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What GAO Found

The FCDC ownership structure could provide a tax avoidance or evasion advantage relative to a structure where U.S. parents own foreign subsidiaries. Academic experts we spoke to said that the FCDC corporate structure does not provide an inherently greater ability to evade taxes through transfer pricing abuse because transfer pricing rules are the same for the FCDC structure as for U.S. corporations with foreign subsidiaries. However, according to IRS officials and our own research, the FCDC structure could confer a tax advantage because certain rules that can limit potential abuse by U.S. parent companies and their foreign subsidiaries may not apply to FCDCs and their foreign parent companies. These rules (called anti-deferral rules) make immediately taxable to U.S. corporations certain types of income such as interest, rents, and royalties of their foreign subsidiaries. These types of income tend to be easily moveable from one taxing jurisdiction to another and hence more amenable to transfer pricing abuse.

Very little is known about the foreign parents of corporations with a majority of their operations in the United States. Studies of this corporate structure were limited to studies of corporations that inverted to achieve this structure. In an inversion, a corporate group with a U.S. owner typically creates a new foreign corporation in a low tax country that becomes the foreign owner of the corporate group in order to reduce the group’s tax liabilities. Even in these cases, the studies did not claim to have information on all inversions. Our own attempts to identify foreign parents of corporations with a majority of their operations in the United States ran into important limitations. In our first method—comparing U.S. sales to the foreign parent’s worldwide sales as shown on their annual reports—provided unrepresentative results because too few foreign parents broke out U.S. sales separately. In addition, results from our second method—using the country where the foreign parent’s principal business activities were located (as reported on IRS Form 5472)—were difficult because IRS does not define principal countries where business is conducted on the form, allowing taxpayers to claim more than one country as a principal location where business is conducted. Thus, the information on the form does not permit clear inferences about how much business the foreign-controlled corporate group does in any particular country, including the United States. Without basic information about these foreign-owned but essentially U.S.-based corporate groups, describing how they came to adopt this structure is not feasible. The benefits of obtaining more information about the possible effects on tax compliance of these foreign-controlled corporate groups, other characteristics of the corporate groups and how they came to be organized as they are would have to be weighed against the cost of collecting such data.

Why GAO Did This Study

A multinational corporate group, whether U.S.-owned or foreign-owned, with subsidiaries inside and outside of the United States can shift income to its subsidiaries in countries where corporate taxes are lower in order to avoid or evade U.S. taxes. As detailed in previous reports, this income shifting can be accomplished through such practices as manipulating transfer prices (the prices that members of the corporate group charge each other for goods and services). Foreign-owned multinational corporations can do this even if the majority of their economic activity is in the United States. Tax policymakers have long been concerned about the tax compliance implications of these practices.

It is not clear what is known about foreign-parented corporate groups with U.S. subsidiaries where the majority of worldwide operations are in the United States. You asked us to provide information about corporate groups that fit this description. Specifically, we agreed to determine (1) whether there are advantages in this ownership structure for avoiding or evading taxes, and (2) what is known about the number, size, type, and other relevant characteristics of these corporate groups and how they came to be organized with this structure.

For more information, contact James R. White at (202) 512-9110 or

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