GAO: Most U.S. firms paid no tax in late '90s

By Warren Vieth
Los Angeles Times

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The report showed 61 percent of U.S. corporations paid no federal income taxes from 1996 through 2000. The study was based on an IRS sampling of more than 2 million tax returns, most from smaller companies.

An estimated 94 percent of U.S. corporations reported tax liabilities amounting to less than 5 percent of their income in 2000.

U.S. companies paid an average of $11.88 in corporate taxes for every $1,000 in gross receipts, the study said.

Small firms were more likely to avoid taxation than large ones, it showed. About 38 percent of big companies (those with more than $250 million in assets or $50 million in revenues) paid no taxes during the five-year period.

The report found that 71 percent of foreign-controlled corporations paid no taxes on their U.S. income, while 89 percent had liabilities of less than 5 percent of their income.

The share of tax receipts paid by U.S. corporations has been declining for decades, government figures show. But it has been falling at an even faster rate in many other countries, said Gary Hufbauer, senior fellow at the Institute for International Economics, and any attempt to raise corporate taxes or close loopholes in this country runs the risk of making U.S. companies less competitive in world markets.

The GAO didn't attempt to determine why so many companies were able to avoid paying taxes. It said possible explanations included legitimate deductions for current-year operating losses, losses carried forward and sufficient credits to offset liabilities. In addition, it said improper pricing of transactions between U.S. and foreign operations could contribute to tax avoidance.

The Senate Finance Committee is reviewing Internal Revenue Service records on almost 700 private agreements the agency has struck with multinational corporations on the way prices have been set for intra-company transactions since 1991. Such transfer-pricing arrangements can be a source of abuse when goods are sold between subsidiaries at inflated prices.

The IRS and companies say their private pricing arrangements, which are voluntary and often done in conjunction with tax authorities in other countries, avoid legal disputes when the companies are audited. In a deal, the company negotiates directly with the IRS, establishing pricing parameters and practices that are good for three to five years.

Companies such as Hewlett-Packard's Compaq Computer, Veritas Software's Seagate Technology and GlaxoSmithKline have all fought the IRS in court over transfer pricing done without earlier approval by the tax agency.

Bloomberg Business News provided information on negotiated pricing arrangements in this report.

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