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entitled 'U.S. Multinational Corporations: Effective Tax Rates Are 
Correlated with Where Income Is Reported' which was released on 
September 8, 2008.

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Report to the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

August 2008: 

U.S. Multinational Corporations: 

Effective Tax Rates Are Correlated with Where Income Is Reported: 

GAO-08-950: 

GAO Highlights: 

Highlights of GAO-08-950, a report to the Committee on Finance, U.S. 
Senate. 

Why GAO Did This Study: 

U.S. and foreign tax regimes influence decisions of U.S. multinational 
corporations (MNC) regarding how much to invest and how many workers to 
employ in particular activities and in particular locations. Tax rules 
also influence where corporations report earning income for tax 
purposes. 

The average effective tax rate, which equals the amount of income taxes 
a business pays divided by its pretax net income (measured according to 
accounting rules, not tax rules), is a useful measure of actual tax 
burdens. 

In response to a request from U.S. Senate Committee on Finance, this 
report provides information on the average effective tax rates that 
U.S.-based businesses pay on their domestic and foreign-source income 
and trends in the location of worldwide activity of U.S.-based 
businesses. 

GAO analyzed Internal Revenue Service (IRS) data on corporate 
taxpayers, including new data for 2004 and Bureau of Economic Analysis 
data on the domestic and foreign operations of U.S. MNCs. Data 
limitations are noted where relevant. 

GAO is not making any recommendations in this report. 

What GAO Found: 

The average U.S. effective tax rate on the domestic income of large 
corporations with positive domestic income in 2004 was an estimated 
25.2 percent. There was considerable variation in tax rates across 
these taxpayers, as shown in the figure below. The average U.S. 
effective tax rate on the foreign-source income of these large 
corporations was around 4 percent, reflecting the effects of both the 
foreign tax credit and tax deferral on this type of income. Effective 
tax rates on the foreign operations of U.S. MNCs vary considerably by 
country. According to estimates for 2004, Bermuda, Ireland, Singapore, 
Switzerland, the United Kingdom (UK) Caribbean Islands, and China had 
relatively low rates among countries that hosted significant shares of 
U.S. business activity, while Italy, Japan, Germany, Brazil, and Mexico 
had relatively high rates. 

U.S. business activity (measured by sales, value added, employment, 
compensation, physical assets, and net income) increased in absolute 
terms both domestically and abroad from 1989 through 2004, but the 
relative share of activity that was based in foreign affiliates 
increased. Nevertheless, as of 2004, over 60 percent of the activity 
(by all six measures) of U.S. MNCs remained located in the United 
States. The U.K., Canada, and Germany are the leading foreign locations 
of U.S. businesses by all measures except income. Reporting of the 
geographic sources of income is susceptible to manipulation for tax 
planning purposes and appears to be influenced by differences in tax 
rates across countries. Most of the countries studied with relatively 
low effective tax rates have income shares significantly larger than 
their shares of the business measures least likely to be affected by 
income shifting practices: physical assets, compensation, and 
employment. The opposite relationship holds for most of the high tax 
countries studied. 

Figure: U.S. Average Effective Tax Rates on U.S. Corporations’ Domestic 
Income, 2004: 

[See PDF for image] 

This figure is a multiple horizontal bar graph depicting the following 
data: 

Weighted average rate: 25.2%; and Median rate: 31.8%. 

Average effective tax rate: Less than or equal to 5%: 
Share of Population: 29.6%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 31.7%. 

Average effective tax rate: 5% < but <= 10%: 
Share of Population: 3.1%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 5.8%. 

Average effective tax rate: 10% < but <= 15%: 
Share of Population: 3.1%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 6.3%. 

Average effective tax rate: 15% < but <= 20%: 
Share of Population: 3.5%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 8.8%. 

Average effective tax rate: 20% < but <= 25%: 
Share of Population: 4.3%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 4.2%. 

Average effective tax rate: 25% < but <= 30%: 
Share of Population: 4.4%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 3.6%. 

Average effective tax rate: 30% < but <= 35%: 
Share of Population: 7.5%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 5.5%. 

Average effective tax rate: 35% < but <= 40%: 
Share of Population: 5.8%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 4.6%. 

Average effective tax rate: 40% < but <= 45%; 
Share of Population: 6.9%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 6.9%. 

Average effective tax rate: 45% < but <= 50%; 
Share of Population: 8%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 5.9%. 

Average effective tax rate: Greater than 50%; 
Share of Population: 25.6%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 14.8%. 

Source: GAO analysis of IRS data. 

[End of figure] 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-950]. For more 
information, contact James White at (202) 512-9110 or whitej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Effective Rates of Tax on the Income of Large U.S. Corporations Vary 
Considerably Both in the United States and across Foreign Locations: 

A Growing Share of U.S. Businesses' Activity Is Located Abroad, and the 
Sourcing of Income Appears to Be Influenced by Foreign Country Tax 
Rates: 

Agency Comments: 

Appendix I: Details of the Methodology for Estimating Effective Tax 
Rates: 

Appendix II: BEA Data Used in This Report: 

Appendix III: Additional Data on the Location of Business Activity: 

Appendix IV: Studies of Effective Tax Rates in Foreign Countries That 
Include Non-U.S. Businesses: 

Appendix V: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Typical Domestic Components of a U.S. Multinational Corporate 
Group and How the Income of the Group Generally Is Taxed: 

Table 2: Typical Foreign Components of a U.S. Multinational Corporate 
Group and How the Income of the Group Generally Is Taxed: 

Table 3: Distribution of Schedule M-3 Filers and Income by Income 
Group, 2004: 

Figures: 

Figure 1: U.S. Average Effective Tax Rates on Domestic Income: 

Figure 2: U.S. Average Effective Tax Rates on Foreign-Source Income: 

Figure 3: Average Effective Tax Rates on the Worldwide Income of CFCs 
and Other Foreign Affiliates, by Principal Place of Business, 2004: 

Figure 4: Distribution of Repatriated Foreign-Source Income by Type of 
Income, 2004: 

Figure 5: Allocation of U.S. Multinational Businesses' Domestic and 
Foreign Activity, for Each Indicator and Year of Activity: 

Figure 6: Differences in the Distribution of Business Activity across 
the Three Largest Industries, 2004: 

Figure 7: Distribution of U.S. Multinational Businesses' Activity in 
2004 across Groups of Countries with Different Average Effective Tax 
Rates: 

Figure 8: Distribution of U.S. Multinational Businesses' Activity in 
1989 across Groups of Countries with Different Average Effective Tax 
Rates (in 2004): 

Figure 9: Worldwide Average Effective Tax Rates during the 1990s for 
Corporations Domiciled in European Union Countries: 

Figure 10: Worldwide Average Effective Tax Rates during the 1990s for 
Corporations Domiciled in Selected Countries: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

August 12, 2008: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

As globalization has intensified, cross-border investment has grown 
dramatically. U.S. businesses have had increasing flexibility in 
locating their activities abroad. From 1982 through 2007 the market 
value of U.S. direct investment abroad increased in real terms by more 
than a factor of 10.[Footnote 1] 

U.S. and foreign tax regimes influence economically significant 
decisions of multinational corporations (MNC), such as how much to 
invest and how many workers to employ in particular activities and 
locations. Tax rules also affect where corporations report income being 
earned, which may differ from the locations where their activities 
actually generated the income. (MNCs have various ways to shift income 
reported for tax purposes, including the manner in which they price 
transactions among affiliated entities within the corporate group.) 
Statutory tax rates do not provide a complete measure of the burden 
that a tax system imposes on business income because many other aspects 
of the system, such as exemptions, deferrals, tax credits, and other 
forms of incentives, also determine the amount of tax a business 
ultimately pays on its income. The average effective income tax rate 
that a business faces--the amount of income tax it pays divided by its 
pretax income--reflects the combined effects of all these tax system 
components. In order to gain a better understanding of the implications 
that the current tax system has for both the domestic and foreign 
operations of U.S. businesses, you asked us to provide information on 
(1) the average effective tax rates that U.S.-based businesses pay on 
their domestic and foreign-source income (before and after the 
application of credits) and the average effective tax rates that 
foreign-based businesses pay on their worldwide income and (2) trends 
in the location of the worldwide activity of U.S.-based businesses. 

To estimate the average effective tax rates faced by U.S.-based 
businesses we used data that the Internal Revenue Service's (IRS) 
Statistics of Income division (SOI) collects from a variety of 
corporate tax forms and schedules.[Footnote 2] To estimate domestic and 
foreign source income we used data from the new Schedule M-3, "Net 
Income (Loss) Reconciliation for Corporations with Total Assets of $10 
Million or More." We used the 2004 Schedule M-3, the only year 
available at the time we made our estimates. This schedule, which large 
U.S. corporate taxpayers must file, provides a detailed reconciliation 
of differences between income defined under financial accounting rules 
and income reported for tax purposes. We used both Form 1120, "U.S. 
Corporate Income Tax Return," and Form 1118, "Foreign Tax Credit-- 
Corporations," to identify separately the U.S. taxes paid on domestic 
income and the residual U.S. tax paid on foreign-source income. Lastly, 
we used data from IRS Form 5471, "Information Return of U.S. Persons 
With Respect to Certain Foreign Corporations," to estimate the average 
combined (U.S. and foreign) effective tax rate on the worldwide income 
of U.S.-owned foreign corporations.[Footnote 3] While there are 
limitations to the data provided on the Schedule M-3 and general 
reporting problems with tax return data, we determined that the data 
were reliable for our purpose of estimating ranges of average effective 
tax rates, provided that we include appropriate sensitivity analyses 
addressing the limitations. See appendix I for a further discussion of 
the data, methodology, and limitations. 

To determine the information available on the average tax rates of 
companies domiciled in different countries, we reviewed the relevant 
literature through searches on Google Scholar and Web sites such as 
those of the Organization for Economic Cooperation and Development, the 
Institute of Fiscal Studies, the United Nations, the International 
Monetary Fund, and the World Bank. We compiled a list of articles that 
evaluated average corporate tax rates in one or more countries. We also 
reviewed the references of these studies to expand our list. The 
studies we found used firm financial or accounting data to calculate 
average tax rates. We were unable to find any studies that use foreign 
firms' tax returns. 

To determine the recent trends in the worldwide activity of U.S. 
corporations and their foreign affiliates, we analyzed data from the 
Department of Commerce's Bureau of Economic Analysis's (BEA) benchmark 
surveys of U.S. multinational corporations at 5-year intervals (1989, 
1994, 1999, and 2004). We based our analysis on a key set of indicators 
including value added, sales, net income, employment, compensation of 
employees, research and development, and physical assets. We reviewed 
BEA articles and interviewed BEA officials about the collection of data 
on U.S. direct investment abroad, as reported in the benchmark surveys. 
We determined that the data were reliable for our purpose of providing 
descriptive trend information on a variety of indicators of business 
activity. See appendix II for details relating to the data and their 
limitations. We conducted this performance audit from March 2007 to 
July 2008 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

Results in Brief: 

We estimate that the weighted average U.S. effective tax rate on the 
domestic income of large corporations with positive domestic income in 
2004 was 25.2 percent. There was considerable variation in tax rates 
across corporate taxpayers, with about one-third of the taxpayers 
having effective rates of 10 percent or less and a quarter of the 
taxpayers having rates over 50 percent. U.S. tax credits had a 
relatively small effect on these effective rates. We were not able to 
isolate the effects that other forms of tax preferences, such as 
exemptions or accelerated depreciation, had on the rates. Our estimate 
of the average U.S. effective tax rate on the foreign-source income is 
quite different conceptually from the effective tax rate on domestic 
income for two reasons. First, the United States imposes only a 
residual tax on foreign income, after providing a credit for foreign 
taxes paid on that same income. Second, a substantial portion of the 
foreign income earned by U.S. multinationals is not taxed until it is 
repatriated to the United States. As a result of this tax deferral and 
the foreign tax credit, the average U.S. effective tax rate on the 
foreign-source income of large corporations was around 4 percent in 
2004. Effective tax rates on the income of foreign operations of U.S. 
MNCs vary considerably by country. According to our estimates for 2004, 
Bermuda, Ireland, Singapore, Switzerland, the United Kingdom (UK) 
Caribbean Islands,[Footnote 4] and China had relatively low effective 
tax rates on the U.S. MNC operations (among countries that hosted 
significant shares of U.S. business activity), while Italy, Japan, 
Germany, Brazil, and Mexico had relatively high rates. Estimates from 
other studies of effective tax rates on all corporations based in 
foreign countries are consistent in some cases but not in others with 
our estimates for tax rates on U.S. corporations operating in those 
countries. 

U.S. business activity (measured by sales, value added, employment, 
compensation, physical assets, and net income) increased in absolute 
terms both domestically and abroad from 1989 through 2004, but the 
relative share of activity that was based in foreign affiliates 
increased. Nevertheless, as of 2004, over 60 percent of the activity 
(by all six measures) of U.S. MNCs remained located in the United 
States. The extent to which activity is located abroad varies by 
industry. Among the three largest industries, finance and insurance has 
the lowest share of activity located abroad, while wholesale trade 
generally has the largest share. For example, only 19 percent of 
employment in finance and insurance was located abroad in 2004, while 
36.2 percent of manufacturing employment and 42.9 percent of wholesale 
employment was located in foreign operations that year. Differences in 
tax rates across countries appear to influence how much income 
corporations report earning in particular countries, relative to the 
amount of other activity in those locations. With the exception of 
China, all of the countries with relatively low effective tax rates 
have income shares that are significantly larger than their shares of 
the three business activity measures least likely to be affected by 
income-shifting practices: physical assets, compensation, and 
employment. In contrast, all of the countries with relatively high 
effective tax rates, except for Japan, have income shares that are 
smaller than their shares of physical assets, compensation and 
employment. The United Kingdom and Canada dominate all of the measures 
of activity, except for income. Germany also has at least a 5 percent 
share of all of the nonincome measures. 

We provided a draft of this report in July 2008 to the Secretary of 
Treasury for review and comments. Officials from the Department of the 
Treasury's Office of Tax Policy provided technical comments, which we 
incorporated as appropriate. 

Background: 

Effective Tax Rates: 

Effective tax rates on corporate income can be defined in a variety of 
ways, each of which provides insights into a different issue. These 
rates fall into two broad categories--average rates and marginal rates. 
An average effective tax rate, computed as the ratio of taxes paid in a 
given year over all of the income the corporation earned that year, is 
a good summary of the corporation's overall tax burden during that 
particular period. In comparison, a marginal effective tax rate focuses 
on the tax burden associated with a specific type of investment 
(usually over the full life of that investment) and is a better measure 
of the effects that taxes have on incentives to invest. There is likely 
to be some correlation between average effective tax rates, marginal 
effective tax rates, and statutory tax rates across countries.[Footnote 
5] In the remainder of the report, unless we specify otherwise, we use 
the term effective tax rate to mean an average effective tax rate. 

Important methodological decisions to make when computing effective tax 
rates on corporate income are the scope of the corporate taxpayer to 
study and what measures of taxes and income to use. These decisions are 
ultimately driven by both conceptual considerations and data 
availability. These considerations will be different, depending on 
whether one is estimating separate effective tax rates on domestic 
income and foreign income or simply a single effective tax rate on 
worldwide income. Our various estimates and those of others that we 
present below are based on the same fundamental definition of an 
average effective tax rate but reflect variations in scope and data as 
appropriate for the different populations being examined. 

The Nature of U.S. Multinational Corporations and How the Federal 
Government Taxes Their Income: 

Large U.S. corporate taxpayers are often complicated groups of separate 
legal entities. A parent corporation may directly own (either wholly or 
partially) multiple subsidiary corporations. In turn, these 
subsidiaries may own other corporate subsidiaries, and any of these 
corporations may own stakes in partnerships. A domestic parent 
corporation (one that is organized under U.S. laws) may head a large 
group of affiliated businesses that includes both domestic and foreign 
subsidiaries and partnerships. The timing of when these various 
entities pay U.S. tax on their income and the tax return on which their 
income and taxes are reported varies depending on both the location of 
the entities and choices made by the parent corporation. These timing 
and reporting differences, which are summarized in table 1 and table 2, 
matter in the estimation of effective tax rates. In particular, the 
fact that the income of a controlled foreign corporation (CFC) is not 
reported or taxed on a U.S. return until it is recognized under Subpart 
F or repatriated in the form of dividends means that an effective tax 
rate estimate based solely on income reported for tax purposes would 
not reflect the tax treatment of a significant component of the income 
of MNCs. This limitation is one reason why prior analysts have used 
income reported on financial statements, rather than tax-reportable 
income, when computing effective tax rates. 

Table 1: Typical Domestic Components of a U.S. Multinational Corporate 
Group and How the Income of the Group Generally Is Taxed: 

Separate legal entities of U.S. multinational corporate group "A": 
Parent corporation "A"; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions (includes both domestic-source 
income and foreign-source income from the entity's direct operations): 
Taxed in current year on the consolidated return; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
group: Not applicable (parent corporation does not make distributions 
to the group). 

Separate legal entities of U.S. multinational corporate group "A": 
Wholly owned domestic subsidiaries[A]; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions (includes both domestic-source 
income and foreign-source income from the entity's direct operations): 
Taxed in current year. May be included on the consolidated return or 
subsidiaries may file their own returns. If the subsidiary is 
consolidated, all of its income and tax will be included on the 
consolidated return. If it is not included, none of its income or tax 
will be in corporate group A's consolidated income, unless a member of 
the group receives a distribution from the subsidiary; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
group: If the subsidiaries are consolidated, any dividends they pay to 
other members of the consolidated group are not taxed. If the 
subsidiaries are not consolidated, the recipient includes the dividend 
in taxable income but is able to deduct 80 percent of the amount 
received.[B]. 

Separate legal entities of U.S. multinational corporate group "A": 
Partially owned domestic subsidiaries; Ownership share of 80 percent or 
more; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions (includes both domestic-source 
income and foreign-source income from the entity's direct operations): 
Same as for wholly owned domestic subsidiaries; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
group: Same as for wholly owned domestic subsidiaries. 

Separate legal entities of U.S. multinational corporate group "A": 
Partially owned domestic subsidiaries; Ownership share of greater than 
or equal to 20 percent but less than 80 percent; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions (includes both domestic-source 
income and foreign-source income from the entity's direct operations): 
Taxed in current year. None of this income is included in corporate 
group A's consolidated income unless a member of the group receives a 
distribution. Instead, the entity must report it on its own return; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
group: The recipient includes the dividend in taxable income but is 
able to deduct 80 percent of the amount received.[B]. 

Separate legal entities of U.S. multinational corporate group "A": 
Partially owned domestic subsidiaries; Domestic portfolio equity 
investments (ownership shares of 20 percent or less); 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions (includes both domestic-source 
income and foreign-source income from the entity's direct operations): 
Taxed in current year. None of this income or tax is reported on parent 
corporate group A's consolidated return, unless a member of the group 
receives a distribution. Instead, the entity must file its own return 
or be consolidated with a different parent corporation; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
group: The recipient includes the dividend in taxable income but is 
able to deduct 70 percent of the amount received.[B]. 

Separate legal entities of U.S. multinational corporate group "A": 
Partially owned domestic subsidiaries; Shares in domestic partnerships; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions (includes both domestic-source 
income and foreign-source income from the entity's direct operations): 
Taxed in current year. The income is not taxed at the partnership 
level; rather, it is passed through to the group member with the 
ownership share and reported on the consolidated return; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
group: Not applicable (partnerships do not make distributions; their 
income is directly allocated among partners). 

Source: GAO Summary based on U.S. Internal Revenue Code. 

[A] Taxpayers have the option of including the shaded entities in a 
consolidated tax return. None of the entities that are unshaded may be 
included in the tax consolidation; however, distributions from these 
unconsolidated entities to any of the consolidated group members are 
included in the group's taxable income. 

[B] The dividend received deductions are subject to certain 
limitations. In addition, dividends received on debt-financed stock are 
permitted a reduced deduction. 

[End of table] 

Table 2: Typical Foreign Components of a U.S. Multinational Corporate 
Group and How the Income of the Group Generally Is Taxed: 

Separate legal entities of U.S. multinational corporate group "A": 
CFCs[A]; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions: Domestic-source Income: Income 
that is "effectively connected" with the conduct of a trade or business 
within the United States is generally taxed in current year. None of 
this income is included in corporate group A's consolidated income 
unless a member of the group receives a distribution. Instead, the 
entity must report it on its own U.S. tax return; Certain types of 
investment income, such as dividends and interest, not effectively 
connected, are subject to a flat rate tax known as the 30 percent 
withholding tax. There are exceptions to these rules, such as those set 
out in various tax treaties; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions: Foreign-source income of the 
entity's direct operations: Generally the tax on this income is not due 
until the income is repatriated to the United States in the form of 
dividends. However, under certain circumstances, antideferral 
provisions may apply, causing the income to be taxed currently. One 
such provision, known as subpart F, disallows deferral of certain types 
of income, such as interest, dividends, other passive investment 
income, and certain types of income derived from buying or selling 
goods or services to or from a related U.S. person or entity; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
Group: Paid out of domestic-source income: The recipient includes the 
dividend in taxable income but is able to deduct 100 percent of the 
amount received from wholly owned subsidiaries and 80 percent of the 
amount received from any subsidiary of which it owns at least 20 
percent; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
Group: Paid out of foreign-source income: These dividends are normally 
included in the recipient's taxable income in the year that they are 
paid. However, a recipient could make a special onetime election to 
deduct 85 percent of the dividends received from CFCs during either the 
recipient's last tax year beginning before October 22, 2004, or its 
first tax year beginning after that date. 

Separate legal entities of U.S. multinational corporate group "A": 
Foreign corporations that are not CFCs; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions: Domestic-source Income: Income 
that is "effectively connected" with the conduct of a trade or business 
within the United States is generally taxed in current year. None of 
this income is included in corporate group A's consolidated income 
unless a member of the group receives a distribution. Instead, the 
entity must report it on its own U.S. tax return; Certain types of 
investment income, such as dividends and interest, not effectively 
connected, are subject to a flat rate tax known as the 30 percent 
withholding tax. There are exceptions to these rules, such as those set 
out in various tax treaties; 
When and where U.S. federal income tax is paid on different types of 
income: Income prior to distributions: Foreign-source income of the 
entity's direct operations: Generally the tax on this income is not due 
until the income is repatriated to the United States in the form of 
dividends. Subpart F generally does not apply to these corporations. 
However, other antideferral provisions, including passive foreign 
investment company (PFIC) rules, could apply[B]; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
Group: Paid out of domestic-source income: The recipient includes the 
dividend in taxable income but is able to deduct 80 percent of the 
amount received from any subsidiary in which they own at least a 20 
percent share and 70 percent of the amount received from any 
corporation in which it owns less than a 20 percent share[C]; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
Group: Paid out of foreign-source income: These dividends are included 
in the recipient's taxable income in the year that they are paid. 

Separate legal entities of U.S. multinational corporate group "A": 
Shares in foreign partnerships; When and where U.S. federal income tax 
is paid on different types of income: Income prior to distributions: 
Domestic-source Income: Taxed in current year. If treated as a 
partnership for U.S. tax purposes, the income is not taxed at the 
entity level; rather, it is passed through to the group member with the 
ownership share and reported on the consolidated return; 
When and where U.S. federal income tax is paid on different types of 
income: Distributions from the specific entity to the tax-consolidated 
Group: Paid out of domestic-source income: Not applicable (partnerships 
do not make distributions; their income is directly allocated among 
partners). 

Source: GAO summary based on U.S. Internal Revenue Code. 

[A] A CFC is a corporation that is incorporated outside of the United 
States but that is more than 50 percent owned (by vote or value) by one 
or more U.S. shareholders, each of whom owns at least 10 percent of the 
CFC's voting stock. 

[B] Generally, a foreign corporation is a PFIC if 75 percent of the 
corporation's income is passive income or if 50 percent of its assets 
are passive assets. Each U.S. shareholder of a PFIC can choose to be 
taxed in one of two (or in the case of marketable stock, one of three) 
ways. They may choose to be taxed currently on the PFIC's earnings; 
they may defer payment of this tax on earnings, but will pay an 
interest charge; or, in the case of shareholders of marketable stock, 
their tax may be based on the appreciation or depreciation in the value 
of that stock. 

[C] At least 10 percent of the stock of such corporation (by vote or 
value) must be owned by the U.S. corporation and no foreign tax credit 
is allowed with respect to the domestic source portion. 

[End of table] 

Two aspects of the U.S. tax treatment of foreign income lead to much 
lower U.S. tax burdens on foreign income than on domestic income, which 
is one reason why it makes sense to look at these effective tax rates 
separately. The first aspect is the aforementioned deferral of tax on 
the income of CFCs generally until that income is repatriated. The 
second aspect is the foreign tax credit, which is designed to prevent 
the double taxation of foreign income (once by the government of the 
country in which the income is earned and once by the United States). 
In effect, the United States taxes the foreign income only to the 
extent that the U.S. corporate tax rate exceeds the foreign rate of tax 
on that income. If the foreign rate of tax is equal to or exceeds the 
U.S. rate, the United States collects no tax on that income. 

Department of the Treasury tax regulations generally effective since 
January 1, 1997 have an important influence on some of the effective 
tax rate estimates and data on business activity location that we 
present below. These regulations,[Footnote 6] commonly known as check- 
the-box rules, permit corporate groups to treat a wholly owned entity 
either as a separate corporation or to "disregard" it as an 
unincorporated branch simply by checking a box on a tax form. Taxpayers 
have used this flexibility to create "hybrid entities," which are 
business operations treated as corporations by one country's tax 
authority and as unincorporated branch operations by another's. Hybrid 
entities can be used in a variety of ways for tax-planning purposes. In 
one example, a U.S. MNC can put substantial equity into a finance 
subsidiary located in a low-tax country. That subsidiary then can lend 
money to an affiliate in a high-tax country to finance most of the 
latter's operations. The high-tax affiliate makes tax-deductible 
interest payments to the finance subsidiary, which will pay a low rate 
of tax on this interest income. Prior to the check-the-box rules the 
interest income of the finance subsidiary would have been subject to 
U.S. tax on a current basis under the subpart F rules. Now, however, 
the taxpayer can, in certain circumstances, treat the high-tax 
affiliate as an unincorporated branch of the low-tax subsidiary, so the 
interest payment is not recognized as a transaction for U.S. tax 
purposes.[Footnote 7] Subject to Subpart F, the United States only 
taxes that income if it is repatriated. 

The American Jobs Creation Act of 2004[Footnote 8] provided a temporary 
incentive for U.S. MNCs to repatriate income from their CFCs. The act 
allowed recipients to make a special, one-time election to deduct 85 
percent of "extraordinary" dividends received from CFCs during either 
the recipient's last tax year beginning before October 22, 2004, or its 
first tax year beginning after that date, provided that the CFCs' 
dividends were not funded by money borrowed from their U.S. 
shareholders and provided that the repatriated funds were used for 
allowable domestic investments. Dividends were extraordinary to the 
extent that they exceeded the average dividends that the shareholder 
received from its CFCs over the previous 5 years (disregarding the 
highest and lowest amounts out of those 5 years). IRS tracked the 
amount of qualified dividends repatriated under this provision and 
found that 843 corporate owners of CFCs reported the receipt of $312.3 
billion in qualified dividends from tax years 2004 through 2006. 
[Footnote 9] Only $9.1 billion of this total was repatriated during tax 
year 2004, the year on which most of our data analyses are based. At 
various points below we discuss how this tax provision may make some of 
our specific results for 2004 differ from those of surrounding years. 

Income Reporting on Financial Statements: 

Publicly traded corporations are required to produce financial 
statements according to guidelines established by the Financial 
Accounting Standards Board. The income reporting in these financial 
statements (commonly known as book income) differs in important ways 
from the income that the corporations report on their federal tax 
returns. One key difference is that book income will include a parent 
corporations' share (in proportion to its ownership share) of all of 
the income of all subsidiaries, both domestic and foreign, in which it 
has at least a 20 percent ownership stake. Other differences arise 
because income reported for tax purposes reflects the effects of 
various incentives and disincentives embedded in the tax code (such as 
accelerated depreciation to encourage investment and limits on 
deductible compensation to discourage excessive payments). 

In the early 1980s, the Joint Committee on Taxation developed an 
approach for using book income and taxes to estimate effective tax 
rates of foreign taxes on foreign-source income, U.S. taxes on domestic 
income, and worldwide tax on worldwide income.[Footnote 10] A 
limitation of this approach was that the book measures of taxes did not 
allow a distinction between U.S. taxes paid on domestic income and the 
U.S. residual tax on foreign-source income. This limitation can be 
overcome by using data from Schedule M-3 of the federal tax return, 
which just recently became available to researchers. 

Information Available from Schedule M-3: 

Beginning with tax year 2004, U.S. domestic corporations with assets of 
$10 million or more are required to include the Schedule M-3 in their 
tax returns.[Footnote 11] This schedule requires taxpayers to provide a 
more detailed reconciliation of their book income and their tax income 
than what was required in earlier years. Data from the Schedule M-3 
allow for the computation of effective tax rates, with some 
limitations, that use book measures of income and taxes actually 
reported on returns. As a result, one can take advantage of the broader 
scope of foreign-source income reported in financial statements and the 
more detailed information on taxes paid, which permits a separation of 
U.S. taxes paid on domestic and foreign income. However, some data 
limitations remain (these are discussed in detail in app. I). The most 
significant limitation is that the data do not permit a comprehensive 
measurement of foreign income without some double counting of income. 
This limitation is best addressed by estimating a range of effective 
tax rates for foreign income using alternative measures of income. The 
most inclusive measure is likely to contain some double counting and, 
therefore, cause an understatement of the effective rate. The least 
inclusive measure avoids double counting but will leave out some income 
that should be included, causing an overstatement of the effective 
rate. The true effective tax rate should be between the upper and lower 
bound of this range. 

Effective Rates of Tax on the Income of Large U.S. Corporations Vary 
Considerably Both in the United States and across Foreign Locations: 

The weighted average U.S. effective tax rate on the domestic income of 
large corporations with positive domestic income in 2004 was 25.2 
percent, while the median effective tax rate for this population of 
corporations was 31.8 percent.[Footnote 12] However, as figure 1 shows, 
under these two summary measures there was considerable variation in 
effective tax rates across taxpayers. At one extreme, 32.9 percent of 
the taxpayers, accounting for 37.5 percent of income, had average 
effective tax rates of 10 percent or less; at the other extreme, 25.6 
percent of the taxpayers, accounting for 14.8 percent of income, had 
effective tax rate over 50 percent.[Footnote 13] The average effective 
tax rates for the remainder of the taxpayers were fairly evenly 
distributed between these two extremes.[Footnote 14] 

Figure 1: U.S. Average Effective Tax Rates on Domestic Income: 

[See PDF for image] 

This figure is a multiple horizontal bar graph depicting the following 
data: 

Weighted average rate: 25.2%; and Median rate: 31.8%. 

Average effective tax rate: Less than or equal to 5%: 
Share of Population: 29.6%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 31.7%. 

Average effective tax rate: 5% < but <= 10%: 
Share of Population: 3.3%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 5.8%. 

Average effective tax rate: 10% < but <= 15%: 
Share of Population: 3.1%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 6.3%. 

Average effective tax rate: 15% < but <= 20%: 
Share of Population: 3.5%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 8.8%. 

Average effective tax rate: 20% < but <= 25%: 
Share of Population: 4.3%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 4.2%. 

Average effective tax rate: 25% < but <= 30%: 
Share of Population: 4.4%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 3.6%. 

Average effective tax rate: 30% < but <= 35%: 
Share of Population: 7.5%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 5.5%. 

Average effective tax rate: 35% < but <= 40%: 
Share of Population: 5.8%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 4.6%. 

Average effective tax rate: 40% < but <= 45%; 
Share of Population: 6.9%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 6.9%. 

Average effective tax rate: 45% < but <= 50%; 
Share of Population: 8%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 5.9%. 

Average effective tax rate: Greater than 50%; 
Share of Population: 25.6%; 
Share of Populations Total Positive Domestic Income Attributable to 
Taxpayers: 14.8%.

Source: GAO analysis of IRS data. 

[End of figure] 

The Residual U.S. Average Effective Tax Rate on the Foreign Income of 
Large U.S. Corporations in 2004 Was Less Than 5 Percent: 

In order to address limitations in the available income data, we 
estimated the residual U.S. average effective tax rate on foreign- 
source income using three alternative income measures. Our estimates of 
the weighted average effective tax rates for large taxpayers with 
positive foreign income ranged from 3.9 percent to 4.2 percent, 
depending on which income measure we used. The true weighted average 
should fall somewhere within this range.[Footnote 15] 

The residual U.S. average effective tax rates on foreign income are 
very low for a combination of reasons that make this measure 
conceptually quite different from our effective tax rate on domestic 
income. First, in cases where a U.S. MNC has paid foreign income taxes 
at a rate that is close or equal to the U.S. tax rate, the U.S. foreign 
tax credit eliminates most or all of the U.S. tax liability on that 
corporation's foreign-source income. Second, in many cases a 
substantial portion of the foreign-source income earned by U.S. MNCs is 
not taxed until it is repatriated to the United States. The denominator 
of our tax rate reflects all of the foreign income that was earned in 
2004, but the numerator includes only taxes that were actually paid in 
2004. Consequently, the numerator does not include any tax on 
nonrepatriated 2004 income; however, it does include tax on repatriated 
dividends paid out of income that CFCs earned prior to 2004. It is 
important to recognize that tax deferral does not necessarily mean that 
the tax will never be paid. 

Figure 2 presents estimates for the distribution of effective tax rates 
that are based on our broadest income measure. The distributions of 
effective tax rates based on our other income measures did not look 
dramatically different. Approximately 80 percent of the large taxpayers 
with positive foreign income, accounting for about 30 percent of that 
population's total foreign income, paid no federal income tax on that 
income. An additional 8.5 percent of this population, accounting for 
about 52 percent of the foreign income, had positive average effective 
U.S. tax rates of 5 percent or less. Less than 10 percent of this 
population had effective tax rates over 10 percent. The taxpayers with 
the higher effective rates may have had relatively high ratios of 
repatriations over current-year income from their CFCs, or the 
dividends that they repatriated may have been paid out of income earned 
in relatively low-tax locations. 

Figure 2: U.S. Average Effective Tax Rates on Foreign-Source Income: 

[See PDF for image] 

This figure is a multiple horizontal bar graph depicting the following 
data: 

Average effective tax rate: Zero ETR; 
Share of Population: 79.8%; 
Share of Populations Total Positive Foreign Income Attributable to 
Taxpayers: 30.5%. 

Average effective tax rate: 0% < but <= 5%; 
Share of Population: 8.5%; 
Share of Populations Total Positive Foreign Income Attributable to 
Taxpayers: 51.9%. 

Average effective tax rate: 5% < but <= 10%; 
Share of Population: 2%; 
Share of Populations Total Positive Foreign Income Attributable to 
Taxpayers: 6.2%. 

Average effective tax rate: 10% < but <= 15%; 
Share of Population: 2%; 
Share of Populations Total Positive Foreign Income Attributable to 
Taxpayers: 6.1%. 

Average effective tax rate: 15% < but <= 20%; 
Share of Population: 1.5%; 
Share of Populations Total Positive Foreign Income Attributable to 
Taxpayers: 0.9%. 

Average effective tax rate: Greater than 20%; 
Share of Population: 6.2%; 
Share of Populations Total Positive Foreign Income Attributable to 
Taxpayers: 4.4%. 

Source: GAO analysis of IRS data. 

[End of figure] 

Due to the incentives under the American Jobs Creation Act of 2004, the 
ratio of repatriations to CFC income may have been different in 2004 
than it was in surrounding years. Some U.S. MNCs may have delayed 
repatriations in the year or two prior to the year in which the made a 
one-time "extraordinary" dividend payment, so that their repatriations 
first were lower than normal, then became higher than normal. The 
timing of this behavior could have varied across firms, depending on 
when their management became sufficiently confident that the tax 
preference would be enacted, the timing of their tax years, and other 
factors. The IRS data on repatriated income presented earlier suggest 
that the 2004 ratio of repatriations is likely to be lower than the 
ratio for 2005 and, perhaps, 2006. The effects of these differences on 
the average effective rates of tax on foreign-source income in all of 
those years are uncertain. On the one hand, a higher rate of 
repatriation would mean that more of the CFCs' income would become 
subject to U.S. taxation in that year; on the other hand, the temporary 
deduction would effectively exclude 85 percent of the repatriations 
from U.S. taxable income.[Footnote 16] 

Tax Credits Have a Relatively Small Effect on U.S. Average Effective 
Tax Rates: 

We estimated the effect of federal income tax credits (other than the 
foreign tax credit) on U.S. average effective tax rates by computing 
rates before and after the inclusion of the credits.[Footnote 17] We 
found that these credits reduced the precredit tax liabilities on 
domestic income by a weighted average 1.7 percentage points (from 26.9 
percent to 25.2 percent). We also found that tax credits reduced the 
precredit tax liabilities on foreign-source income by a weighted 
average 0.8 percentage points.[Footnote 18] These estimates indicate 
the extent to which tax preferences in the form of tax credits reduce 
corporate tax burdens. We have no way to precisely measure the effects 
of other forms of tax preferences, such as exemptions or accelerated 
depreciation. These other forms of preferences explain some of the 
differences between the precredit effective tax rates shown in figure 1 
and the 35 percent statutory rate; however, there are differences 
between book and tax income that are not tax preferences that also 
explain some of the differences. 

Average Effective Tax Rates on the Worldwide Income of U.S. Controlled 
Foreign Corporations Vary Widely by Principal Place of Business: 

The U.S. average effective tax rates that we presented above do not 
reflect the taxes that U.S. businesses pay on their foreign-source 
income to foreign governments. The effective rates of foreign tax are 
likely to be one of several factors that influence the specific 
location of U.S. business activity abroad. Economists have used 
different approaches to estimate these effective foreign taxes. Each of 
these approaches has limitations; however, when used in combination, 
these approaches provide broadly consistent effective tax rate rankings 
for many important locations of U.S. business activity. 

Effective Tax Rates on All CFCs with Positive Income in 2004: 

One estimation approach used by researchers with access to IRS tax data 
has been to compute effective rates of tax paid by U.S. CFCs as the 
ratio of the total income taxes that a CFC pays on its worldwide 
income, divided by that worldwide income. The income from CFCs 
represents a significant component of U.S. businesses' foreign-source 
income. We used IRS data on CFCs for 2004 to estimate that the average 
combined (U.S. and foreign) effective tax rate on the worldwide income 
of CFCs (excluding those that had negative income) was 16.1 percent. 
[Footnote 19] One limitation of this estimation approach is that when 
aggregated, the CFC income data double counts income earned by lower-
tier CFCs that is distributed to higher-tier CFCs in the form of 
dividends. We computed a separate effective tax rate for manufacturing 
CFCs only, which exclude holding companies that may be used to 
accumulate income from lower-tier CFCs. We found that the rate for 
manufacturing CFCs, at 15.4 percent, was actually lower than the rate 
for all CFCs. One possible explanation for this result is that, if U.S. 
MNCs do route substantial amounts of dividends to holding company CFCs, 
the dividend-paying businesses may be hybrid entities that are 
disregarded for U.S. tax-reporting purposes rather than CFCs 
themselves. That practice would make sense from a tax-planning 
standpoint. Under such an arrangement, the income of the hybrid 
entities would not be reported separately in the IRS data we used; it 
would be counted only once, as part of the income of a higher-tier CFC. 

Our estimate for the effective rate of tax on manufacturing CFCs is 
significantly lower than the 21 percent effective rate that Altshuler 
and Grubert estimated for manufacturing CFCs for tax year 2001. Those 
authors noted that the effective tax rate has declined steadily from 33 
percent in 1980. Our estimate suggests that effective rates may have 
continued to drop since 2001.[Footnote 20] This decline predominantly 
represents a reduction in the amount of tax paid to foreign 
governments, not to the United States. Altshuler and Grubert conclude 
that a significant portion of the effective tax rate reduction may be 
attributable to the increased tax-planning flexibility that U.S. MNCs 
have enjoyed since the introduction of the check-the-box rules. 
Oosterhuis (2006) points to Altshuler and Grubert's recent estimates as 
evidence of how the check-the-box rules have enabled U.S. MNCs to 
reduce their payments of foreign taxes.[Footnote 21] Oosterhuis notes 
that, although a reduction in foreign taxes may make U.S. MNCs more 
competitive overseas against foreign MNCs, it also makes foreign 
investment by U.S. MNCs more attractive relative to investment in the 
United States. 

Another approach for estimating the effective tax rate on the foreign- 
source income of U.S. businesses is to use BEA's data on the operations 
of U.S. MNCs, which includes the amount of net income earned and 
foreign taxes paid by foreign affiliates of these MNCs.[Footnote 22] In 
the case of U.S. majority-owned foreign affiliates, the BEA data permit 
one to compute net income with and without equity income. The latter 
measure of income eliminates some important forms of double counting 
(discussed below). An unavoidable limitation of BEA's foreign affiliate 
income measure for the purposes of estimating effective tax rates is 
that it includes negative values for affiliates that incur losses. As a 
consequence, when the income data are aggregated at the country level 
or for the full population, the net value will be lower than the 
aggregate income of just those businesses that are profitable. In the 
absence of any offsetting factors, effective tax rates that have this 
income measure as the denominator will overstate the rates that 
profitable businesses pay.[Footnote 23] Using data from BEA's 2004 
benchmark survey, we estimate that the average effective tax rate on 
foreign affiliates was 28.7 percent, significantly higher than our 
estimate based on CFC data. 

Effective Tax Rates by Principal Place of Business: 

Although the CFC data may be preferable to the BEA data for estimating 
an overall average effective tax rate for the foreign operations of 
U.S. MNCs, the former data provide an imperfect basis for estimating 
average effective tax rates for specific countries. Although the CFC 
data can be aggregated by principal place of business, the allocation 
of income and taxes paid by principal place of business is not 
perfectly correlated with where the income and taxes of the CFCs are 
actually earned and paid because some CFCs earn income and pay taxes in 
multiple locations. The growing use of hybrid entities has likely 
reduced this correlation, particularly for CFCs located in countries 
that are favored locations for accumulating income. Some hybrids may 
formerly have been CFCs with separate U.S. tax filing requirements that 
indicated where their principal operations were located. Now, as 
hybrids, their income and tax data would not be separated from that of 
the CFCs into which they have become absorbed for U.S. tax-reporting 
purposes. Consequently, the data for those hybrids are now associated 
with the country where the CFC has its principal operations, rather 
than where the hybrid has its own operations. In contrast, the BEA data 
treat the disregarded hybrid entities as separate affiliates, and their 
data are associated with the countries where their physical assets are 
located or where their primary activities are carried out. An important 
exception to this general treatment applies in the case of holding 
companies. When a corporation has physical assets or operations in 
multiple foreign countries, it is classified as a holding company and 
the assets assigned to its country of incorporation include the equity 
that it holds in the operations in the other countries. Those outside 
operations are reported as separate foreign affiliates, so when the BEA 
data are aggregated there is some double counting of assets. 

Figure 3 compares the three effective tax rates we estimated for 17 of 
the most important foreign locations of U.S. MNC operations, based on 
their shares of various measures of U.S. business activity.[Footnote 
24] In most cases the effective tax rates based on BEA data are higher 
than those based on either set of CFC data. Despite the variation in 
results from the three different measures, one subset of countries 
(shown in the top panel) can be identified as having relatively low 
effective rates of tax on the U.S. business operations located there. 
[Footnote 25] Similarly, a subset of countries (shown in the middle 
panel) has relatively high rates (over 18 percent) by any of the three 
measures. Of the remaining four countries, Australia is near the 
boundary between high and low effective rates by all three measures, 
the Netherlands and the United Kingdom are shown to have low effective 
tax rates according to the CFC data but high rates according to the BEA 
data, and Luxembourg appears to have very low overall effective tax 
rates, but not for manufacturing CFCs. Later in the report we show how 
the distribution of activity by foreign affiliates of U.S. MNCs differs 
across these three groups of countries. 

Figure 3: Average Effective Tax Rates on the Worldwide Income of CFCs 
and Other Foreign Affiliates, by Principal Place of Business, 2004: 

[See PDF for image] 

This figure contains three multiple vertical bar graphs depicting the 
following data: 

Countries with Relatively Low Effective Tax Rates: 

Country: Bermuda; 
All CFC data: 6.7%; 
CFC manufacturing data:	4%; 
BEA data w/o equity income: 4.8%. 

Country: Ireland; 
All CFC data: 6.9%; 
CFC manufacturing data:	6.1%; 
BEA data w/o equity income: 8.2% 

Country: United Kingdom Islands, Caribbean; 
All CFC data: 14.7%; 
CFC manufacturing data: 4.6%; 	
BEA data w/o equity income: 3.6%. 

Country: Singapore; 
All CFC data: 9.5%; 
CFC manufacturing data:	7.5%; 
BEA data w/o equity income: 10.5%. 

Country: Switzerland; 
All CFC data: 7.7%; 
CFC manufacturing data:	10.6%; 
BEA data w/o equity income: 11.3%. 

Country: China;	
All CFC data: 10.8%; 
CFC manufacturing data:	9%; 
BEA data w/o equity income: 17%. 

Countries with Relatively High Effective Tax Rates:	 

Country: France; 
All CFC data: 18.3%; 
CFC manufacturing data:	20.8%; 
BEA data w/o equity income: 30.6%. 

Country: Canada	20.4; 
All CFC data: 20.4%; 
CFC manufacturing data:	20.7%; 
BEA data w/o equity income: 29%. 

Country: Mexico; 
All CFC data: 23%; 
CFC manufacturing data:	28.5%; 
BEA data w/o equity income: 32.6%. 

Country: Brazil; 
All CFC data: 21.3%; 
CFC manufacturing data:	22.3%; 
BEA data w/o equity income: 41.6%. 

Country: Germany; 
All CFC data: 20.2%; 
CFC manufacturing data:	21.5%; 
BEA data w/o equity income: 43.5%. 

Country: Japan; 
All CFC data: 28%; 
CFC manufacturing data:	32.6%; 
BEA data w/o equity income: 36.6%. 

Country: Italy; 
All CFC data: 32.3%; 
CFC manufacturing data:	31.3%; 
BEA data w/o equity income: 54.1%. 

Countries with Mixed Tax Rates:	 

Country: Luxembourg; 
All CFC data: 8.6%; 
CFC manufacturing data:	23.3%; 
BEA data w/o equity income: 4%. 

Country: Netherlands; 
All CFC data: 7.8%; 
CFC manufacturing data:	6%; 
BEA data w/o equity income: 32%. 

Country: Australia; 
All CFC data: 16.1%; 
CFC manufacturing data:	25.2%; 
BEA data w/o equity income: 19.3%. 

Country: United Kingdom; 
All CFC data: 14.9%; 
CFC manufacturing data:	17.2%; 
BEA data w/o equity income: 45.8%. 

Source: GAO analysis of IRS data. 

[End of figure] 

The Repatriated Foreign-Source Income of U.S. Corporate Taxpayers Is 
Composed of Various Types of Income: 

We were not able to disaggregate the worldwide income of U.S. corporate 
taxpayers by character of income with the data that were available. 
However, we were able to present such a disaggregation for an important 
form of income: the foreign-source income that was subject to the 
federal income tax (prior to the application of foreign tax credits) in 
2004.[Footnote 26] Figure 4 shows that no single form of income 
predominates. "Grossed-up" dividend income, the largest type of income, 
accounted for 24.6 percent of this foreign-source income.[Footnote 27] 
The next most important type of income (that could be broken out 
separately) was that from foreign branch operations (direct foreign 
operations of U.S.-based corporations that were not established as 
separate legal entities) with a 20.2 percent share, followed by rents, 
royalties, and license fees with a 16.5 percent share. 

Figure 3: Distribution of Repatriated Foreign-Source Income by Type of 
Income, 2004: 

[See PDF for image] 

This figure is a pie-chart depicting the following data: 

Distribution of Repatriated Foreign-Source Income by Type of Income, 
2004: 
Dividends (grossed up): 25%; 
Interest: 12%; 
Rents, royalties, and license fees: 16%; 
Service income: 5%; 
Foreign branch income: 20%; 
Other income: 21%. 

Source: GAO analysis of SOI data. 

[End of figure] 

Estimates from Other Studies of Effective Tax Rates on Corporations 
Based in Foreign Countries Are Consistent with Our Estimates for Some 
Countries but Not for Others: 

The various estimates of effective rates of tax that we have presented 
up to this point have covered only U.S. businesses (those that are 
incorporated in the United States or whose parent corporations are). We 
reviewed the relevant economic literature to determine what information 
is available about effective tax rates imposed on all corporations 
based in specific foreign countries. We identified four studies that 
used corporations' financial statement information to compare the 
average effective tax rates corporations pay across multiple foreign 
countries. The studies we identified estimated rates of total worldwide 
taxes paid on total worldwide income for corporations based in 
countries in the European Union and in Canada, the United States, 
Japan, and Australia.[Footnote 28] The two studies that covered 
corporations based in the European Union during the 1990s reported 
similar rankings of countries by average effective tax rates, although 
exact estimates varied across alternative measures using different 
measures of income (see fig. 8 in app. IV). Ireland and Austria had the 
lowest rates at around 20 percent or less, while Italy and Germany, 
with rates over 35 percent, had the highest. The two other studies, 
which covered limited selections of countries, suggested that effective 
tax rates in the United States, the United Kingdom, Germany, France and 
Australia were within 5 percentage points of each other, while Canada 
had a significantly lower rate and Japan a significantly higher 
rate.[Footnote 29] A comparison of the country rankings based on these 
estimated effective tax rates for all corporations and the rankings 
based on our estimates of effective rates for U.S. CFCs and other 
foreign affiliates of U.S. MNCs reveals both consistencies (low rates 
for Ireland and high rates for Italy and Japan) and inconsistencies (in 
the cases of Netherlands and the United Kingdom). 

A Growing Share of U.S. Businesses' Activity Is Located Abroad, and the 
Sourcing of Income Appears to Be Influenced by Foreign Country Tax 
Rates: 

Business activity can be measured in a variety of ways and the location 
of these activities can be influenced by numerous factors, with certain 
factors having greater influence on some activities than on others. For 
example, taxes, wage rates, the availability of skilled labor, and 
proximity to natural resources or to final product markets can all 
influence where businesses decide to locate production facilities; 
however, wage rates are likely to be particularly important for the 
location of low-skilled, labor-intensive operations, while access to a 
highly educated workforce may have greater influence on the location of 
scientific research activities. Tax regimes--both those of the United 
States and of foreign countries--will have some influence over where 
business activity is actually located; however, they also provide some 
incentive for businesses to report net income as coming from locations 
other than where factors of production, such as labor and physical 
capital, actually generated the income.[Footnote 30] This shifting of 
income may be reflected in income data BEA and other agencies gather 
from businesses as well as in data on related items, such as sales and 
value added. In contrast, measures such as physical assets, employment, 
and compensation are less likely to be debatably sourced because of tax 
considerations.[Footnote 31] These practices make it difficult to 
determine the extent to which the distribution of some of the business 
activities that we present below reflects the actual, as opposed to 
just the reported, location of the activities. 

Most of the Activity of U.S. MNCs Remains Located in the United States, 
but the Share of Activity Located Abroad Has Increased: 

Figure 5 shows the trends across the last four BEA benchmark studies of 
U.S. MNC operations (1989-2004) for six key measures of business 
activity: value added, sales, physical assets, compensation of 
employees, number of employees, and pretax income excluding income from 
equity investments.[Footnote 32] Each bar in the graph shows how the 
aggregate amount of a particular activity was divided between 
operations of U.S. parent corporations (including any of their domestic 
subsidiaries) and the operations of the majority-owned foreign 
affiliates of those parent corporations. Business activity by all 
measures increased in absolute terms both domestically and abroad 
during this period, but the relative share of activity that was based 
in foreign affiliates increased. Nevertheless, as of 2004, over 60 
percent of the activity (by all six measures) of U.S. MNCs remained 
located in the United States. 

Figure 5: Allocation of U.S. Multinational Businesses' Domestic and 
Foreign Activity, for Each Indicator and Year of Activity: 

[See PDF for image] 

This figure is a stacked multiple vertical bar graph depicting the 
following data: 

Allocation of U.S. Multinational Businesses' Domestic and Foreign 
Activity, for Each Indicator and Year of Activity: 

Value added, 1989: 
Share of activity, U.S. parents: 76.6%; 
Share of activity, Foreign majority owned affiliates: 23.4%. 

Value added, 1994; 
Share of activity, U.S. parents: 76.5%; 
Share of activity, Foreign majority owned affiliates: 23.5%. 

Value added, 1999; 
Share of activity, U.S. parents: 77.2%; 
Share of activity, Foreign majority owned affiliates: 22.8%. 

Value added, 2004; 
Share of activity, U.S. parents: 72.6%; 
Share of activity, Foreign majority owned affiliates: 27.4%. 

				
Sales, 1989; 
Share of activity, U.S. parents: 75.5; 
Share of activity, Foreign majority owned affiliates: 24.5%. 

Sales, 1994; 
Share of activity, U.S. parents: 73.5%; 
Share of activity, Foreign majority owned affiliates: 26.5%. 

Sales, 1999; 
Share of activity, U.S. parents: 72.9%; 
Share of activity, Foreign majority owned affiliates: 27.1%. 

Sales, 2004; 
Share of activity, U.S. parents: 68.1%; 
Share of activity, Foreign majority owned affiliates: 31.9%. 
				
Physical Assets, 1989; 
Share of activity, U.S. parents: 82.3%; 
Share of activity, Foreign majority owned affiliates: 17.7%. 

Physical Assets, 1994; 
Share of activity, U.S. parents: 80.7%; 
Share of activity, Foreign majority owned affiliates: 19.3%. 

Physical Assets, 1999; 
Share of activity, U.S. parents: 77.4%; 
Share of activity, Foreign majority owned affiliates: 22.6%. 

Physical Assets, 2004; 
Share of activity, U.S. parents: 74.8; 
Share of activity, Foreign majority owned affiliates: 25.2%. 
				
Compensation, 1989; 
Share of activity, U.S. parents: 83.4%; 
Share of activity, Foreign majority owned affiliates: 16.6%. 

Compensation, 1994; 
Share of activity, U.S. parents: 81.4%; 
Share of activity, Foreign majority owned affiliates: 18.6%. 

Compensation, 1999; 
Share of activity, U.S. parents: 81.2%; 
Share of activity, Foreign majority owned affiliates: 18.8%. 

Compensation, 2004; 
Share of activity, U.S. parents: 78.9%; 
Share of activity, Foreign majority owned affiliates: 21.1%. 
				
Employment, 1989; 
Share of activity, U.S. parents: 78.6%; 
Share of activity, Foreign majority owned affiliates: 21.4%. 

Employment, 1994; 
Share of activity, U.S. parents: 76.5%; 
Share of activity, Foreign majority owned affiliates: 23.5%. 

Employment, 1999; 
Share of activity, U.S. parents: 74.8%; 
Share of activity, Foreign majority owned affiliates: 25.2%. 

Employment, 2004; 
Share of activity, U.S. parents: 71%; 
Share of activity, Foreign majority owned affiliates: 29%. 
				
Pretax Income, 1989; 
Share of activity, U.S. parents: 68.7%; 
Share of activity, Foreign majority owned affiliates: 31.3%. 

Pretax Income, 1994; 
Share of activity, U.S. parents: 72.1%; 
Share of activity, Foreign majority owned affiliates: 27.9%; 

Pretax Income, 1999; 
Share of activity, U.S. parents: 73%; 
Share of activity, Foreign majority owned affiliates: 27%. 

Pretax Income, 2004; 
Share of activity, U.S. parents: 55.7%; 
Share of activity, Foreign majority owned affiliates: 44.3%. 
				
Pretax Income (no equity), 1989; 
Share of activity, U.S. parents: 67.8%; 
Share of activity, Foreign majority owned affiliates: 32.2%. 

Pretax Income (no equity), 1994; 
Share of activity, U.S. parents: 73%; 
Share of activity, Foreign majority owned affiliates: 27%. 

Pretax Income (no equity), 1999; 
Share of activity, U.S. parents: 76.2%; 
Share of activity, Foreign majority owned affiliates: 23.8%. 

Pretax Income (no equity), 2004: 
Share of activity, U.S. parents: 63.5%; 
Share of activity, Foreign majority owned affiliates: 36.5%. 

Source: GAO analysis of BEA data. 

[End of figure] 

The Extent to Which Activity Is Located Abroad Varies by Industry: 

Figure 6 compares the division of activity between U.S. and foreign 
operations across the three largest industries--manufacturing, finance 
and insurance (excluding depository institutions), and wholesale trade. 
[Footnote 33] The height of each bar in the figure represents the 
industry's share of total worldwide activity of U.S. MNCs. The division 
of each bar indicates how that particular measure for the industry is 
divided between U.S. and foreign operations. Manufacturing accounts for 
the largest share of all six measures of activity.[Footnote 34] Among 
these three industries finance and insurance has the lowest share of 
its activity (by all measures) located abroad, while wholesale trade 
generally has the largest share (except for physical assets). For 
example, only 19 percent of employment in finance and insurance was 
located abroad in 2004, while 36.2 percent of manufacturing employment 
and 42.9 percent of wholesale employment was located in foreign 
operations that year. 

Figure 6: Differences in the Distribution of Business Activity across 
the Three Largest Industries, 2004: 

[See PDF for image] 

This figure contains three multiple stacked vertical bar graphs 
depicting the following data: 

Manufacturing: 

Value added; 
Percentage share, U.S.: 32%; 
Percentage share, Foreign: 13.7%. 

Sales; 
Percentage share, U.S.: 31%; 
Percentage share, Foreign: 15%. 

NPPE; 
Percentage share, U.S.: 26.2%; 
Percentage share, Foreign: 10.9%. 

Compensation; 
Percentage share, U.S.: 34.2%; 
Percentage share, Foreign: 10.1%. 

Employment; 
Percentage share, U.S.: 25.6%; 
Percentage share, Foreign: 14.5%. 

Pretax income; 
Percentage share, U.S.: 28.6%; 
Percentage share, Foreign: 8.5%. 

Pretax Income (no equity); 
Percentage share, U.S.: 27.4%; 
Percentage share, Foreign: 13%. 

Finance and Insurance (excluding depository institutions): 

Value added; 
Percentage share, U.S.: 5.1%; 
Percentage share, Foreign: 1%. 

Sales; 
Percentage share, U.S.: 7%; 
Percentage share, Foreign: 2.2%. 

NPPE; 
Percentage share, U.S.: 3.6%; 
Percentage share, Foreign: 0.7%. 

Compensation; 
Percentage share, U.S.: 7.8%; 
Percentage share, Foreign: 1.5%. 

Employment; 
Percentage share, U.S.: 3.7%; 
Percentage share, Foreign: 0.9%. 

Pretax income; 
Percentage share, U.S.: 9.2%; 
Percentage share, Foreign: 4.2%. 

Pretax Income (no equity); 
Percentage share, U.S.: 13.1%; 
Percentage share, Foreign: 5.6%. 

Wholesale trade: 

Value added; 
Percentage share, U.S.: 4.1%; 
Percentage share, Foreign: 3.8%. 

Sales; 
Percentage share, U.S.: 7.1%; 
Percentage share, Foreign: 8.1%. 

NPPE; 
Percentage share, U.S.: 3.3%; 
Percentage share, Foreign: 1%. 

Compensation; 
Percentage share, U.S.: 3.8%; 
Percentage share, Foreign: 2.6%. 

Employment; 
Percentage share, U.S.: 3.2%; 
Percentage share, Foreign: 2.4%. 

Pretax income; 
Percentage share, U.S.: 3,8%; 
Percentage share, Foreign: 3.8%. 

Pretax Income (no equity); 
Percentage share, U.S.: 5.2%; 
Percentage share, Foreign: 5.7%. 

Source: GAO analysis of BEA data. 

[End of figure] 

We can track activity by industry consistently back to 1999 only (due 
to a change in industrial classifications prior to 1999). The most 
significant difference between these three industries' shares of 
overall activity in 1999 and what is shown for 2004 is that 
manufacturing's share of total value added, physical assets, and pretax 
net income (excluding income from equity) all declined by 4 to 5 
percentage points during that interval. At the same time, the 
proportions of manufacturing's value added, physical assets, and pretax 
net income that were located abroad increased from an average of about 
25 percent to an average of about 30 percent. There were no significant 
changes in the shares of the finance and insurance industry. The only 
significant change in the wholesale trade industry is that its share of 
total pretax net income (excluding income from equity) increased by 6 
percentage points from 1999 to 2004. 

Tax Rates Appear to Have Some Influence over the International Location 
of Income: 

Figure 7 clearly reveals a relationship between effective tax rates and 
the size of a country's income shares relative to its shares of the 
other measures of business activity. The figure shows the share of the 
various measures of U.S. multinational business activity in 2004 for 
the 17 important foreign locations that we presented in figure 3. The 
measures include the five nonincome statistics from the previous 
figures (shown by the darker bars) plus three measures of net income 
(shown by the lighter bars). The first two income measures are pretax 
net income from the BEA data, excluding and including income from 
equity investments.[Footnote 35] The third income measure is net 
earnings and profits from the CFC data. With the exception of China, 
all of the countries with relatively low effective rates of tax have 
income shares that are significantly larger than their share of the 
three measures least likely to be affected by income-shifting 
practices: physical assets, compensation, and employment. This 
relationship holds for all three income measures. In contrast, all of 
the countries with relatively high effective tax rates, except for 
Japan, have income shares that are smaller than their shares of 
physical assets, compensation, and employment. Of the four countries 
with a mix of both high and low estimated effective tax rates, the 
United Kingdom bears a similarity to the high-tax pattern and 
Luxembourg to the low-tax pattern, while Australia is balanced across 
all eight measures. The Netherlands has a balanced pattern when income 
is measured in terms of the BEA data without equity income; however, it 
has an extremely large proportion of equity income relative to other 
types of net income. Luxembourg, the United Kingdom Caribbean Islands 
(and, to a lesser extent, Bermuda and Switzerland) also have 
significant shares of income from equity investments. IRS data on 
dividends repatriated by U.S. MNCs claiming the temporary dividend 
deduction indicates that the Netherlands, Switzerland, and Bermuda were 
the three largest sources of such repatriations. Luxembourg and the 
Cayman Islands were also among the top eight sources (along with 
Ireland, Canada, and the United Kingdom).[Footnote 36] Income from 
equity investments was not prominent in any of the 17 countries in 1989 
(see app. III). The growth in this category of income from 1989 through 
2004 is consistent with observations made by others that the 1997 check-
the-box rules have significantly affected the tax planning of U.S. 
MNCs.[Footnote 37] Data are not yet available to show whether this 
accumulation of equity income in certain countries was largely a 
temporary phenomenon, leading up to repatriations made from 2004 
through 2006. 

The United Kingdom and Canada dominate all of the measures of activity, 
except for income. Germany also has at least a 5 percent share of all 
of the nonincome measures. Mexico, China, and Brazil have employment 
shares that are disproportionate to their shares of the other activity 
measures. This fact is not surprising, given that these are the three 
countries with the lowest wage rates out of the 17 (which is apparent 
from the relative sizes of their compensation and employment shares). 
Compared to 1989, the share of U.S. business activity, particularly 
physical capital, that is located in Canada has declined noticeably. 
This is also true, to a lesser extent, for Germany. 

Figure 7: Distribution of U.S. Multinational Businesses' Activity in 
2004 across Groups of Countries with Different Average Effective Tax 
Rates: 

[See PDF for image] 

This figure contains three multiple vertical bar graphs depicting the 
following data: 

Countries with Relatively Low Effective Tax Rates: 

Country: Bermuda; 
Percentage share, Value added: 0.7%; 
Percentage share, Sales: 1.4%; 
Percentage share, Physical capital: 0.6%; 
Percentage share, Compensation: 0.1%; 
Percentage share, Employees: 0; 
Percentage share, Pretax Income (no equity): 3.9%; 
Percentage share, Pretax Income: 5.5%; 
Percentage share, Pretax CFC Income: 5.4%. 

Country: Ireland; 
Percentage share, Value added: 4.4%; 
Percentage share, Sales: 4.1%; 
Percentage share, Physical capital: 1.8%; 
Percentage share, Compensation: 1.4%; 
Percentage share, Employees: 1%; 
Percentage share, Pretax Income (no equity): 9.1%; 
Percentage share, Pretax Income: 7.8%; 
Percentage share, Pretax CFC Income: 5.2%. 

Country: United Kingdom Islands, Caribbean; 
Percentage share, Value added: 0.2%; 
Percentage share, Sales: 0.6%; 
Percentage share, Physical capital: 0.3%; 
Percentage share, Compensation: 0.1%; 
Percentage share, Employees: 0.1%; 
Percentage share, Pretax Income (no equity): 1.1%; 
Percentage share, Pretax Income: 2.7%; 
Percentage share, Pretax CFC Income: 3%. 

Country: Singapore; 
Percentage share, Value added: 1.7%; 
Percentage share, Sales: 4%; 
Percentage share, Physical capital: 1.3%; 
Percentage share, Compensation: 1.1%; 
Percentage share, Employees: 1.3%; 
Percentage share, Pretax Income (no equity): 3.4%; 
Percentage share, Pretax Income: 3%; 
Percentage share, Pretax CFC Income: 1.4%. 

Country: Switzerland; 
Percentage share, Value added: 2.1%; 
Percentage share, Sales: 4.1%; 
Percentage share, Physical capital: 0.9%; 
Percentage share, Compensation: 1.7%; 
Percentage share, Employees: 0.8%; 
Percentage share, Pretax Income (no equity): 3.9%; 
Percentage share, Pretax Income: 5.2%; 
Percentage share, Pretax CFC Income: 4.2%. 

Country: China; 
Percentage share, Value added: 1.5%; 
Percentage share, Sales: 1.9%; 
Percentage share, Physical capital: 1.6%; 
Percentage share, Compensation: 1.2%; 
Percentage share, Employees: 5.3%; 
Percentage share, Pretax Income (no equity): 2%; 
Percentage share, Pretax Income: 1.3%; 
Percentage share, Pretax CFC Income: 1.4%. 

Countries with Relatively High Effective Tax Rates: 

Country: France; 
Percentage share, Value added: 5.9%; 
Percentage share, Sales: 5.2%; 
Percentage share, Physical capital: 4%; 
Percentage share, Compensation: 8.4%; 
Percentage share, Employees: 6.4%; 
Percentage share, Pretax Income (no equity): 3.3%; 
Percentage share, Pretax Income: 2.4%; 
Percentage share, Pretax CFC Income: 3.2%. 

Country: Canada; 
Percentage share, Value added: 12.1%; 
Percentage share, Sales: 13%; 
Percentage share, Physical capital: 15.9%; 
Percentage share, Compensation: 12.5%; 
Percentage share, Employees: 12.5%; 
Percentage share, Pretax Income (no equity): 11.5%; 
Percentage share, Pretax Income: 9%; 
Percentage share, Pretax CFC Income: 10.5%. 

Country: Mexico; 
Percentage share, Value added: 2.8%; 
Percentage share, Sales: 3.5%; 
Percentage share, Physical capital: 3.3%; 
Percentage share, Compensation: 3.3%; 
Percentage share, Employees: 9.3%; 
Percentage share, Pretax Income (no equity): 2.7%; 
Percentage share, Pretax Income: 1.6%; 
Percentage share, Pretax CFC Income: 3.3%. 

Country: Brazil; 
Percentage share, Value added: 2%; 
Percentage share, Sales: 2.1%; 
Percentage share, Physical capital: 2.4%; 
Percentage share, Compensation: 2%; 
Percentage share, Employees: 4%; 
Percentage share, Pretax Income (no equity): 1.2%; 
Percentage share, Pretax Income: 0.7%; 
Percentage share, Pretax CFC Income: 1.5%. 

Country: Germany; 
Percentage share, Value added: 9%; 
Percentage share, Sales: 7.6%; 
Percentage share, Physical capital: 6.5%; 
Percentage share, Compensation: 11.8%; 
Percentage share, Employees: 6.7%; 
Percentage share, Pretax Income (no equity): 2.7%; 
Percentage share, Pretax Income: 2.4%; 
Percentage share, Pretax CFC Income: 3.2%. 

Country: Japan; 
Percentage share, Value added: 5.4%; 
Percentage share, Sales: 5.6%; 
Percentage share, Physical capital: 3.7%; 
Percentage share, Compensation: 5.7%; 
Percentage share, Employees: 2.7%; 
Percentage share, Pretax Income (no equity): 6.4%; 
Percentage share, Pretax Income: 3.3%; 
Percentage share, Pretax CFC Income: 4.2%. 

Country: Italy; 
Percentage share, Value added: 3.4%; 
Percentage share, Sales: 3%; 
Percentage share, Physical capital: 2.2%; 
Percentage share, Compensation: 3.5%; 
Percentage share, Employees: 2.6%; 
Percentage share, Pretax Income (no equity): 1.6%; 
Percentage share, Pretax Income: 1%; 
Percentage share, Pretax CFC Income: 1.4%. 

Countries with Mixed Tax Rates:	 

Country: Luxembourg; 
Percentage share, Value added: 0.1%; 
Percentage share, Sales: 0.4%; 
Percentage share, Physical capital: 0.2%; 
Percentage share, Compensation: 0.2%; 
Percentage share, Employees: 0.1; 
Percentage share, Pretax Income (no equity): 0.8%; 
Percentage share, Pretax Income: 8.1%; 
Percentage share, Pretax CFC Income: 2.7%. 

Country: Netherlands; 
Percentage share, Value added: 3.3%; 
Percentage share, Sales: 4.3%; 
Percentage share, Physical capital: 2.7%; 
Percentage share, Compensation: 3.2%; 
Percentage share, Employees: 2.1; 
Percentage share, Pretax Income (no equity): 3.5%; 
Percentage share, Pretax Income: 12.7%; 
Percentage share, Pretax CFC Income: 10.5%. 

Country: Australia; 
Percentage share, Value added: 3.5%; 
Percentage share, Sales: 2.6%; 
Percentage share, Physical capital: 3.9%; 
Percentage share, Compensation: 3.8%; 
Percentage share, Employees: 3.1; 
Percentage share, Pretax Income (no equity): 3%; 
Percentage share, Pretax Income: 2.5%; 
Percentage share, Pretax CFC Income: 3.6%. 

Country: United Kingdom; 
Percentage share, Value added: 15.4%; 
Percentage share, Sales: 13.8%; 
Percentage share, Physical capital: 16.6%; 
Percentage share, Compensation: 19.3%; 
Percentage share, Employees: 13; 
Percentage share, Pretax Income (no equity): 7.1%; 
Percentage share, Pretax Income: 6.8%; 
Percentage share, Pretax CFC Income: 11.7%. 

Source: GAO analysis of BEA data. 

[End of figure] 

Research and development is one more measure of business activity (not 
included in figs. 5 through 7 because it is more narrowly focused than 
the other measures) that is significant. The United Kingdom, which 
accounted for 20.7 percent of all research and development performed by 
foreign affiliates of U.S. MNCs, was the primary location for this 
activity in 2004, followed by Germany (16.2 percent share) and Canada 
(10.6 percent share). Japan's share of this research and development 
activity fell from 12.6 percent in 1989 to 6.3 percent by 2004. Among 
the countries whose shares increased the most over that period were 
Sweden (from 0.4 percent to 5.6 percent) and Israel (from 0.4 percent 
to 3.4 percent). 

Agency Comments: 

We provided a draft of this report in July 2008 to the Secretary of 
Treasury for review and comments. Officials from the Department of the 
Treasury's Office of Tax Policy provided technical comments, which we 
incorporated as appropriate. 

As we agreed with your offices, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from the date of this letter. We will then send copies to 
others who are interested and make copies available to others who 
request them. This report is available at no charge on GAO's web site 
at [hyperlink, http://www.gao.gov]. If you or your staff have any 
questions on this report, please call 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 V. 

Signed by: 

James R. White: 
Director, Tax Issues, Strategic Issues: 

[End of section] 

Appendix I: Details of the Methodology for Estimating Effective Tax 
Rates: 

Average Effective Tax Rates of Schedule M-3 Filers: 

Data Consistency Checks: 

Tax year 2004 was the first year for which corporations had to file the 
new Schedule M-3. Consequently, there was likely to be a higher rate of 
taxpayer error in filling out the form than there is for most forms 
that have been in use for many years. We ran a number of internal 
consistency checks and, to the extent possible, corrected common 
errors, guided by the findings of previous researchers.[Footnote 38] We 
dropped all cases that had uncorrectable errors in the data elements 
that were key to our analysis.[Footnote 39] These exclusions reduced 
our population of corporations that filed nonblank Schedule M-3s from 
34,154 to 28,820. This final population of corporations accounted for 
95 percent of the book income of the population of all Schedule M-3 
filers.[Footnote 40] 

Calculating Domestic Income: 

To calculate domestic income we began with the book value of income of 
the tax includible group and subtracted foreign-source income that is 
includible. Specifically, our Schedule M-3 domestic income = book 
income (Schedule M-3, Part I, line 11) -foreign equity method income 
(Schedule M-3, Part II, line 1) - gross foreign dividends (Schedule M- 
3, Part II, line 2) - gross foreign distributions (Schedule M-3, Part 
II, line 5) - domestic equity method (Schedule M-3, Part II, line 6) - 
minority interest reduction (Schedule M-3, Part II, line 8) - foreign 
partnership income (Schedule M-3, Part II, line 10). This measure is 
designed to be closer to a tax consolidated group measure by removing 
the less than 80 percent owned domestic subsidiaries.[Footnote 41] It 
includes the total income of domestic tax consolidated subsidiaries, 
excludes the income of nonincludible domestic subsidiaries (ownership 
less than 80 percent), but includes the dividends of nonincludible 
domestic subsidiaries and partnership income. 

There are some limitations to this measure of income. While foreign 
income is excluded through the conversion from the financial 
consolidated group to the tax consolidated group and the removal of 
foreign dividends, adjustments made in line 8 in Part I of the Schedule 
M-3 could result in the improper inclusion of foreign royalties and 
other foreign payments. In addition, the 2004 Schedule M-3 did not 
require taxpayers to fill in all of the columns in Part II. Line 10, 
foreign partnership income and lines 2 and 5, foreign dividends and 
distributions, are reported both under financial and tax rules but are 
not listed separately on the Form 1120. We perform a sensitivity 
analysis by excluding observations that did not complete all columns. 
(We do the same for our measures of foreign-source income, described 
below.) 

Calculating Foreign Income: 

The data from the Schedule M-3 does not allow us to derive a 
comprehensive measure of foreign-source income without double counting 
certain types of income. For this reason, we provide estimates based on 
three alternative measures of foreign income. Our estimates based on 
one of these measures likely overstate the effective tax rate, while 
estimates based on an alternative measure likely understate the rates. 
Consequently, our range of estimates represents an upper and lower 
bound for the true rate. 

Our broadest measure of foreign income includes the book income of 
majority owned foreign subsidiaries (reported on lines 5a and 5b in 
Part I of the Schedule M-3), plus equity-method income from foreign 
subsidiaries (reported on line 1 in Part II of the Schedule M-3), plus 
dividends and distributions from foreign subsidiaries (reported on 
lines 2 and 5 in Part II of the Schedule M-3). The problem with this 
broad measure is that it likely double counts some income in the 
aggregate. Lines 5a/b list 100 percent of the income of majority owned 
foreign subsidiaries, even if the taxpayer filing the Schedule M-3 owns 
less than 100 percent of the subsidiary. Thus, 5a/b overstates the 
consolidated group's share of the income or loss of majority owned 
foreign subsidiaries. This reporting limitation, by itself, would not 
be a problem for our aggregate measure of the foreign income of 
Schedule M-3 filers, except to the extent to which the minority owners 
of the less-than-100-percent-owned subsidiaries are not Schedule M-3 
filers themselves.[Footnote 42] However, a larger potential 
overstatement problem arises when we include equity-method income and 
dividends and distributions in our measure. For example, if a foreign 
subsidiary is owned 75 percent by one U.S. parent and 25 percent by a 
second U.S. parent, line 5a/b would provide 100 percent of the income 
of the foreign subsidiary and line 1 in Part II of the Schedule M-3 
providing the equity method income of foreign subsidiaries would add 
another 25 percent of the income of that subsidiary. Similarly, 
including the dividends and distributions in lines 2 and 5 in Part II 
of the Schedule M-3 would double count that income in cases where it is 
already counted on another Schedule M-3 filer's line 5a/b or line 1 in 
Part II of the Schedule M-3. 

Our second measure of foreign income starts with our broadest measure 
and then excludes equity-method income. Our third measure excludes both 
equity-method income and dividends and distributions.[Footnote 43] In 
contrast to our broadest measure, our third measure is likely to 
understate foreign-source income in cases where Schedule M-3 filers 
share ownership of their less-than-100-percent-owned foreign 
subsidiaries with majority shareholders other than Schedule M-3 filers. 
For example, if U.S. Parent A owns 70 percent of foreign subsidiary 1 
and U.S. Parent B owns 30 percent of foreign subsidiary 1 and 25 
percent of foreign subsidiary 2 and a foreign parent owns 75 percent of 
foreign subsidiary 2, line 5a/b would provide 100 percent of the income 
of foreign subsidiary 1, but none of the income of foreign subsidiary 
2. In addition, excluding dividends and distributions would exclude any 
income from less-than-20-percent-owned foreign subsidiaries if those 
subsidiaries are majority owned by a shareholder other than a Schedule 
M-3 filer. 

We compute our various effective rate estimates only for those 
taxpayers that had positive domestic income, foreign income, or both. 
Table 3 shows how many taxpayers had positive, negative, or zero values 
for domestic and foreign income and the aggregate value of that income 
for our broadest and narrowest measures of income. 

Table 3: Distribution of Schedule M-3 Filers and Income by Income 
Group, 2004 (Dollars in billions): 

Foreign income including equity method income and dividends: 
Corporations with positive foreign income: 

Corporations with positive domestic income: 
Number: 1,907; 
Domestic income: $331.5; 
Foreign income: $144.9. 

Corporations with zero domestic income: 
Number: 16; 
Domestic income: $0; 
Foreign income: $0.02. 

Corporations with negative domestic income: 
Number: 1,458; 
Domestic income: -$174.0; 
Foreign income: $143.5. 

Totals: 
Number: 3,381; 
Domestic income: $157.5; 
Foreign income: $288.5. 

Foreign income including equity method income and dividends: 
Corporations with zero foreign income; 

Corporations with positive domestic income: 
Number: 16,839; 
Domestic income: $175.0; 
Foreign income: $0. 

Corporations with zero domestic income: 
Number: 283; 
Domestic income: $0; 
Foreign income: $0. 

Corporations with negative domestic income: 
Number: 6,753; 
Domestic income: -$65.2; 
Foreign income: $0. 

Totals: 
Number: 23,875; 
Domestic income: $109.8; 
Foreign income: $0. 

Foreign income including equity method income and dividends: 
Corporations with negative foreign income; 

Corporations with positive domestic income: 
Number: 920; 
Domestic income: $63.7; 
Foreign income: -$13.6. 

Corporations with zero domestic income: 
Number: 6; 
Domestic income: $0; 
Foreign income: -$0.05. 

Corporations with negative domestic income: 
Number: 638; 
Domestic income: -$44.8; 
Foreign income: -$4.5. 

Totals: 
Number: 1,564; 
Domestic income: $18.9; 
Foreign income: -$18.2. 

Foreign income including equity method income and dividends: Totals; 

Corporations with positive domestic income: 
Number: 19,666; 
Domestic income: $570.2; 
Foreign income: $131.3. 

Corporations with zero domestic income: 
Number: 305; 
Domestic income: $0; 
Foreign income: -$0.03. 

Corporations with negative domestic income: 
Number: 8,849; 
Domestic income: -$284.0; 
Foreign income: $139.0. 

Totals: 
Number: 28,820; 
Domestic income: $286.3; 
Foreign income: $270.3. 

Foreign income excluding equity method income and dividends: 
Corporations with positive foreign income: 

Corporations with positive domestic income: 
Number: 1,543; 
Domestic income: $297.7; 
Foreign income: $136.5. 

Corporations with zero domestic income: 
Number: 0; 
Domestic income: $0; 
Foreign income: $0. 

Corporations with negative domestic income: 
Number: 1,315; 
Domestic income: -$166.6; 
Foreign income: $128.8. 

Totals: 
Number: 2,858; 
Domestic income: $131.1; 
Foreign income: $265.3. 

Foreign income excluding equity method income and dividends: 
Corporations with zero foreign income; 

Corporations with positive domestic income: 
Number: 17,259; 
Domestic income: $203.7; 
Foreign income: $0. 

Corporations with zero domestic income: 
Number: 305; 
Domestic income: $0; 
Foreign income: $0. 

Corporations with negative domestic income: 
Number: 6,938; 
Domestic income: -$69.3; 
Foreign income: $0. 

Totals: 
Number: 24,502; 
Domestic income: $34.5; 
Foreign income: $0. 

Foreign income excluding equity method income and dividends: 
Corporations with negative foreign income; 

Corporations with positive domestic income: 
Number: 864; 
Domestic income: $68.8; 
Foreign income: -$12.9. 

Corporations with zero domestic income: 
Number: 0; 
Domestic income: $0; 
Foreign income: $0. 

Corporations with negative domestic income: 
Number: 596; 
Domestic income: -$48.1; 
Foreign income: -$4.6. 

Totals: 
Number: 1,460; 
Domestic income: $20.7; 
Foreign income: -$17.5. 

Foreign income excluding equity method income and dividends: Totals; 
Corporations with positive domestic income: 
Number: 19,666; 
Domestic income: $570.2; 
Foreign income: $123.6. 

Corporations with zero domestic income: 
Number: 305; 
Domestic income: $0; 
Foreign income: $0. 

Corporations with negative domestic income: 
Number: 8,849; 
Domestic income: -$284.0; 
Foreign income: $124.2. 

Totals: 
Number: 28,820; 
Domestic income: $286.3; 
Foreign income: $247.8. 

Source: GAO analysis of SOI data. 

[End of table] 

Calculating U.S. Tax on Domestic Income and U.S. Residual Tax on 
Foreign Income: 

We computed effective tax rates before credits, after credits, and 
after credits and other taxes. The tax code does not specify that tax 
credits (other than the foreign tax credit) be allocated in any 
particular manner between U.S. tax on domestic income and U.S. tax on 
foreign-source income. We simply assume that these credits are 
allocated against U.S. taxes on domestic income and U.S. residual taxes 
on foreign-source income in proportion to each of those taxes' share of 
total U.S. tax. 

To calculate U.S. taxes on domestic income, we began with regular tax 
liability and removed the foreign tax credit limit because the latter 
represents the initial U.S. tax due on foreign-source income before any 
credits are given for foreign taxes paid. Specifically, U.S. tax on 
domestic income before credits is calculated as regular tax liability 
(Form 1120, Schedule J, line 5) - the sum over each income type of 
foreign tax credit limitation (Form 1118, Schedule B, line 10). 
Taxpayers are required to file a separate Form 1118 for each category 
of income, so we added the separate limits from these forms together to 
obtain the total foreign tax credit limit on repatriated foreign 
income. 

This calculation provides the U.S. tax on domestic income regardless of 
whether the corporation had excess credits because the credit limit is 
essentially the initial US tax (before foreign tax credit) on foreign- 
source income. If the corporation has an excess of foreign tax credits, 
then there is no residual U.S. tax on repatriated foreign income and 
the U.S. tax on domestic income is found by removing the initial U.S. 
tax on repatriated foreign income (the credit limit) from the US tax on 
worldwide income (Form 1120 tax liability without foreign tax credit). 
If the corporation is below the credit limit, then there is a residual 
US tax on repatriated foreign income, which would be included 
separately in the U.S. taxes on foreign-source income measure. In that 
case the U.S. tax on domestic income is found by removing the initial 
U.S. tax on repatriated foreign income (the credit limit) from the U.S. 
tax on worldwide income (Form 1120 tax liability without foreign tax 
credit). In both cases, the foreign tax credit limit represents the 
potential tax due on foreign-source income, and by removing it the 
remaining tax is on domestic income. 

U.S. residual tax on foreign-source income was calculated as the 
difference between the foreign tax credit limit and the foreign tax 
credit (with any negative values treated as zeros). Specifically, it 
equals the greater of: the sum over the income types of the foreign tax 
credit limit (line 10 on Form 1118, Schedule B) - foreign tax credit 
(line 11 on Form 1118, Schedule B) or 0 for each type of income. The 
U.S. residual tax on foreign-source income is zero if the corporation 
has paid substantial foreign taxes such that its foreign tax credit 
limit is binding. For example, if a corporation paid taxes in a single 
country with a tax rate of 40 percent, the United States would not 
collect any residual tax on the repatriated income because the taxes 
paid abroad would be greater than the taxes due in the United States at 
the corporate rate of 35 percent. The residual tax is positive as long 
as the corporation's creditable foreign taxes paid are below the 
foreign tax credit limit. For example, if a corporation paid taxes 
abroad at a rate of 10 percent, the United States would tax that income 
at 35 percent and thus collect a residual tax over the credit for the 
tax paid abroad. 

Allocating Credits: 

To compute estimates of the domestic effective tax rates on domestic 
and foreign-source income after credits, we allocated credits according 
to the income sources' shares of total tax. Specifically, U.S. tax on 
domestic income after credits equals the total U.S. domestic tax before 
credits minus total other credits times the domestic tax share of total 
U.S. and foreign tax liability before the application of credits. Total 
other credits equal the total credits (line 7 on the Form 1120, 
Schedule J) minus the foreign tax credit (line 6a on the Form 1120, 
Schedule J). Similarly, we also estimated effective tax rates after 
credits and other taxes by the same formula, substituting total credits 
and other taxes for total credits. Total credits and other taxes equal 
regular tax minus final tax liability minus the foreign tax credit 
(line 5 - line 11 - line 6a on Schedule J of the Form 1120). The 
credits and other taxes are applied to the final taxes, which include 
both domestic tax on domestic income and residual domestic tax of 
repatriated foreign income. 

Average Effective Tax Rates for CFCs: 

We followed the methodology used by Altshuler, Grubert, and Newlon 
(1998) and Altshuler and Grubert (2006) to estimate average effective 
tax rates using data from Internal Revenue Service's Statistics of 
Income Division's Form 5471 study for 2004.[Footnote 44] SOI's 2004 CFC 
study changed from a defined population study (7,500 largest CFCS of 
the largest parent corporations) to a sample of CFCs that included all 
Form 5471's filed by all corporations in the SOI corporate study. We 
restrict our sample to CFCs associated with U.S. corporations sampled 
at 100 percent.[Footnote 45] The effective rate was computed as the 
income taxes paid (line 8 on Form 5471, Schedule E) divided by pretax 
earnings and profits. Pretax earnings and profits were calculated as 
final earnings and profits on line 5d of Form 5471, Schedule H plus the 
total income taxes paid (line 8 on Form 5471, Schedule E). We 
restricted our analysis to CFCs with positive pretax earnings and 
profits and nonnegative foreign taxes paid. We computed the effective 
tax rates by primary place of business, as reported by the CFCs, by 
aggregating the taxes paid and positive earnings for all CFCs reporting 
the same principal place of business and then taking the ratio. 

[End of section] 

Appendix II: BEA Data Used in This Report: 

Bureau of Economic Analysis (BEA) data provide a wide array of data 
items on multinational corporations (MNC) cross-classified by country 
and industry. The financial and operating data are collected by BEA in 
two types of surveys--benchmark and annual, authorized by a law known 
as the International Investment and Trade in Services Survey 
Act.[Footnote 46] On both surveys, the data are collected at the 
enterprise, or company, level and are classified according to the 
primary industry of the enterprise. The annual survey estimates are a 
collection of sample data reported to BEA on U.S. direct investment 
abroad in the annual survey and the estimates of affiliates that were 
not in the sample. The sample is a cutoff sample, with reporting 
thresholds significantly higher than those on the benchmark surveys. To 
obtain universe estimates of the overall operations of parents and 
affiliates for nonbenchmark years, data reported in the benchmark 
surveys for nonsample companies are extrapolated forward, based on the 
movement of the sample data in the annual surveys. We relied on the BEA 
benchmark surveys, which are conducted every 5 fiscal years because the 
universe in the benchmark surveys did not pose the sample limitations 
of the annual surveys. Selected tables from the final 2004 benchmark 
survey results, including the tables needed for the charts in this 
report, are available on the BEA Web site under Operations of 
Multinational Companies, U.S. Direct Investment Abroad, Financial and 
Operating Data, Selected Tables, IID Product Guide, Revised 2004 
Estimates. Final benchmark survey data results are available for all 
previous years. 

The benchmark surveys covered every U.S. person who had a foreign 
affiliate--that is, who had direct or indirect ownership or control of 
10 percent or more of the voting securities of an incorporated foreign 
business enterprise or an equivalent interest in an unincorporated 
foreign business enterprise--any time during its reporting fiscal year. 
A completed benchmark survey form was required for affiliates that had 
total assets, sales, or net income (or losses) greater than a minimum 
set value per reporting year, so the trend data we present refer to 
information on U.S. businesses that met the reporting requirement. 
[Footnote 47] Data on all of the benchmark surveys were required to be 
reported as they would have been for stockholders' reports rather than 
for tax or other purposes. Thus, U.S. generally accepted accounting 
principles were followed unless otherwise indicated by the survey 
instructions. 

The 1999 benchmark survey marks the first year that annual and 
benchmark survey data on U.S. direct investment abroad have classified 
industries using BEA's International Survey Industry (ISI) 
classification system that is based on the 1997 North American Industry 
Classification System (NAICS).[Footnote 48] Therefore, trend analysis 
by industry is not comparable before and after this change.[Footnote 
49] Our ability to provide details of worldwide activity by country and 
industry were limited by BEA's suppression of aggregate data when they 
represented a small number of corporations that accounted for a 
relatively large portion of the aggregate total. Under the 
International Investment and Trade in Services Survey Act, the direct 
investment data collected by BEA are confidential. 

We contacted BEA to ensure that the data collection encompassed the 
universe of worldwide activity of U.S. companies and their foreign 
affiliates. BEA's methodology for benchmark survey results notes that 
because of limited resources, BEA's efforts to ensure compliance with 
reporting requirements focused mainly on large parents and affiliates. 
Some parents of small affiliates that were not aware of the reporting 
requirements and were not on BEA's mailing list may not have filed 
reports. BEA believes that the omission of these parents and their 
affiliates probably has not significantly affected the aggregate values 
of the various data items collected but would have caused an unknown, 
but possibly significant, understatement of the number of parents or 
affiliates. 

[End of section] 

Appendix III: Additional Data on the Location of Business Activity: 

Figure 8: Distribution of U.S. Multinational Businesses' Activity in 
1989 across Groups of Countries with Different Average Effective Tax 
Rates (in 2004): 

[See PDF for image] 

This figure contains three multiple vertical bar graphs depicting the 
following data: 

Countries with Relatively Low Effective Tax Rates: 

Country: Bermuda; 
Percentage share, Value added: 0%; 
Percentage share, Sales: 1.1%; 
Percentage share, Physical capital: 0.1%; 
Percentage share, Compensation: 0%; 
Percentage share, Employees: 0; 
Percentage share, Pretax Income (no equity): 2.2%; 
Percentage share, Pretax Income: 2.9%. 

Country: Ireland; 
Percentage share, Value added: 1.4%; 
Percentage share, Sales: 1.1%; 
Percentage share, Physical capital: 0.8%; 
Percentage share, Compensation: 0.7%; 
Percentage share, Employees: 0.8%; 
Percentage share, Pretax Income (no equity): 3.1%; 
Percentage share, Pretax Income: 3%. 

Country: United Kingdom Islands, Caribbean; 
Percentage share, Value added: 0%; 
Percentage share, Sales: 0.1%; 
Percentage share, Physical capital: 0%; 
Percentage share, Compensation: 0%; 
Percentage share, Employees: 0%; 
Percentage share, Pretax Income (no equity): 0.2%; 
Percentage share, Pretax Income: 0.5%. 

Country: Singapore; 
Percentage share, Value added: 0.7%; 
Percentage share, Sales: 1.5%; 
Percentage share, Physical capital: 0.9%; 
Percentage share, Compensation: 0.6%; 
Percentage share, Employees: 1.4%; 
Percentage share, Pretax Income (no equity): 1.4%; 
Percentage share, Pretax Income: 1.2%. 

Country: Switzerland; 
Percentage share, Value added: 1.6%; 
Percentage share, Sales: 3.6%; 
Percentage share, Physical capital: 0.8%; 
Percentage share, Compensation: 1.7%; 
Percentage share, Employees: 0.8%; 
Percentage share, Pretax Income (no equity): 2.6%; 
Percentage share, Pretax Income: 5.6%. 

Country: China; 
Percentage share, Value added: 0%; 
Percentage share, Sales: 0%; 
Percentage share, Physical capital: 0.1%; 
Percentage share, Compensation: 0%; 
Percentage share, Employees: 0.1%; 
Percentage share, Pretax Income (no equity): -0.1%; 
Percentage share, Pretax Income: 0%;. 

Countries with Relatively High Effective Tax Rates: 

Country: France; 
Percentage share, Value added: 7.1%; 
Percentage share, Sales: 6.9%; 
Percentage share, Physical capital: 4.5%; 
Percentage share, Compensation: 8.7%; 
Percentage share, Employees: 6.5%; 
Percentage share, Pretax Income (no equity): 4.2%; 
Percentage share, Pretax Income: 3.7%. 

Country: Canada; 
Percentage share, Value added: 16.3%; 
Percentage share, Sales: 17%; 
Percentage share, Physical capital: 25.7%; 
Percentage share, Compensation: 20%; 
Percentage share, Employees: 17.7%; 
Percentage share, Pretax Income (no equity): 12.7%; 
Percentage share, Pretax Income: 11.5%. 

Country: Mexico; 
Percentage share, Value added: 1.5%; 
Percentage share, Sales: 1.6%; 
Percentage share, Physical capital: 1.6%; 
Percentage share, Compensation: 1.6%; 
Percentage share, Employees: 6.4%; 
Percentage share, Pretax Income (no equity): 2.17%; 
Percentage share, Pretax Income: 1.7%. 

Country: Brazil; 
Percentage share, Value added: 5.2%; 
Percentage share, Sales: 3%; 
Percentage share, Physical capital: 3.7%; 
Percentage share, Compensation: 3.8%; 
Percentage share, Employees: 6.7%; 
Percentage share, Pretax Income (no equity): 5.5%; 
Percentage share, Pretax Income: 5.1%. 

Country: Germany; 
Percentage share, Value added: 11.2%; 
Percentage share, Sales: 10.4%; 
Percentage share, Physical capital: 8.5%; 
Percentage share, Compensation: 14.2%; 
Percentage share, Employees: 9.7%; 
Percentage share, Pretax Income (no equity): 7.5%; 
Percentage share, Pretax Income: 7.4%. 

Country: Japan; 
Percentage share, Value added: 4.5%; 
Percentage share, Sales: 5.7%; 
Percentage share, Physical capital: 3.2%; 
Percentage share, Compensation: 5%; 
Percentage share, Employees: 2.6%; 
Percentage share, Pretax Income (no equity): 5.9%; 
Percentage share, Pretax Income: 5%. 

Country: Italy; 
Percentage share, Value added: 5.2%; 
Percentage share, Sales: 4.4%; 
Percentage share, Physical capital: 2.6%; 
Percentage share, Compensation: 4.5%; 
Percentage share, Employees: 3.1%; 
Percentage share, Pretax Income (no equity): 3.4%; 
Percentage share, Pretax Income: 3%. 

Countries with Mixed Tax Rates:	 

Country: Luxembourg; 
Percentage share, Value added: 0.2%; 
Percentage share, Sales: 0.1%; 
Percentage share, Physical capital: 0.3%; 
Percentage share, Compensation: 0.2%; 
Percentage share, Employees: 0.2; 
Percentage share, Pretax Income (no equity): 0.2%; 
Percentage share, Pretax Income: 0.3%. 

Country: Netherlands; 
Percentage share, Value added: 4.1%; 
Percentage share, Sales: 4.5%; 
Percentage share, Physical capital: 3.3%; 
Percentage share, Compensation: 3.3%; 
Percentage share, Employees: 2.3; 
Percentage share, Pretax Income (no equity): 4.6%; 
Percentage share, Pretax Income: 6.3%. 

Country: Australia; 
Percentage share, Value added: 4.3%; 
Percentage share, Sales: 3.7%; 
Percentage share, Physical capital: 4.9%; 
Percentage share, Compensation: 3.9%; 
Percentage share, Employees: 3.8; 
Percentage share, Pretax Income (no equity): 4%; 
Percentage share, Pretax Income: 3.5%. 

Country: United Kingdom; 
Percentage share, Value added: 16.5%; 
Percentage share, Sales: 16.4%; 
Percentage share, Physical capital: 17.1; 
Percentage share, Compensation: 15%; 
Percentage share, Employees: 14.7; 
Percentage share, Pretax Income (no equity): 13.1%; 
Percentage share, Pretax Income: 14.2%. 

Source: GAO analysis of BEA data. 

[End of figure] 

[End of section] 

Appendix IV: Studies of Effective Tax Rates in Foreign Countries That 
Include Non-U.S. Businesses: 

We identified four studies that used corporations' financial statements 
to compare the average effective tax rates of corporations across 
multiple foreign countries. All of these studies produced estimates for 
multiyear periods during the 1990s. There is considerable overlap in 
the methodologies across the four studies; however, there are some 
variations in the measures of effective tax rate used, even within some 
of the studies. Buijink, Janssen, and Schols (2000) and Gorter and de 
Mooij (2001) both use consolidated financial statements from the 
Worldscope financial statement database to estimate effective tax rates 
for countries in the European Union.[Footnote 50] Buijink, et al. use 
two different measures: the first is a simple ratio of income taxes 
paid over pretax book income (before equity income, minority interest 
income, and extraordinary income); in their second measure they adjust 
income taxes for the net change in deferred taxes. Gorter and de 
Mooij's effective tax rate measure is calculated as the ratio of 
corporate income taxes paid over pretax corporate income. The results 
from these two studies are summarized in figure 9.[Footnote 51] 

Figure 9: Worldwide Average Effective Tax Rates during the 1990s for 
Corporations Domiciled in European Union Countries: 

[See PDF for image] 

This figure is a multiple vertical bar graph depicting the following 
data: 

Country: Ireland; 
Buijink et al. Measure 1, average over 1990-1996: 0.1386; 
Buijink et al. Measure 2, average over 1991-1996: 0.1258; 
Gorter and de Mooij, average over 1990-1999: 0.208. 

Country: Austria; 
Buijink et al. Measure 1, average over 1990-1996: 0.1767; 
Buijink et al. Measure 2, average over 1991-1996: 0.1364; 
Gorter and de Mooij, average over 1990-1999: 0.201. 

Country: Portugal; 
Buijink et al. Measure 1, average over 1990-1996: 0.1719; 
Buijink et al. Measure 2, average over 1991-1996: 0.1697; 
Gorter and de Mooij, average over 1990-1999: 0.224; 

Country: Belgium; 
Buijink et al. Measure 1, average over 1990-1996: 0.2099; 
Buijink et al. Measure 2, average over 1991-1996: 0.2356; 
Gorter and de Mooij, average over 1990-1999: 0.208. 

Country: Greece; 
Buijink et al. Measure 1, average over 1990-1996: 0.2085; 
Buijink et al. Measure 2, average over 1991-1996: 0.2318; 
Gorter and de Mooij, average over 1990-1999: 0.273. 

Country: Sweden; 
Buijink et al. Measure 1, average over 1990-1996: 0.2747; 
Buijink et al. Measure 2, average over 1991-1996: 0.1868; 
Gorter and de Mooij, average over 1990-1999: 0.279. 

Country: Spain; 
Buijink et al. Measure 1, average over 1990-1996: 0.2411; 
Buijink et al. Measure 2, average over 1991-1996: 0.2345; 
Gorter and de Mooij, average over 1990-1999: 0.267. 

Country: Denmark; 
Buijink et al. Measure 1, average over 1990-1996: 0.294; 
Buijink et al. Measure 2, average over 1991-1996: 0.2354; 
Gorter and de Mooij, average over 1990-1999: 0.314. 

Country: U.K. 
Buijink et al. Measure 1, average over 1990-1996: 0.29; 
Buijink et al. Measure 2, average over 1991-1996: 0.2828; 
Gorter and de Mooij, average over 1990-1999: 0.302. 

Country: Finland; 
Buijink et al. Measure 1, average over 1990-1996: 0.2982; 
Buijink et al. Measure 2, average over 1991-1996: 0.2749; 
Gorter and de Mooij, average over 1990-1999: 0.305. 

Country: Netherlands; 
Buijink et al. Measure 1, average over 1990-1996: 0.318; 
Buijink et al. Measure 2, average over 1991-1996: 0.3137; 
Gorter and de Mooij, average over 1990-1999: 0.312. 

Country: France; 
Buijink et al. Measure 1, average over 1990-1996: 0.3282; 
Buijink et al. Measure 2, average over 1991-1996: 0.3172; 
Gorter and de Mooij, average over 1990-1999: 0.35. 

Country: Italy; 
Buijink et al. Measure 1, average over 1990-1996: 0.3532; 
Buijink et al. Measure 2, average over 1991-1996: 0.3735; 
Gorter and de Mooij, average over 1990-1999: 0.438. 

Country: Germany; 
Buijink et al. Measure 1, average over 1990-1996: 0.3853; 
Buijink et al. Measure 2, average over 1991-1996: 0.3621; 
Gorter and de Mooij, average over 1990-1999: 0.434. 

Source: Buijink et al. (2000), and Gorter and de Mooij (2001). 

Note: each bar represents the average (across all years covered by the 
particular study) of the median (for the population of corporations in 
each study) average effective tax rates. 

[End of figure] 

Collins and Shackelford (2003) and Chennells and Griffith (1997) both 
use Standard and Poor's Compustat Global database to estimate effective 
tax rates for small selections of major industrial nations (see figure 
10).[Footnote 52] The Compustat Global database is limited to 
information on foreign firms that people have requested and, therefore, 
is likely not to be a representative sample of companies, but weighted 
toward larger and more recognized firms. While Collins and Shackelford 
provide estimates of effective tax rates separately for multinational 
firms, the average effective tax rates listed in figure 10 are for all 
companies. They use an effective tax rate measure similar to the second 
measure used by Buijink, et al.; they also compute an alternative 
estimate that uses a less comprehensive measure of income, but one that 
has greater comparability across countries. The authors address the 
outlier issue by excluding cases with negative tax rates or rates over 
70 percent. Chennells and Griffith's effective tax rate measure is 
similar to the first measures of Collins and Shackelford and Buijink, 
et al., except that they do not make the adjustment for deferred taxes. 

Figure 5: Worldwide Average Effective Tax Rates during the 1990s for 
Corporations Domiciled in Selected Countries: 

[See PDF for image] 

This figure is a multiple vertical bar graph depicting the following 
data: 

Country: Canada; 
Collins and Shackelford measure 1, average over 1992-1997: 0.18; 
Collins and Shackelford measure 2, average over 1992-1998: 0.11; 
Chennells and Griffith, average over 1990-1994: [Empty]. 

Country: Germany; 
Collins and Shackelford measure 1, average over 1992-1997: 0.28; 
Collins and Shackelford measure 2, average over 1992-1998: 0.14; 
Chennells and Griffith, average over 1990-1994: 0.3102. 

Country: United Kingdom; 
Collins and Shackelford measure 1, average over 1992-1997: 0.26; 
Collins and Shackelford measure 2, average over 1992-1998: 0.19; 
Chennells and Griffith, average over 1990-1994: 0.2978. 

Country: United States; 
Collins and Shackelford measure 1, average over 1992-1997: 0.26; 
Collins and Shackelford measure 2, average over 1992-1998: 0.16; 
Chennells and Griffith, average over 1990-1994: 0.329. 

Country: Australia; 
Collins and Shackelford measure 1, average over 1992-1997: [Empty]; 
Collins and Shackelford measure 2, average over 1992-1998: [Empty]; 
Chennells and Griffith, average over 1990-1994: 0.3144. 

Country: France; 
Collins and Shackelford measure 1, average over 1992-1997: [Empty]; 
Collins and Shackelford measure 2, average over 1992-1998: [Empty]; 
Chennells and Griffith, average over 1990-1994: 0.334. 

Country: Japan; 
Collins and Shackelford measure 1, average over 1992-1997: 0.44; 
Collins and Shackelford measure 2, average over 1992-1998: 0.22; 
Chennells and Griffith, average over 1990-1994: 0.433. 

Source: Collins and Shackelford (2003), and Chennells and Griffith 
(1997). 

Note: Each bar represents the unweighted average (across all 
corporations and years covered by the particular study) of the average 
effective tax rates. 

[End of figure] 

[End of section] 

Appendix V: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

James R. White, (202) 512-9110 or whitej@gao.gov: 

Acknowledgments: 

In addition to the contact named above, James Wozny, Assistant 
Director; Susan Baker; Sylvia Bascope; Kathleen Easterbrook; Jennifer 
Gravelle; Ed Nannenhorn; and Cheryl Peterson made key contributions to 
this report. 

[End of section] 

Footnotes: 

[1] Based on GAO analysis of Bureau of Economic Analysis data on the 
international investment position of the United States. 

[2] The word "average" in this term refers to the fact that the rate is 
the amount of tax that a corporation pays on each dollar of income, 
averaged across all of its income. We use the term weighted average tax 
rate when referring to an average of the average tax rates across a 
population of taxpayers in which each taxpayer's rate is given a weight 
equal to that taxpayer's share of the population's total income. 

[3] For both populations of corporations we estimated effective tax 
rates only for taxpayers with positive income because tax rates on 
losses in a given year are not meaningful and the inclusion of losses 
in our aggregate computations would obscure the effective rates paid by 
profitable companies. 

[4] These islands are the Cayman Islands, the British Virgin Islands, 
the Turks and Caicos, and Montserrat. 

[5] For this reason, the finding we present below regarding the 
relationship between average effective tax rates and the size of a 
country's share of total MNC income (relative to its shares of other 
business activity) does not contradict CBO's conclusion that statutory 
tax rates are the tax system components that most strongly influence 
income-shifting behavior. (See CBO, Corporate Income Tax Rates: 
International Comparisons, November 2005.) Our study was not designed 
to identify the best measures to use for estimating the influence of 
taxes on particular types of behavior; rather, its objective is simply 
to provide information on both average effective tax rates and the 
location of U.S. MNC business activity. Cross-country empirical studies 
using all three types of measures have found negative influences 
between taxation and the location of foreign direct investment. (For a 
recent review of such studies see OECD, Tax Effects on Foreign Direct 
Investment: Recent Evidence and Policy Analysis, OECD Tax Policy 
Studies No. 17, 2007.) 

[6] 26 C.F.R. §§ 301.7701-1-4. 

[7] The high-tax foreign country still considers the affiliate located 
there to be a separate corporation and, therefore, allows a tax 
deduction for its interest payments. For further discussion of tax 
planning strategies based on hybrids see Rosanne Altshuler and Harry 
Grubert, "Governments and Multinational Corporations in the Race to the 
Bottom," Tax Notes, February 27, 2006, pp. 979-992. 

[8] Pub. L. No. 108-357 (2004). 

[9] See Melissa Redmiles, "The One-Time Received Dividend Deduction," 
Statistics of Income Bulletin, vol. 27, no.4, (2008): 102-114. 

[10] GAO subsequently replicated this approach to produce updated 
estimates in 1990 and 1992 (GAO, Tax Policy: 1987 Company Effective Tax 
Rates Higher Than in Prior Years, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO/GGD-90-69] (Washington, D.C.: May 10, 1990), and Tax 
Policy: 1988 and 1989 Company Effective Tax Rates Higher Than in Prior 
Years, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-92-111] 
(Washington, D.C.: Aug. 19, 1992)). 

[11] SOI's corporate taxpayer sample for tax year 2004 was the most 
recent sample available at the time we conducted our analyses and was 
the first sample to include data from the Schedule M-3. 

[12] The weighted average effective rate is actually an average of the 
individual average tax rates of all the corporations with positive 
income. Each corporation's effective tax rate is weighted by that 
corporation's share of the population's income. The weighted average 
was lower than the median because corporations with lower rates 
accounted for a disproportionate share of the population's total 
positive income. 

[13] A corporation's average effective tax rate can exceed the 
statutory rate because of differences between financial and tax 
reporting. For example, depreciation for tax purposes follows the 
Modified Accelerated Cost Recovery System, which results in 
depreciation at an accelerated pace compared to depreciation for 
financial purposes. Firms that are no longer investing may show 
financial income lower than tax income in years where they have 
exhausted depreciation for tax purposes but continue to deduct 
depreciation for financial purposes. Similarly, items that cause a 
greater amount of income in the current period for tax purposes than 
they do for book purposes could result in average effective tax rates 
above the statutory rate. For example, bad debt expense is deducted 
when estimated for financial purposes but is not deductible for tax 
purposes until the debt has actually gone bad. 

[14] In order to determine the extent to which our weighted average and 
median estimates were influenced by outliers, we recomputed our 
estimates after dropping out cases with effective tax rates in the top 
1 percent of the distribution. This sensitivity test reduced our 
estimated weighted average and median by less than 1 percentage point 
each. We also tested our results for sensitivity to potential data 
quality issues arising from the fact that 2004 was the first time that 
taxpayers had to fill out a Schedule M-3. This sensitivity test 
involved reestimating all the results after excluding data for all 
taxpayers that had internal inconsistencies in the data they reported 
on the sections of the Schedule M-3 that we used (although not in the 
specific line items that we used). The exclusion of these cases raised 
our estimate of the weighted average effective tax rate on domestic 
income to 28.6 percent for those with positive domestic income. 

[15] As noted earlier, there is likely to be some doublecounting of 
foreign income if we include equity method income (the income of 
foreign subsidiaries that are not majority-owned by any U.S. parent but 
that are at least 20 percent owned by a U.S. corporation in our 
population). Similarly, there would be some double-counting if we 
included distributions and dividends from foreign subsidiaries. 
However, excluding these types of income completely would result in an 
understatement of foreign income. Our broadest measure of foreign- 
source income includes the total income from majority-owned foreign 
subsidiaries, plus the equity method income, plus all dividends and 
distributions from foreign subsidiaries. Compared to this first 
measure, our intermediate measure excludes equity method income. Our 
narrowest measure excludes both equity method income and all dividend 
and distributions from foreign subsidiaries. As we did for our earlier 
estimates, we tested these results for sensitivity to potential data 
quality issues. After excluding data for all taxpayers that had 
internal inconsistencies in the data they reported on the sections of 
the Schedule M-3 that we used, our range of estimates was lowered to 
from 3.2 percent to 3.6 percent. 

[16] The real effect of the temporary incentive is to replace a tax 
deferral benefit with a significant tax reduction benefit. This is not 
an effect that would be readily discernable in a comparison of average 
effective tax rates across tax years immediately surrounding and 
including 2004. 

[17] We disregarded the foreign tax credit for this analysis because 
our focus was on tax preferences in the form of credits. The foreign 
tax credit typically is not considered to be a tax preference; rather, 
it is a mechanism for avoiding the double taxation of income. This 
provision reflects the general international convention of giving 
taxing precedence to the country where the income is generated. 

[18] The size of this gap was essentially the same regardless of which 
measure of foreign income we used. Our sensitivity test for data 
quality concerns resulted in moderately smaller estimates for the 
effects of tax credits on the average effective tax rates on both 
domestic and foreign-source income. 

[19] To the extent that some CFCs have operations in the United States 
the effective tax rate reflects some income from and taxes paid to the 
United States; however, in 2004 CFCs that identified the United States 
as their principal place of business accounted for only 0.02 percent of 
total positive CFC income. Any U.S. taxes that are included will only 
be those that the CFCs pay themselves and not any additional tax that 
their U.S. parent companies may pay on dividends from the CFCs. 

[20] There are also some differences in scope between the tax data 
files we used and those that Altshuler and Grubert used, which could 
also contribute to some of the difference between our results. 

[21] Paul W. Oosterhuis, "The Evolution of U.S. International Tax 
Policy--What Would Larry Say," Tax Notes International, June 6, 2006: 
1119-1128. See also the Statement of Paul W. Oosterhuis, Testimony 
Before the Subcommittee on Select Revenue Measures of the House 
Committee on Ways and Means, June 22, 2006. 

[22] See, for example, Martin A. Sullivan, "U.S. Multinationals Paying 
Less Foreign Tax," Tax Notes, March 17, 2008. The extent to which the 
population of majority-owned foreign affiliates represented in the BEA 
data differs from the population of CFCs represented in the IRS data is 
difficult to determine. The criteria for qualifying as a CFC are not 
exactly the same as BEA's criteria for majority-owned foreign 
affiliates. For example, BEA's data covers majority-owned partnerships, 
which would not be in the CFC population. However, if those 
partnerships are owned by an intermediate level of CFCs, then their 
income should be reflected in the CFC data. 

[23] This overstatement could be increased to the extent that foreign 
affiliates pay tax to their host countries on dividends that they 
receive from investments in other countries. (When equity income is 
excluded, the dividend income is removed from the denominator of the 
effective tax rate calculation, but any tax paid on those dividends 
remains in the numerator.) However, corporations have an incentive to 
channel dividends through countries with territorial tax systems that 
do not tax income earned in other countries. 

[24] These 17 cases represent all the countries in which the operations 
of U.S. foreign affiliates accounted for at least 3 percent of the 
worldwide activity of all U.S. foreign affiliates when measured in 
terms of sales, value added, physical assets, employees, compensation, 
or pretax net income. 

[25] The effective tax rates by all three measures for these countries 
were 17 percent or less. 

[26] This income includes amounts repatriated to the United States as 
well as certain types of nonrepatriated income, such as income from 
branch operations and passive investment income that is taxed on a 
current-year basis by the United States, regardless of whether it is 
repatriated. We obtained these income data from the foreign tax credit 
filings (on IRS Form 1118) made by corporate taxpayers represented in 
SOI's sample of taxpayers for 2004. 

[27] The grossed-up value of a dividend equals the amount of pretax 
profits needed to pay the dividend. In other words, it equals the 
dividend received by the U.S. owner plus the amount of foreign income 
tax that the dividend-paying corporation paid on the portion of its 
profits that was used to pay the dividend. The 24.6 percent share 
attributable to grossed-up dividends represents a 17.8 percent share 
for dividends received and a 6.8 percent share for the foreign income 
taxes associated with those dividends. 

[28] These effective rates are more closely related to those that we 
estimated for U.S. CFCs than to those we estimated for the population 
of large U.S. corporations that filed Schedule M-3s. 

[29] Again, the specific ranges of rates varied when the authors used 
alternative measures of income; however, the differences across 
countries were similar, regardless of the measures used. See fig. 10 in 
app. IV for details. 

[30] As we and others have reported previously, corporate groups have 
various ways of shifting the location of reported income, including the 
way they set prices on goods and services transferred among affiliated 
corporations. See, for example, GAO, Puerto Rico: Fiscal Relations with 
the Federal Government and Economic Trends during the Phaseout of the 
Possessions Tax Credit, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-06-541] (Washington, D.C.: May 19, 2006), and U.S. 
Department of the Treasury, Report to The Congress on Earnings 
Stripping, Transfer Pricing and U.S. Income Tax Treaties (Washington, 
D.C.: 2007). 

[31] We use the term physical assets as shorthand for BEA's measure of 
net property, plant and equipment. 

[32] Value added can be measured as the value of gross output minus the 
cost of intermediate inputs; physical assets are the value of property, 
plant and equipment net of depreciation. 

[33] These are the only three industries that accounted for at least 10 
percent of the total activity of U.S. MNCs, according to at least one 
of the six measures. 

[34] We do not report total assets, where finance and insurance would 
have the largest share, because of the double-counting issue noted 
previously. 

[35] The measure that includes equity income contains some double 
counting of income because a share of the after-tax income of lower- 
tier affiliates is counted as equity income of the holding company. In 
contrast to the double counting that may occur in the CFC data, the 
double counting in this particular BEA measure occurs whether or not 
the income of lower-tier affiliates is transferred to the holding 
companies in the form of dividends. 

[36] See Melissa Redmiles, "The One-Time Received Dividend Deduction," 
106. 

[37] See Altshuler and Grubert, "Governments and Multinational 
Corporations in the Race to the Bottom," 979-992, and Oosterhuis, "The 
Evolution of U.S. International Tax Policy--What Would Larry Say," 1119-
1128. 

[38] Charles Boyton, Portia DeFilippes, and Ellen Legel, "A First Look 
at 2004 Schedule M-3 Reporting by Large Corporations," Tax Notes, 
September 11, 2006 provided an initial summary of the Schedule M-3 data 
and identified common errors. 

[39] These data elements were lines 5a (Net income from nonincludible 
foreign entities), 5b (Net loss from nonincludible foreign entities), 
and 11 (Net income (loss) per income statement of includible 
corporations) of part I of the Schedule M-3. Lines 4 through 10 in part 
I of the Schedule M-3 should total to line 11. We excluded cases where 
line 11 did not equal the sum of completed line items and cases where 
lines 4 through 10 were not completed. 

[40] SOI's annual sample for 2004 of corporate tax returns are designed 
such that all corporations that meet the size threshold for filing a 
Schedule M-3 are sampled at a 100 percent level. 

[41] We remove the equity method income of domestic subsidiaries owned 
20 percent to 50 percent from line 11 of part I of the Schedule M-3 to 
ensure the proper alignment of income and taxes for calculating 
effective tax rates. Even though income from these subsidiaries is 
listed on the parent's financial statement, these subsidiaries are not 
consolidated with the parent tax group and file their own separate 
income tax returns and pay taxes associated with that income that are 
not reported on parent's statement. We also remove line 8, which 
reverses the minority interest reduction on subsidiaries owned 80 
percent or more to include the full income of the tax consolidated 
group. 

[42] If the minority shares are owned by Schedule M-3 filers, then all 
of the income from lines 5a/b is properly included in our measure of 
aggregate income. 

[43] We calculated our broadest measure, all income, which includes 
equity method income, dividends, and share income, as Schedule M-3, 
Part II, line 1 + Schedule M-3, Part II, line 2 + Schedule M-3, Part 
II, line 5 + Schedule M-3, Part II, line 10 - (Schedule M-3, Part I, 
line 5a - Schedule M-3, Part I, line 5b). We calculated a measure that 
only excludes equity method income, as Schedule M-3, Part II, line 2 + 
Schedule M-3, Part II, line 5 + Schedule M-3, Part II, line 10 - 
(Schedule M-3, Part I, line 5a - Schedule M-3, Part I, line 5b). 
Finally, we calculated the narrowest measure, one that excludes equity 
income and dividends, as - (Schedule M-3, Part I, line 5a - Schedule M- 
3, Part I, line 5b). (Note, in part I on the M3 foreign income is 
reported negatively and losses positively. Consequently, we need to 
change the sign on the variables.) 

[44] Rosanne Altshuler, Harry Grubert, and T. Scott Newlon, "Has U. S. 
Investment Abroad Become More Sensitive to Tax Rates?" NBER, 
International Taxation and Multinational Taxation ed. James R. Hines, 
Jr. (Chicago: University of Chicago Press, 2001), and Rosanne Altshuler 
and Harry Grubert, "Governments and Multinational Corporations in the 
Race to the Bottom," Tax Notes, February 27, 2006: 979-992. 

[45] SOI sampling of corporate returns was not designed to make 
estimates for the CFC populations. As a result, the sample sizes of 
CFCs associated with U.S. corporations in the noncertainty strata were 
extremely small and population estimates are therefore unreliable. The 
CFCs associated with U.S. corporations sampled at 100 percent accounted 
for over 99 percent of both the total number of CFCs in the file and 
the total positive income of those CFCs. 

[46] 22 U.S.C §§ 3101-3108 (2004). 

[47] Beginning with the results of the 1999 benchmark survey, BEA has 
expanded its statistics on the operations of U.S. MNCs in order to 
provide fuller coverage of the survey universe. In the statistics for 
preceding years, BEA excluded foreign affiliates below a certain size 
because only very limited information was reported for them, and their 
inclusion would not have had a material impact on the aggregate direct 
investment statistics in terms of value. Beginning with the data for 
1999, the BEA data have included these very small affiliates. 

[48] NAICS is the new industry classification system of the United 
States, Canada, and Mexico. In the United States, NAICS supplants the 
1987 Standard Industrial Classification (SIC), which was the basis for 
the old ISI classification system. 

[49] BEA changed from relying on the SIC codes to classify industry to 
the NAICS codes beginning with data for 1997 for foreign direct 
investment in the United States and for 1999 for U.S. direct investment 
abroad. 

[50] W. Buijink, B. Janssen, and Y. Schols. Evidence of the Effect of 
Domicile on Corporate Average Effective Tax Rates in the European Union 
MARC World Paper MARC-WP/3/2000-11 (2000). J. Gorter, R. de Mooij. 
Capital Income Taxation in Europe: Trends and Trade-offs, ISBN: 90-120- 
9281-7 (2001). Both studies report the median (across all corporations) 
of average effective tax rates in each year that they cover, as opposed 
to an average of the average rates, to reduce the influence of 
outliers. 

[51] Gorter and de Mooij exclude Luxembourg from their analysis because 
of too few observations; therefore we exclude the country from our 
summary. 

[52] Julie H. Collins and Douglas A. Shackelford, "Do U.S. 
Multinationals Face Different Tax Burdens than Do Other Companies?" Tax 
Policy and the Economy 17, edited by James M. Poterba, National Bureau 
of Economic Research and MIT Press (Cambridge, Mass.), 2003: 141-168, 
and Lucy Chennells and Rachel Griffith, Taxing Profits in a Changing 
World, Institute of Fiscal Studies, ISBN 1-873357-73-7, 1997. 

[End of section] 

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