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GAO Report Shows Most US Corporations Paying No Tax, Say Senators

by Leroy Baker, Tax-News.com, New York

14 August 2008


Most corporations doing business in the United States pay no federal income tax to the federal government according to a new Government Accountability Office (GAO) study requested by US Senators Byron Dorgan (D-N.D) and Carl Levin (D-MI).

The report says that two thirds of both American companies and foreign companies doing business in the United States end up avoiding all income tax obligations to the federal government despite corporate sales totaling USD2.5tn.

The report discloses that each year from 1998 to 2005, an average of 68% of the foreign companies doing business in the US paid zero federal income taxes. During the same period 66% of US domestic corporations paid no federal income taxes to the federal government.

In 2005, 28% of large foreign companies (over USD250mn in assets or USD50mn in sales) doing business in the US paid no taxes even though they reported USD372bn in gross receipts that year. This amounts to 998 companies, the Senators said. They also noted that 25% of the largest US corporations had USD1.1tn in gross sales in 2005 and yet paid no federal income taxes for the year.

Dorgan called the conclusions “a shocking indictment of the current tax system”.

“It’s shameful that so many corporations make big profits and pay nothing to support our country. The tax system that allows this wholesale tax avoidance is an embarrassment and unfair to hardworking Americans who pay their fair share of taxes. We need to plug these tax loopholes and put these corporations back on the tax rolls,” he said, adding that: “It’s time for the big corporations to pay their fair share.”

Levin commented: “This report makes clear that too many corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.”

In reaching its conclusions, the GAO analyzed data from the Internal Revenue Service's Statistics of Income samples of corporate tax returns. It found that foreign-controlled domestic corporations (FCDCs) reported lower tax liabilities than US-controlled corporations (USCCs) by most measures. Also, a greater percentage of large FCDCs reported no tax liability in a given year from 1998 through 2005.

For all corporations, a higher percentage of FCDCs reported no tax liabilities than USCCs through 2001 but according to the GAO, differences after 2001 were "not statistically significant." Most large FCDCs and USCCs that reported no tax liability in 2005 also reported that they had no current-year income. A smaller proportion of these corporations had losses from prior years and tax credits that eliminated any tax liability. By another measure, large FCDCs were more likely to report no tax liability over multiple years than large USCCs, the report stated.

In 2005, comparisons of FCDCs and USCCs based on ratios of reported tax liabilities to gross receipts or total assets showed that FCDCs reported less tax than USCCs. However, the GAO noted that foreign and domestic controlled companies differed in age, size, and industry: FCDCs were younger than USCCs in that a greater percentage had been incorporated for 3 years or less from 1998 through 2005; in 2005, FCDCs were larger on average than USCCs in that they reported higher average gross receipts and assets than USCCs; a comparison by industry in 2005 showed that large FCDCs were relatively more concentrated in manufacturing and wholesale trade, while large USCCs were more evenly distributed across industries.

The GAO did not attempt to determine the extent to which these factors and others, such as transfer pricing abuse, explain differences in tax liabilities. It also did not make any recommendations in its report.


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