Corporate-Tax Reporting Draws GAO Scrutiny
By JESSE DRUCKER
At least 23% of large U.S. corporations don't pay federal income taxes in any given year, according to a report by the investigative arm of Congress.
The Government Accountability Office also found that in a given year at least 60% of all U.S. corporations studied -- which also includes many smaller companies -- reported no federal income-tax liability during the period studied, 1998 to 2005.
The study didn't reach any conclusions about why so many corporations reported no tax liability. But prior research has looked at the gap between the earnings that companies report to their shareholders and the smaller profits they report to the Internal Revenue Service.
The finding comes as the next president will inherit a record budget deficit. Both presumptive presidential nominees have proposed closing a variety of corporate tax loopholes. Sen. John McCain, the Republican hopeful, also has proposed cutting the federal corporate tax rate from 35% to 25%.
In the study, the GAO analyzed samples of Internal Revenue Service data covering both publicly traded and closely held corporations, including U.S.-based and foreign corporations operating in the U.S.
For large U.S. corporations -- defined as those with at least $250 million in assets or gross annual receipts of at least $50 million -- the GAO found that 25% reported owing no federal income tax in 2005. That percentage has been falling significantly since 2001, when it reached a peak for the period of 38%. The study also found that about 24% of these large U.S. corporations reported no tax liability for at least four of the eight years being studied.
Also, 72% of large foreign-owned corporations that do business in the U.S. reported no tax liability for at least one year during the period, the GAO found.
The GAO found that most U.S. corporations were wiping out their tax liability without using tax credits or net operating losses -- a mechanism that allows corporations to deduct from their taxable profits the losses generated in previous years. The most commonly used deductions were for salaries and wages and "other deductions."
The GAO didn't attempt to measure taxes owed as a percentage of profitability reported to shareholders, which uses a different system.
"This is a reminder that the reporting is a broken system as far as corporations are reporting one set to the tax authorities and another to the capital markets," said Mihir Desai, a finance professor at Harvard Business School who specializes in tax issues. "Both would be better off if they got a clearer sense of what real profits were."
The GAO report came in response to a request by a pair of Democratic senators -- Carl Levin of Michigan and Byron Dorgan of North Dakota -- who said they were concerned about whether so-called transfer pricing was being abused to avoid taxes. Transfer pricing is the method that companies use to allocate costs and revenue between different tax jurisdictions. However, the GAO didn't attempt to determine whether corporations were abusing transfer pricing.
Full Story Below:
Corporate-Tax Reporting Draws GAO Scrutiny - WSJ.com