IRS Reports Strong Income From US Foreign-Controlled Corporations

by Mike Godfrey, Tax-News.com, Washington

26 September 2006

The Internal Revenue Service has found that the relatively small percentage of US corporations that are controlled by foreign persons accounted for a surprisingly large proportion of reported income in 2003.

According to the IRS's Summer Statistics of Income Bulletin, for the 2003 tax year, there were 58,945 domestic corporations each controlled by a foreign person, which accounted for just 1.1% of US corporations. But these corporations generated $2.6 trillion of total receipts and reported $6.2 trillion of total assets, accounting for 12.4% of the receipts and 11.5% of the assets reported on all US corporation income tax returns.

However, the profits reported by FCDCs for tax purposes were $32.0 billion, accounting for only 4.1% of the profits of all corporations for 2003.

Statistics of Income (SOI) conducts fourteen studies of international income and taxes. Many of the trends noted in these studies show an increase in the amount of foreign activity of US persons and the amount of US activity of foreign persons. Total receipts of the largest 7,500 controlled foreign corporations (CFCs), for example, grew at a higher rate than total receipts of US corporations.

The portion of total receipts from all US corporations earned by those controlled by foreign persons grew from 2% for Tax Year 1971 to nearly 13% for Tax Year 2002. Over the past two decades, however, fluctuations in foreign-source taxable income from corporations have roughly followed the same pattern as fluctuations in worldwide taxable income.

The Bulletin also shows that the number of returns filed for estates of nonresident aliens increased significantly in recent filing years, from 525 in Filing Year 2003 to 734 in Filing Year 2005. Within these totals, there were two main types of return: treaty status returns and nontreaty status returns. Among treaty status returns, Canada, Germany and the United Kingdom were the most common countries of domicile for decedents in each of the filing years.

The US total gross estate of treaty status returns increased from $125.4 million in 2003 to $292.4 million in 2005. For non-treaty status returns, US total gross estate increased from $48.4 million in 2003 to $110.0 million in 2005.

Meanwhile, total profits for all non-farm sole proprietorships were $247.6 billion, a 7.5% increase from Tax Year 2003. The largest percentage increase in profits for a major industrial sector was 18.3% for the wholesale trade sector, followed by a 9.2% increase by both the real estate and rental and leasing sector and the professional, scientific and technical services sector. Although overall profits for non-farm sole proprietorship returns increased, deficits also increased by an amount of 7.5% in real terms from Tax Year 2003.

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