly to provide and  could contribute to the ongoing debate about the direction of U.S. policy.  Such reporting would make explicit to policy makers, and perhaps to the  general public as well, how little residual revenue is received by the United  States from taxing foreign-source corporate income. Doing so could help  highlight the important role that international corporate tax rules play in  protecting the domestic tax base.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Secretary of the Treasury use currently collected  information to report annually on the revenue to the United States  Treasury from taxing foreign-source corporate income. To enhance  usefulness, such reports should describe the methodology and important  limitations.
section_title: Agency Comments
paragraphs: We requested comments on a draft of this report from the Secretary of the  Treasury.  Treasury agreed with our recommendation.  The Acting  Assistant Secretary (Tax Policy)'s letter is reprinted in Appendix VI.   Treasury and IRS staff also provided technical comments, which we have  incorporated as appropriate.
As agreed 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 send copies to the Secretary of the Treasury, the  Commissioner of Internal Revenue, and other interested parties. This  report will also be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff has any questions, please contact me at (202) 512-9110  or whitej@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  Key contributors to this report are listed in Appendix VII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to (1) describe, for select case study  countries that take a territorial approach, what types of foreign-source  income the countries exempt and the rules governing those exemptions;  and (2) describe, to the extent information is available, the compliance  risks and taxpayer compliance burdens that the taxation of foreign-source  corporate income presents for each of these countries.
To address our objectives, we selected five countries—Australia, Canada,  France, Germany, and the Netherlands—to study based on several criteria,  including range of tax treatments for foreign-source corporate income,  unique tax system features, and Organization for Economic Cooperation  and Development (OECD) membership. To gather information related to  our selection criteria, we interviewed a number of corporate income tax  experts, including academics, corporate tax practitioners, corporate  taxpayers, officials at the OECD, and government officials. We contacted  those experts that we identified through our literature review, which is  described immediately below, along with experts that were recommended  by other experts. Our literature review consisted of academic articles and  books, national government publications, OECD and other multinational- organization publications on worldwide and territorial tax systems, and  private sector research pertaining to various international aspects of  corporate income tax systems and administration.
To describe the corporate income tax systems of our study countries, we  consulted with corporate taxpayers, business representatives, government  tax officials, and academic experts. We performed an in-depth literature  review on each country’s corporate income tax system, focusing on the  rules governing international taxation. We also reviewed research-based  publications produced by professional services organizations, academic  experts, and international organizations. In general, we relied on  information provided by tax officials from the study countries as well as  published documents to summarize and characterize the corporate income  tax systems for each country. We collected and analyzed data on the  countries and their systems for taxing foreign-source corporate income,  including tax policies, administrative mechanisms, compliance activities,  and taxpayer reporting and documentation requirements. We did not  conduct a formal legal review of the tax laws and rules in other countries,  but relied on the information supplied by tax agency officials in those  countries. We also provided the tax agency officials in our study countries  a copy of our report to verify data and specific factual and legal statements  about the tax laws in their country.
To address our second objective, we searched for publicly available data  that quantified taxpayer compliance risk and burden for each of our study  countries. In addition, we interviewed tax practitioners, taxpayers,  government tax officials, business representatives, and officials from the  OECD. We analyzed the information gathered through interviews as well  as published documents to identify and describe the common sources of  taxpayer compliance risk and compliance burden across the study  countries. When available, we used publicly available data obtained from  governments, private sector research, and academics to support evidence  provided in the interviews. In addition, we provided tax agency officials  from each of the study countries with a statement of facts that were  presented in the report for their review and comment. Technical  corrections were made to this report based upon country responses. This  report shows general tax treatments and does not present all of the details,  exceptions, or rules that govern the tax treatment of foreign-source  income in our study countries and the United States.
We conducted our work from June 2008 to September 2009 in accordance  with all sections of GAO’s Quality Assurance Framework that are relevant  to our objectives. The framework requires that we plan and perform the  engagement to obtain sufficient and appropriate evidence to meet our  stated objectives and to discuss any limitations in our work. We believe  that the information and data obtained, and the analysis conducted,  provide a reasonable basis for any findings and conclusions in this  product.
section_title: Appendix II: Transfer Pricing Documentation Requirements in the Study Countries
subsections: section_title: Documentation requirements
paragraphs: Step 1: Accurately characterize the international dealings  between the associated enterprises in the context of the  taxpayer’s business and document that characterization;  Step 2: Select the most appropriate transfer pricing methods  and document the choice;  Step 3: Apply the most appropriate method, determine the  arm’s length outcome and document the process; and  Step 4: Implement support processes. Install review process to  ensure adjustment for material changes and document these  processes.
Contemporaneous documentation required for cross border,  related party transactions. Form T-106 required to be filed  annually asks for reporting of non-arms-length transactions.
Taxpayers are not required to keep any transfer pricing  documentation but are expected to cooperate with the tax  agency in transfer pricing audits.
No formal contemporaneous  documentation requirement.
Documentation that shows the type and content of business  transaction to related parties, including general information  about (1) the group and ownership structure, (2) business  relations to related parties, (3) analysis of functions and risks,  and (4) transfer pricing analysis.
Netherlands   Documentation must show the arm’s length nature of the  transfer price that was applied.
section_title: Appendix III: Example from Australia of the Process for Obtaining an Advanced Pricing Agreement
paragraphs: Appendix III: Example from Australia of the  Process for Obtaining an Advanced Pricing  Agreement Step 1: Pre-lodment meetings The prpoe of pre-lodgment meeting to: ■  diuss the suitability of n APA ■  llow  business to provide  rod otline of the propoed trfer pricing methodology ■  diuss whether the APA will nilterl or ilter■  diuss the required docmenttion nd ly■  determine whether independent expert dvice i required ■  diuss Tx Office audit ctivity (if n APA i to flow on from audit) ■  gree on te for lodging  formppliction ■  gree on the APA timetable, nd ■  diuss the process for evuating the ppliction.
Pre-lodgment meeting do not ind either prty to the APA progrm.
Step 2: Lodment of formal application If proceeding with the APA,  business will e required to lodge  formppliction. The APA ppliction hold inclde: ■  detil of the propoed trfer pricing methodology, supported y relevnt informtion ■  term nd condition governing the ppliction of the trfer pricing methodology ■   howing tht the trfer pricing methodology will prodce rm’ length result■   diussion nd ly of the criticassumption, nd ■   suggeted period of time for which the APA will pply.
For ilterl APA we normlly dvie the trety prtner’authority once the ppliction has een ccepted.
Step 3: Analy/evaluation We evuate the d submitted nd other relevnt informtion, nd eek dditionl informtion where necessary. We normlly hve nmerous  meeting with  business.
Step 4: Neotiation and areement For  ilterl APA, the relevnt tdminitrtion exchnge poition ppertlining the cceptability of the propoed trfer pricing  methodology. A written confirmtion of the conclded greement i provided to the business.
For  nilterl APA, we provide written confirmtion of the greement we rech with the business.
Step 5: Concluded APA A conclded APA contin t least the following informtion: ■  the trsaction, greement or rrngement covered y the APA ■  the period nd tx ye covered y the APA ■  the greed trfer pricing methodology nd the criticassumption on which it i based ■  the definition of key term tht form the bas of the methodology (for exmple, sale, operting profit) ■  if pplicable, nge of rm’ length result, nd ■  the business’ligtion as  result of the APA.
Table 7 provides some examples of non-controlled-foreign-corporation  (CFC) anti-avoidance rules. This is not a complete list of the anti- avoidance rules in these countries. The consequences of falling under  these rules are not necessarily the same as the CFC rules, but those  consequences are beyond the scope of this table.
section_title: Appendix V: Description of Dividend Exemption Systems in Japan and the United Kingdom
paragraphs: Japan and the United Kingdom both adopted dividend exemption systems  in 2009. These countries previously taxed dividends received from foreign  subsidiaries but allowed for foreign tax credits (FTC) for foreign taxes  paid. Like our study countries, Japan and the United Kingdom have  specific rules used to determine whether a dividend qualifies for  exemption. Table 8 describes these rules.
Like the study countries, both Japan and the United Kingdom have anti- avoidance rules, including controlled foreign corporation (CFC) rules,  which limit the tax advantages of earning or holding certain types of  income in relatively low-tax jurisdictions. Japan revised their rules at the  same time the dividend exemption system was implemented. The United  Kingdom plans to address reforms to their CFC rules in future years.  However, the United Kingdom did introduce a worldwide debt cap rule  that limits the extent to which debt expenses can be deducted by  corporations in the United Kingdom. One goal of this rule is to prevent  situations in which businesses in the United Kingdom borrow excessively  in order to invest internationally to produce exempt dividends. This is  similar to some of the interest expense limitation rules we identified in the  other study countries.
section_title: Appendix VI: Comments from the Department of the Treasury
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, José Oyola, Assistant Director;  Brian James; Ed Nannenhorn; Danielle Novak; Chhandasi Pandya;  Matthew Reilly; A.J. Stephens; and Charles Veirs IV made significant  contributions to this report.
section_title: Related GAO Products
paragraphs: Cayman Islands: Review of Cayman Islands and U.S. Laws Applicable  to U.S. Persons’ Financial Activity in the Cayman Islands, an E- supplement to GAO-08-778, GAO-08-1028SP. Washington, D.C.: July 2008.
U.S. Multinational Corporations: Effective Tax Rates Are Correlated  with Where Income Is Reported. GAO-08-950. Washington, D.C.: August 12,  2008.
Tax Administration: Comparison of the Reported Tax Liabilities of  Foreign- and U.S.-Controlled Corporations, 1998-2005. GAO-08-957.  Washington, D.C.: July 24, 2008.
Business Tax Reform: Simplification and Increased Uniformity of  Taxation Would Yield Benefits. GAO-06-1113T. Washington, D.C.: Sept. 20,  2006.
Understanding the Tax Reform Debate: Background, Criteria, and  Questions. GAO-05-1009SP. Washington, D.C.: September 2005.
Tax Administration: Comparison of the Reported Tax Liabilities of  Foreign- and U.S.-Controlled Corporations, 1996-2000. GAO-04-358.  Washington, D.C.: Feb. 27, 2004.
Tax Administration: IRS’ Advanced Pricing Agreement Program.  GAO/GGD-00-168. Washington, D.C.: Aug. 14, 2000.
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.
International Taxation: Transfer Pricing and Information on  Nonpayment of Tax. GAO/GGD-95-101. Washington, D.C.: Apr. 13, 1995.
International Taxation: IRS’ Administration of Tax-Customs Valuation  Rules in Tax Code Section 1059A. GAO/GGD-94-61. Washington, D.C.:  Feb. 4, 1994.
International Taxation: Taxes of Foreign- and U.S.-Controlled  Corporations. GAO/GGD-93-112FS. Washington, D.C.: June 11, 1993.
International Taxation: Problems Persist in Determining Tax Effects of  Intercompany Prices. GAO/GGD-92-89. Washington, D.C.: June 15, 1992.