International Taxation:

Transfer Pricing and Information on Nonpayment of Tax

GGD-95-101: Published: Apr 13, 1995. Publicly Released: May 11, 1995.

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Pursuant to a congressional request, GAO provided information regarding transfer pricing issues and foreign-controlled corporations' (FCC) and U.S.-controlled corporations' (USCC) tax compliance, focusing on: (1) the Internal Revenue Service's (IRS) handling of transfer pricing issues through its examinations, appeals, and litigation functions; and (2) IRS use of available regulatory and procedural tools.

GAO found that: (1) recent IRS experiences with transfer pricing cases have been mixed; (2) although there were as many regulatory violations in 1993 and 1994 as in previous years, the value of the 1994 adjustments increased $1.3 billion over 1993 adjustments; (3) a large number of the 1993 and 1994 cases involved pricing methods other than the three methods specifically described in earlier IRS regulations; (4) the outcomes of IRS appeals and legal processes for the 2 years were similar to those in 1987 and 1988, with a sustention rate of about 30 percent of the proposed adjustments' value; (5) IRS has used certain procedural tools, such as simultaneous examinations and arbitration, as effective deterrents to abusive transfer pricing practices; (6) IRS expects to increase its use of advanced pricing agreements; (7) the success of the new transfer pricing regulations remains to be seen; (8) about 75 percent of FCC and 60 percent of USCC paid no U.S. income tax between 1987 and 1991; (9) the corporations that paid U.S. taxes in 1991 held 80 percent of FCC and USCC assets and generated 81 percent of their receipts; (10) the largest nontaxpaying corporations accounted for most FCC and USCC assets and receipts; and (11) factors other than transfer pricing abuse may contribute to the differences in tax amounts paid by FCC and USCC.

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