Corporate Income Tax: Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate
Published: 2016-03-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress and the administration continue to express interest in reforming the U.S. corporate income tax and the rate at which U.S. corporations' income is taxed. Currently, the top statutory corporate income tax rate is 35 percent. GAO's 2013 report on corporate ETRs found that in tax year 2010, whether for all large corporate filers or only profitable ones, the average ETRs were significantly below the statutory rate.
To provide an update, GAO was asked to assess the extent to which U.S. corporations pay federal income tax and the percentage that had no federal income tax liability. In this report, GAO estimates (1) the percentage of all and large corporations that had no federal income tax liability and (2) average ETRs based on financial statement reporting and tax reporting. To conduct this work, GAO reviewed economic literature, analyzed IRS data for tax years 2006 to 2012 (the most recent data available), including the financial and tax information that large corporations report on Schedule M-3, and interviewed Internal Revenue Service (IRS) officials and subject matter experts.
section_title: What GAO Found
paragraphs: In each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability. Larger corporations were more likely to owe tax. Among large corporations (generally those with at least $10 million in assets) less than half—42.3 percent—paid no federal income tax in 2012. Of those large corporations whose financial statements reported a profit, 19.5 percent paid no federal income tax that year. Reasons why even profitable corporations may have paid no federal tax in a given year include the use of tax deductions for losses carried forward from prior years and tax incentives, such as depreciation allowances that are more generous in the federal tax code than those allowed for financial accounting purposes. Corporations that did have a federal corporate income tax liability for tax year 2012 owed $267.5 billion.
These reasons also explain why corporate effective tax rates (ETR) can differ substantially from statutory tax rates. ETRs attempt to measure taxes paid as a proportion of economic income, while statutory rates indicate the amount of tax liability (before any credits) relative to taxable income, which is defined by tax law and reflects tax benefits built into the law. The statutory tax rate on net corporate income ranges from 15 to 35 percent, depending on the amount of income earned. For tax years 2008 to 2012, profitable large U.S. corporations paid, on average, U.S. federal income taxes amounting to about 14 percent of the pretax net income that they reported in their financial statements (for those entities included in their tax returns).
When foreign and state and local income taxes are included, the average ETR across all of those years increases to just over 22 percent. GAO also computed ETRs that combine large profitable corporations and those large corporations with current year losses, which pay little if any actual tax. Over tax years 2008 to 2012, all large corporations—profitable and those that reported current year losses—paid 25.9 percent of their pretax net income in U.S. federal income taxes, and 40.1 percent when foreign and state and local taxes are included. Including corporations with losses results in a more comprehensive estimate, but makes the results difficult to interpret because ETR is not meaningful for a corporation in a year in which it has a net loss. GAO could not examine the variation in ETRs across corporations with the aggregated data available, although GAO's prior work suggests that ETRs are likely to vary considerably.
section_title: What GAO Recommends
paragraphs: GAO does not make recommendations in this report. GAO provided a draft of this report to IRS for review and comment. IRS provided technical comments, which were incorporated, as appropriate.

section_title: Letter
paragraphs: Congress and the administration continue to debate how to reform the  U.S. corporate income tax. One focus of this discussion is the rate at  which U.S. corporations’ income should be taxed—currently, the top  federal statutory corporate income tax rate is 35 percent. As policymakers  debate this issue, it will be helpful to also have an understanding of the  average effective tax rate (ETR) for corporations, which equals the  amount of income tax corporations pay divided by their pretax income.  ETRs are more appropriate measures of corporate tax burdens than  statutory rates because ETRs reflect the combined effects of exemptions,  deferrals, tax credits, and other tax benefits. Our previous report on  corporate ETRs found that in 2010, whether for all large corporations or  only profitable ones, the average ETRs were significantly below the  statutory rate.
As Congress continues discussions on corporate tax reform and what  burden corporations should bear, you asked us to assess the extent to  which U.S. corporations pay federal income tax and the percentage that  had no federal income tax liability. In this report, we estimate (1) the  percent of all corporations and large corporations that had no federal  income tax liability in each year for tax years 2006 to 2012, and (2) the  average corporate effective tax rates for large corporations based on  financial statement reporting and tax reporting for tax years 2006 to  2012.
To estimate the number and percentage of corporations that had no  federal income tax liability, we analyzed data on the number of  corporations with and without total income tax after credits for all  corporations from the Internal Revenue Service’s (IRS) Corporation  Income Tax Returns Complete Report, as well as for the population of  large corporations that filed Schedules M-3. The Schedule M-3  reconciles income and expense amounts that corporations report for  financial statement purposes with amounts they report for tax purposes,  and is the data source we used for analyzing ETRs, as described below.  We report data for all corporations for tax years 2006 to 2012, for all  Schedule M-3 filers for tax years 2006 to 2012, and for profitable  Schedule M-3 filers for tax years 2008 to 2012. These were the most  recent estimates available at the time of our work and are subject to  sampling errors.
To report what available data indicate about the difference between  average effective tax rates based on financial statement reporting versus  those based on tax reporting, we computed a variety of such rates using  income and expense data that large corporations report on the Schedules  M-3 that they file with IRS. These data, which the joint Department of the  Treasury-IRS M-3 First Look Team compiles for a large sample of  taxpayers, allowed us to compare and estimate U.S. and worldwide  effective tax rates on worldwide income of entities included in the federal  income tax return, first using only financial statement data, then using  only data reported for tax purposes, and finally using income data from  financial statements and tax return data for the amount of taxes paid.
The financial statement data we used from the Schedules M-3 for  worldwide income and tax expenses—including federal, foreign, and U.S.  state and local income taxes—are limited to the entities that are included  in the U.S. taxpayer’s federal tax return. Consequently, the scope of the  corporate entities included in our analysis can differ from the scope of the  entities included in publicly filed financial statements because not all  foreign entities represented in those statements are included in a federal  tax return. In addition, our estimates of effective tax rates remain limited  to corporations with assets of $10 million or more because those are the  ones that filed a Schedule M-3. Our analysis covers all large corporations  for tax years 2006 to 2012 and profitable large corporations (i.e., those  that did not report net losses in their financial statements) for tax years  2008 to 2012. The Schedule M-3 data were available to us in aggregated  form and therefore we were not able to provide any information on the  distribution of ETRs across individual corporations; instead, we estimated  ETRs averaged over the populations of all corporations and profitable  corporations (see appendix I for a detailed discussion of several  limitations of the data for purposes of estimating ETRs).
We also reviewed and summarized the relevant economic and accounting  literature on ETRs since March 2013 (the end date of the literature review  in our previous report). We also discussed our methodology with subject  matter experts from the Congressional Research Service and from the  Department of the Treasury, each of whom has written on effective tax  rates. Based on these discussions, we supplemented our analysis where  we deemed appropriate and possible based on available data.
To assess the reliability of the data and estimates, we reviewed agency  documentation, interviewed agency officials, and reviewed our prior  reports that have used the data and estimates. While there are limitations  to the data provided on the Schedules M-3 and general reporting  problems with tax return data, we determined that the data were  sufficiently reliable to meet our reporting objectives.
We conducted our work from August 2015 to March 2016 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: Corporate Income Tax System
paragraphs: The base of the federal corporate income tax includes net income from  business operations (receipts, minus the costs of purchased goods, labor,  interest, and other expenses). It also includes net income that  corporations earn in the form of interest, dividends, rent, royalties, and  realized capital gains. The statutory rate of tax on net corporate income  ranges from 15 to 35 percent, depending on the amount of income  earned. The United States taxes the worldwide income of domestic  corporations, regardless of where the income is earned, but allows a  foreign tax credit for certain taxes paid to other countries. The timing of  the tax liability depends on several factors. For example, income earned  by foreign subsidiaries is generally not taxed until it is distributed—such  as in the form of a dividend—to the U.S. parent corporation.  Another  important element of the U.S. corporate income tax system is the  treatment of losses incurred in a given tax year. If a corporation has a net  operating loss in a particular year, the corporation may carry those losses  forward into future tax years or backward into prior tax years. When  carried back, corporations can deduct those losses from taxable income  and are eligible for a refund equal to the difference between previously  paid taxes and taxes owed after deducting the current year’s loss. Losses  carried forward may be used to reduce future taxable income and tax  liabilities, but cannot be used to reduce taxable income below zero. As a  result, a corporation with a substantial loss in a particular year may claim  deductions stemming from that loss over a number of years in the future.
While corporate income taxes have declined markedly as a share of  gross domestic product since the 1950s, they remain an important source  of federal revenue. In fiscal year 2014, corporate income tax revenue as a  share of gross domestic product was 1.9 percent and totaled $321 billion.  By comparison, revenues from individual income taxes and from social  insurance and retirement receipts (e.g., Medicare) were $1.4 trillion and  $1.02 trillion, respectively, in that year. Corporate income taxes  accounted for 10.6 percent of all federal revenues in 2014, up from 6.6  percent in 2009, but still below their recent high of 14.7 percent in 2006  (see figure 1).
section_title: Financial and Tax Reporting Requirements for Corporations
paragraphs: Businesses operating as publicly traded corporations in the United States  are required to report the income they earn and the expenses (including  taxes) they incur each year according to two separate standards. First,  corporations must produce financial statements in accordance with  generally accepted accounting principles in order to provide certain  information to investors and creditors. The income and expense items  reported in these statements are commonly known as book items.  Second, U.S. corporations must file corporate income tax returns on  which they report income, expenses, and tax liabilities, according to rules  set out in the Internal Revenue Code (IRC) and associated Department of  the Treasury regulations. While the IRC generally requires that a  corporation’s taxable year and overall method of accounting conform to  those standards used for financial reporting purposes, specific differences  are permitted (and, in some cases, required). These are known as book- tax differences. One important source of book-tax differences is  incentives for investment and other specific activities that Congress has  chosen to incorporate into the tax code. For example, the bonus  depreciation allowance permits businesses to depreciate qualified capital  assets much more rapidly than they are permitted to do under financial  accounting. As a result, taxable income will be reduced by a greater  amount than will book income for the year in which the qualified  investment is made. However, in later years (until the asset is completely  depreciated), book income will be reduced by greater amounts than will  taxable income.
Corporations with assets that equal or exceed $10 million are required to  report these book-tax differences to IRS on the Schedule M-3 of their  income tax returns. In tax year 2012, 42,301 corporations filed a  Schedule M-3 return. Of these, 27,546 were profitable according to their  financial statements. By comparison, in that same year, there were  almost 1.62 million active corporations, which include Schedule M-3  filers. A Schedule M-3 filer is required to report the worldwide income of  the entity represented in its financial statements and then follow a well- defined series of steps—subtracting out income and losses of foreign and  U.S. entities that are included in the financial statements but not in  consolidated tax returns; adding in the income and losses of entities that  are included in consolidated tax returns but not in financial statements;  and making other adjustments to arrive at the book income of entities  included in the federal tax return.
section_title: Effective Tax Rates
paragraphs: Effective tax rates on corporate income can be defined in several ways,  each of which provides insights into a different issue. This report focuses  on average corporate effective tax rates, which are generally computed  as the ratio of taxes paid or tax liabilities accrued in a given year over the  net income the corporation earned that year. Average effective tax rates  attempt to measure taxes paid as a proportion of economic income. By  contrast, the marginal effective tax rate focuses on the tax burden  associated with a specific investment (usually over the full life of that  investment), and thus is a better measure of the effects that taxes have  on incentives to invest. Meanwhile, statutory rates determine the amount  of tax liability (before any credits) relative to taxable income, which is  defined by tax law and reflects tax benefits and subsidies built into the  law. The highest corporate statutory tax rate of 35 percent applies to most  large U.S. corporations in years that they report positive amounts of  taxable income.
To estimate average effective tax rates, analysts need two components:   1.  The measure of tax liabilities to be used as the numerator. Common current book tax expense, including either only federal taxes or  worldwide taxes—federal, foreign, and U.S. state and local income  taxes paid by entities included in the federal tax return,  total book tax expense, which includes the sum of current and  deferred taxes (again, either federal only or worldwide), and actual tax paid, which is what corporations report as their income tax  liability after credits.  2.  The measure of income to be used as the denominator. The typical  measure of income for effective tax rate estimates based on financial  statements has been some variant of pretax net book income, which  we use for all of our ETR estimates.
section_title: In Each Year from 2006 to 2012, Most Corporations Had No Federal Income Tax Liability, but a Majority of Large Corporations Did
paragraphs: In each tax year from 2006 to 2012 at least two-thirds of active U.S.  corporations had no federal income tax liability after credits (see figure 2).  The percentage of such corporations with no tax liability remained  relatively stable, ranging between 67 and 72 percent during that  timeframe. In tax year 2012, 70.1 percent of the 1.62 million active  corporations had no federal income tax liability with the peak coming in  2009 near the end of the recession. Among large corporations for 2012,  less than half—42.3 percent, or 17,882 returns—had no federal income  tax after accounting for tax credits. Among profitable large corporations,  19.5 percent, or 5,359 returns, had no federal income tax liability in tax  year 2012. Corporations that did have a federal corporate income tax  liability for tax year 2012 owed $267.5 billion.
Corporations may pay no federal income tax for a number of reasons.  One important reason is that in each of the years from 2008 to 2012,  between approximately 49 to 54 percent of all active corporations had  negative net tax income based on federal tax accounting rules. Large  corporations were less likely to have incurred losses. In each year during  that period, between 34.9 percent and 44.2 percent of Schedule M-3 filers  had negative net tax income. A second reason is that other corporations  had positive net tax income that was completely offset by net operating  loss deductions (NOLD) carried forward from prior tax years. In each year  from 2008 to 2012, approximately 15 to 19 percent of all active  corporations had their income completely offset in this manner. Similar  percentages of all and profitable large corporations had their income  completely offset by NOLDs from 2008 to 2012. The use of federal tax  credits appears to have had little effect on the number of corporations that  paid no tax in each year (this does not imply that these credits did not  significantly reduce the amount of tax that some corporations paid). For  all active corporations, federal tax credits increased the percentage of  corporations not paying tax by less than one percentage point each year.  Much the same was true for all and profitable large corporations (see  appendix III).
section_title: Average ETRs for Large Corporations, Which Differed Significantly from Their Statutory Rates, Increased Slightly from 2010 to 2012
subsections: section_title: Average ETRs for Large Profitable Corporations Were Well Below Statutory Rates, Even When Deductions for Prior-Year Losses Were Excluded
paragraphs: For tax year 2012, the actual U.S. federal income taxes paid by profitable  large corporations amounted to 16.1 percent of the income that those  corporations reported in their financial statements (for those entities  included in their tax returns); this federal effective tax rate averaged 14  percent from tax years 2008 to 2012 (see the first panel of figure 3).  This tax rate is slightly lower than the 17.3 percent rate based on the  current federal book tax expense, and the 18.5 percent rate based on  total federal book tax expenses for tax year 2012, which includes current  and deferred federal book tax expenses. Each averaged 15.3 percent and  18.6 percent, respectively, from tax years 2008 to 2012.
The subject matter experts with whom we spoke suggested it would be of  interest to estimate what profitable large corporations would have paid in  the current year if one did not take into account the deductions that  corporations are allowed to take for losses carried forward from prior  years. Adjusting for these net operating loss deductions (NOLD) raises  the effective rate of actual U.S. federal taxes paid to 19.5 percent in tax  year 2012 and averaged 16.5 percent from tax years 2008 to 2012.  These rates were 2.6 percentage points higher than the unadjusted rates  (see figure 3).
Even with the adjustment for NOLDs, these ETRs remain well below the  top statutory federal income tax rate of 35 percent for a number of  reasons. First, to the extent that corporations have foreign-source income  on which they have paid tax to foreign governments, their U.S. federal  income tax will be reduced by the foreign tax credit. Also, as noted earlier,  tax incentives, such as the bonus depreciation allowance, will cause  taxable income (on which the actual federal tax is based) to be less than  book income (which is the denominator of the ETR). Other types of  differences between financial statement and tax accounting can have the  same effect.
The second panel of figure 3 presents ETRs that incorporate the  worldwide taxes of entities included in the federal tax returns of Schedule  M-3 filers. These worldwide ETRs for profitable large corporations ranged  between 3.5 and 8.7 percentage points higher than comparable federal  ETRs. For example, from tax years 2008 to 2012, the actual worldwide  taxes paid by profitable large corporations averaged 22.2 percent of the  income that those corporations reported in their financial statements (for  those entities included in their tax returns). As was the case with the  federal ETRs for profitable large corporations, the worldwide ETRs have  increased somewhat since tax year 2010. These measures do not  include income earned by foreign subsidiaries or the taxes that those  foreign subsidiaries pay, except in the cases where that income is  repatriated to U.S. corporations in the form of dividends or falls into  certain categories of income that are taxed immediately under federal tax  rules.
In our May 2013 report and in this report, we present ETR estimates for  all large corporations as well as for the population of profitable Schedule  M-3 filers. Our estimates for profitable large corporations are not  intended to represent the tax burdens of all large corporations; their  purpose is to provide a more accurate picture of the tax burden for the  significant subpopulation of corporations that are profitable in a particular  year without the distortion caused by the losses of other corporations.  Profitable large corporations represented between 56 percent and 57  percent of all large corporations from 2008 through 2009; from 2010  through 2012, they represented between 64 percent and 65 percent of all  filers. Some of the past studies we identified in our May 2013 report and  during the course of this report have excluded unprofitable corporations;  others have not (see appendix II).
section_title: The Inclusion of Large Corporations with Current- Year Losses Raises the Average Effective Tax Rates but Makes Those Rates Difficult to Interpret
paragraphs: In tax year 2012, all corporate returns with a Schedule M-3, including  those with current-year losses, paid actual U.S. federal income taxes  amounting to 21.2 percent of the income that they reported. Based on  current and total book tax expenses, these corporations had ETRs of 21.8  percent and 22.3 percent, respectively (see the first panel of figure 4). On  average, over tax years 2008 to 2012, all large corporations actually paid  25.9 percent of their pretax net income in U.S. federal income taxes. The  inclusion of large corporations with losses raises federal ETRs between 3  and 15 percentage points higher than those of large profitable  corporations for years in which ETRs are calculated for both, including tax  years 2009 to 2012. This increase occurs because firms with current year  losses, which pay little if any actual tax, have a negligible effect on the  numerator of the ETR, but their losses can significantly reduce the pretax  net book income in the denominator. For example, in tax year 2009,  profitable large corporations had pretax net book income of $1.187 trillion,  while unprofitable large corporations had net current year losses of $619  billion, netting to a pretax book income of $568 billion. The inclusion of  large corporations with current year losses in that year more than doubles  the ETR based on actual federal taxes paid in comparison to the rate for  only profitable large corporations. In tax year 2008, the losses of  unprofitable large corporations more than completely offset the income of  profitable large corporations, resulting in negative pretax net book  income. Consequently, we were not able to compute ETRs for all large  corporations in that year.
From tax years 2008 to 2012, worldwide ETRs for all large corporations,  which includes federal,  foreign, and state and local taxes paid by entities  included in federal tax returns, ranged between almost 5 to more than 16  percentage points greater than comparable federal ETRs for all large  corporations (see figure 4). Over those tax years, ETRs averaged 40  percent when foreign and state and local taxes are included.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue for review and comment. IRS provided technical comments,  which were incorporated, as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Chairmen and  Ranking Members of other Senate and House committees and  subcommittees that have appropriation, authorization, and oversight  responsibilities for IRS. We will also send copies of the report to the  Commissioner of Internal Revenue and other interested parties. In  addition, this report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions or wish to discuss the material in  this report further, please contact me at (202) 512-9110 or  LucasJudyJ@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 V.
section_title: Appendix I: Selected Issues Relating to the Calculation of Effective Corporate Income Tax Rates
subsections: section_title: The Inclusion of Corporations with Losses in Effective Tax Rate Estimates
paragraphs: In this report, we present effective tax rate (ETR) estimates for both  profitable and all corporations. As we noted, the first set of estimates  provides meaningful information for an important population of firms  without the distortion caused by the losses of other corporations. The  second set of estimates covers a more comprehensive population of  firms; however, an ETR is not meaningful for a corporation in a year in  which it has a net loss. Consequently, it is not clear how to interpret  average ETRs for populations that include some corporations with net  income and others with net losses for a given year. The simplified  example in table 1 demonstrates the nature of this problem. In this  example, Corporation A is profitable in all years, while Corporation B  incurs losses in the first 2 years, which it then offsets against its income in  the third year. A weighted average ETR based on the combined data for  the two corporations for all 3 years provides an accurate representation at  the aggregate level of the tax burden on income earned in those 3 years  (35 percent). However, when the time period is limited so that not all  losses can be used during the period, the estimates do not give an  accurate representation of the longer term rates. The average for the first  2 years (70 percent) overstates the burden because it does not include  the income against which Corporation B’s losses during these 2 years is  actually offset. Instead, those losses offset a completely different  corporation’s income. Conversely, the average for the last 2 years (26.3  percent) understates the burden over the 3-year period because losses  incurred outside of the 2-year period are used to reduce tax payments  during the period. The types of distortions shown in this example arise at  the beginning and end of any finite period of analysis.  losses would be to reduce pretax net book income in the denominator by  the amount of NOLDs used in that year. The estimate that results from  this approach shows the ETRs on the portion of current-year income that  was not offset by prior-year losses. As seen in table 2, compared with our  original actual taxes paid ETRs for profitable corporations, the estimates  that are adjusted for NOLDs are slightly higher. None of these ETRs for  corporations that are profitable in a given year is meant to represent the  tax burden averaged across all corporations (both profitable and  unprofitable ones).
In commenting on our May 2013 report on ETRs, at least one person  stated that ETRs for the full population of corporations are more  appropriate for policymakers. In our view, the choice of which ETR  measure to examine depends on the specific question being considered.
In many cases it is more instructive to examine the distribution of ETRs  across different subpopulations of corporations. With detailed taxpayer- level data one might track individual corporations from year to year to  address timing issues relating to losses. We did not have access under  the law to such data for this report.
section_title: Calculating Worldwide Effective Tax Rates
paragraphs: The scope of the data available to us from Schedule M-3 and Form 1120  limited our ability to estimate worldwide ETRs for the large corporations  (Schedule M-3 filers). As noted above, our estimated worldwide ETRs  represent the burden of taxes paid and income received by entities that  are included in federal tax returns. These measures do not include  income earned by foreign subsidiaries or the taxes that those foreign  subsidiaries pay, except in the cases where that income is repatriated to  U.S. corporations in the form of dividends or falls into certain categories  of income that are taxed immediately under federal tax rules. In the  remainder of this section, we compare the data on worldwide taxes  available to us for this report with the data we used for our previous  report.
First, we need to describe some of the relevant U.S. tax rules applying to  foreign-source income. The United States taxes domestic corporations on  their worldwide income, regardless of where it is earned. A U.S.  corporation may directly or indirectly own shares of stock of other  corporations both foreign and domestic; if the U.S. corporation owns all or  a significant number of shares of stock, it may be considered a parent  and the other corporation a subsidiary.  In general, a U.S. taxpayer who  owns stock in a corporation is not taxed on income earned by the  corporation when it is earned, but taxed when it is distributed to the  taxpayer, such as in the form of dividends. When the taxpayer is a U.S.  corporation and it owns shares of a foreign corporation in a jurisdiction  with a lower corporate tax rate than that of the United States, this can  result in what is known as deferral. However, the Internal Revenue Code  (IRC) has antideferral provisions which limit deferral in certain  circumstances. For example, if a foreign entity is a Controlled Foreign  Corporation, as defined in statute, then certain U.S. shareholders, such  as parent corporations, are taxed on their share of certain income earned  by the Controlled Foreign Corporation when it is earned. The income of a  Controlled Foreign Corporation to be included in U.S. shareholders’  income includes the income defined in subpart F (often called Subpart F  income) and earnings of the Controlled Foreign Corporation invested in  U.S. property. Major types of Subpart F income include income from  passive investments, income from transactions with entities related to the  Controlled Foreign Corporation, and insurance income as well as certain  other easily manipulated income, which are ineligible for deferral. When  income is deemed to be received by the U.S. corporation in this way, it  may have already been taxed in the foreign country where it was earned.
The IRC allows U.S. parent corporations to claim a foreign tax credit for  taxes paid to other countries so that foreign source income, such as  repatriated dividends and Subpart F income, is not taxed twice. This  results in U.S. corporations paying federal income tax on foreign-source  income only to the extent that the federal income tax on that income  exceeds the foreign tax credit. Section 78 of the IRC requires U.S.  corporations electing to claim the foreign tax credit to “gross-up” (i.e.,  increase) their dividend income by the amount of creditable foreign  income taxes associated with the dividends they received. Similar  requirements apply to Subpart F income.
For our prior report we did not have data relating to the amount of foreign  tax credits claimed by our population of profitable large corporations. As  a substitute for the amount of foreign taxes paid, we used the current  foreign tax expenses and foreign withholding tax expenses that the  taxpayers reported in their financial statements. In the case of repatriated  dividends, our measure included foreign taxes paid on the dividends  themselves, but not any foreign tax paid on the subsidiaries’ income out  of which the dividends were paid. In the latest data we obtained from the  Internal Revenue Service (IRS), we do have amounts for the foreign tax  credits claimed in 2012 by the profitable corporations. The new data also  enabled us to make reliable estimates of the foreign tax credits claimed in  2010 and 2011; however, we could not make similar estimates for earlier  years.
Although this new measure includes the most comprehensive measure of  foreign taxes available in our database, it does not achieve a perfect  alignment between the taxes included in the numerator and the income  included in the denominator. Nevertheless, after discussions with  analysts from IRS and Department of the Treasury, we concluded that  this new measure represents the closest alignment between income and  the taxes paid thereon that is possible with the aggregated Schedule M-3  data available to us. More importantly, as we mentioned in the body of  our report, regardless of the adjustments we make above, our worldwide  ETR estimates do not represent a comprehensive worldwide ETR. They  do not account for income not repatriated by Controlled Foreign  Corporations and the foreign taxes paid on that income. Data do not exist  to measure both the complete worldwide income of U.S. corporate groups  and the actual taxes that they pay. A truly comprehensive rate could be  either higher or lower than the ones we report. The rate of foreign tax paid  on income that Controlled Foreign Corporations choose to repatriate may  be higher than the rate paid on foreign income that is not repatriated.  Since the U.S. tax system provides a foreign tax credit to U.S.  corporations on foreign taxes paid when income is repatriated, it may  create an incentive for Controlled Foreign Corporations to repatriate  income earned in high tax countries, so that U.S. parent corporations can  claim the full foreign tax credit amount. In contrast, as the foreign tax rate  decreases, the U.S. tax due when the income is repatriated increases,  creating a disincentive to repatriate income earned in low tax countries.
section_title: Appendix II: Summary of Selected Past Estimates of Average Effective Tax Rates Based on Financial Statement Data
paragraphs: We used the criteria in our May 2013 report for selecting studies that  included estimates of corporate effective tax rates (ETR). Specifically, a  study had to have (1) used financial statement data to estimate average  ETRs for U.S. corporations, (2) employed pretax worldwide book income  as the denominator of its ETR calculations, and (3) covered at least one  tax year since 2001. In the previous report, these criteria identified eight  studies.
PricewaterhouseCoopers LLP, Global Effective Tax Rates. April 14,  2011.
Markle, Kevin S. and Douglas A. Shackelford (1). “Cross-Country  Comparisons of Corporate Income Taxes.” National Tax Journal, vol.  65, no. 3. 2012: 493-528.
Costa, Melissa and Jennifer Gravelle, “Taxing Multinational  Corporations: Average Tax Rates.” Symposium on International  Taxation and Competitiveness, 65 Tax L. Rev. 391. 2012.
Lee, Namryoung and Charles Swenson. “Is It a Level Playing Field?
An Analysis of Effective Tax Rates.” Tax Notes International. May 25,  2009: 685-693.
Markle, Kevin S. and Douglas Shackelford (2). Do Multinationals or  Domestic Firms Face Higher Effective Tax Rates? National Bureau of  Economic Research, Working Paper 15091. June 2009.  http://www.nber.org/papers/w15091.
Blouin, Jennifer L. and Irem Tuna. Tax Contingencies: Cushioning the  Blow to Earnings? Working Paper. April 2007.
Hanlon, Michelle and Edward L. Maydew. “Book-Tax Conformity:  Implications for Multinational Firms.” National Tax Journal, vol. 62, no.  1. March 2009: 127-153.
Dyreng, Scott D., Michelle Hanlon, and Edward L. Maydew. “Long- Run Corporate Tax Avoidance,” The Accounting Review, vol. 83, no.  1. 2008: 61-82.
For our report, we searched for studies released after March 2013. Our  search yielded the following seven:
Dyreng, Scott D., Michelle Hanlon, Edward L. Maydew, and Jacob R.
Thornock. Changes in Corporate Effective Tax Rates Over the Past  Twenty-Five Years. Social Science Research Network. October 2014:  1-58. Accessed October 8, 2015.  http://ssrn.com/abstract=2521497.
Blouin, Jennifer. “Defining and Measuring Tax Planning  Aggressiveness.” National Tax Journal, vol. 67, no. 4. 2014:875-900.
Hope, Ole-Kristan, Mark (Shuai) Ma, and Wayne B. Thomas. “Tax  Avoidance and Geographic Earnings Disclosure.” Journal of  Accounting and Economics, vol. 56. 2013:170-189.  Jiménez-Angueira, Carlos and Larry Ochoa, “The Determinants and  Market Implications of Long-run Effective Tax Rates.” The Journal of  Theoretical Accounting Research, vol. 9.2. Spring 2014: 58-106.
Markle, Kevin S. and Douglas A. Shackelford. The Impact of  Headquarter and Subsidiary Locations on Multinationals’ Effective Tax  Rates. National Bureau of Economic Research Working Paper 19621.  November 2013. Accessed October 1, 2015.  http://www.nber.org/papers/w19621.
Carlos Jiménez-Angueira. “The Effect of Tax Regime Changes on the  Market Valuation of Tax Avoidance?” Journal of Finance and  Accountancy, vol. 15. April 2014: 1-20.
Crabtree, Aaron D. and Thomas R. Kubick, “Corporate Tax Avoidance  and the Timeliness of Annual Earnings Announcements,” Review of  Quantitative Finance and Accounting, vol. 42. January 2014: 51-67.
As indicated in figure 5, these studies used a variety of measures of  worldwide taxes for their numerator in order to calculate their respective  corporate effective tax rates. Four of the seven studies we identified  excluded corporations with negative book income from their ETR  calculations. It is difficult to make close comparisons between our results  and estimates from those of prior studies based on financial statement  data below because most of the latter estimates are averaged over  multiple years for which we have no data.
section_title: Appendix III: Number and Percentage of U.S. Corporations with No Federal Income Tax Liability from Tax Years 2006 to 2012
paragraphs: The following two tables present data on the number of corporations with  and without federal income tax liability for tax years 2006 to 2012. Data  are presented for all active corporations as well as all and profitable large  corporations that filed a Schedule M-3.
section_title: Appendix IV: Average Federal and Worldwide Effective Tax Rates for Varying Populations of Large Corporations (Schedule M-3 Filers)
paragraphs: Appendix IV: Average Federal and Worldwide  Effective Tax Rates for Varying Populations of  Large Corporations (Schedule M-3 Filers)
The following two tables present effective tax rate estimates for all and  profitable large corporations that filed a Schedule M-3. We present  effective tax rates for all large corporations for tax years 2006 through  2012 and for profitable large corporations for tax years 2008 to 2012.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, James Wozny, Assistant  Director, Lissette Baylor, Karen O’Conor, Robert Gebhart, Donna Miller,  Ed Nannenhorn, Alan Rozzi, A.J. Stephens, Jennifer Stratton, and Jason  Vassilicos made significant contributions to this report.