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PSE [Public Safety Equipment]--St. Louis, Missouri 8/27/92 [OA 7579] [1]
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Originally Processed With FOIA(s):
FOIA Number:
S
S
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
Library Staff.
Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin:
Speechwriting, White House Office of
Series:
Speech File Backup Files
Subseries:
Chron File, 1989-1993
OA/ID Number:
13828
Folder ID Number:
13828-006
Folder Title:
PSE [Public Safety Equipment]--St. Louis, Missouri 8/27/92 [OA 7579] [1]
Stack:
Row:
Section:
Shelf:
Position:
G
26
22
7
4
(Ferguson/Walters)
August 26, 1992
2:45 p.m.
STLOUIS
PRESIDENTIAL REMARKS: PUBLIC SAFETY EQUIPMENT, INC.
ST. LOUIS, MISSOURI
AUGUST 27, 1992
9:00 A.M. (??)
Thank you and good morning.
(Acknowledgments)
((This is great. Look at the equipment you have here --
light bars, beacons -- you've given a whole new meaning to a
thousand points of light.))
((I may take some of your sirens back to Washington.
They're the only thing that makes more noise than the White House
press corps.))
You know, the press specializes in the business of bad news.
But today I'd like to open with some good news.
Together we have seen a world transformed these past three
and a half years -- a world made new by American strength and
resolve. And now that the Cold War is over, the defining
challenge of the '90s is to win the economic competition of the
new global economy -- to win the peace.
Our goal is simple and profound: We must be a military
superpower, an economic superpower and an export superpower.
In this election, you'll hear two versions of how to do
this. My opponents' answer is to look inward, and protect what
we already have from the challenges of this new world. My
approach is to look forward -- to open new markets, prepare our
people to compete, to restore our social fabric -- to save and
invest, so that we can win.
2
I wanted to come here today to St. Louis to lay out the
sharp difference between Governor Clinton and me on the crucial
issue of investment and open trade. My policies encourage both -
- because my experience in business and foreign affairs has shown
me that trade and investment create jobs.
In contrast, my opponent and the Democratic Congress want to
tax both trade and investment. But taxes stifle things -- and in
this case, their taxes would chase away business and destroy
jobs.
I know my opponent has lots of slogans and policy buzzwords
that sound appealing when you first hear them -- but America
can't afford them.
PSE is an example of where we're going -- and how we're
going to get there. Not so long ago companies like PSE could be
satisfied with a national market -- sell your goods in the fifty
states and leave it at that.
That's no longer good enough. So five years ago, you took
on the world. I'm told that now 35 percent of what you build is
Ed
Q
sold outside our borders, in 48 -different countries. Today your Ryan
light bars and sirens help save lives not only on the streets of
&
Detroit and Peoria, but in Israel, Hong Kong and Spain.
"
PSE's story is a parable for our entire country's economic
future -- never settling for less, always pushing ahead,
embracing the challenges of foreign competition and reshaping
them as opportunities.
3
Let me offer a personal note -- tell you how I first learned
about competing in the world.
I spent a good part of my life out in West Texas, in the oil
business. I painted rigs for a while, even lived out of a
suitcase as a salesman. And all around me in those days I saw
LOOKING
PORWARD
towns and businesses rise up from nothing, for a simple reason:
The world wanted what Texas had to offer -- cotton and cattle and
crude.
We understood that the more goods we sold outside our
borders, the more jobs we could create within them.
Later on, when I started my own business, I learned again:
we had to take a global view to compete. I shopped for investors
on the west coast, on the east coast, but I couldn't stop there.
I traveled the world -- to Europe and the Far East. Every dollar
we could bring into this country was a dollar that went to expand
our company, create jobs in our community.
Then when I started to get involved in foreign relations, I
built on that business experience. I saw again how important
America is to the world, and how important the world is to
America -- not just for national security in the traditional
sense, but for our economic security, for creating jobs, right
here at home.
We've held steady to this vision for three years now, and
we've made solid progress. As we knock down trade barriers,
American companies are rushing to meet the demand. Since I took David
office, exports have increased by one-third. America is the
Watters
4
David
greatest exporter the world has ever seen -- $422 billion dollars
Walters
of exports last year alone.
Let me bring it close to home. In Missouri, exports are up
37 percent over the last three years -- $4.5 billion worth of
DOC
goods shipped to 166 countries around the world.
Impressive numbers, but when you dig behind the trade
statistics, you find the real benefit of the new world economy -
- in a word, it's jobs. Here in Missouri, 100,000 jobs are
supported by foreign trade Across the country, more than 7 David
Walters
million Americans owe their jobs to trade.
Everyone recognizes that the world is moving at a faster
pace, but I see something more: it's moving our way. Right now
we're building on the export success of the last three years.
Two weeks ago we entered a new era of open trade. Along with
Mexico and Canada, we initialed the North American Free Trade
Agreement, with the goal of knocking down tariffs and creating
one of the largest free-trade areas in the world -- an integrated
economy worth more than $6 trillion dollars. David Walters
what NAFTA
Here in Missouri, you already export $2 billion worth of
meas for
goods to Mexico and Canada. That's a lot of paychecks, but our MO
fastsheet
new agreement will create still more jobs, and make us even
stronger in the race with our European and Asian competitors.
NAFTA is a solid agreement -- when you've been in as many
tough negotiations as I have, you learn to tell the difference.
We're going to take this case to the protectionists on Capitol
Hill, because they need to hear it. Right now, before our
initials are even dry on the agreement, the Democratic DG leadership Josh
5
in Congress is calling for us to slap a tarriff on any new trade Bolton
that comes from NAFTA.
Think about that for a minute -- ((that's a minute longer
than they've thought about it)). After long, tough negotiations
with our two closest trading partners, we've agreed to end
tariffs. The congressional Democrats say: Okay, fine. But first
you have to put on a new tariff.
In other words, they think the way to eliminate trade
barriers is to build a new trade barrier.
That's like telling us they want us to hit a homerun but
please only if we run around the bases backward.
?
This "transaction tax," as they call it, will make it more
expensive for our businesses to compete with the European and
Asians -- and it will discourage the creation of new jobs for you
and your neighbors. It turns the agreement on its head --
defeats the whole purpose.
What about Governor Clinton? Where does he stand? Well,
NAFTA
just last week, when asked about our new trade agreement, he
BC
hemmed and hawed, and at last he said: "When I have a definitive Detrit
opinion, I'll say so."
8/21/92
No matter how much Governor Clinton would like to fudge the
issue, the difference couldn't be clearer -- and the difference
is based on two very different views of America's future. My
opponents see us knocking down trade barriers and they say: Hold
everything. They see us open new markets for American goods and
6
they say: Wait a minute. Maybe we can't compete. The American
worker can't cut it. So let's pull down the blinds, lock the
doors and hope the world goes away.
Well, let me tell them something you already know. The
American worker doesn't have to hide from anybody. Americans can
outwork, out-think, out-compete anybody, anywhere, anytime.
That's something everyone in the world seems to understand -
- everyone but the protectionist Democrats. Over the last
decade, we've seen a flood of foreign investment in the United
States -- businesses from all over the world setting up shop from
Portland, Oregon to Portland, Maine. These investors follow a
simple logic: if you want the best science and universities in
the world, if you want the best workers in the world, you have to
come to the U.S.A.
The result has been jobs: One out of every ten manufacturing
Sue
workers in the United States works for a company supported by
Maguire
foreign investment. And that's the bottom line: jobs for
COMM.
Americans, a growing economic pie for everyone.
Now, here's one issue where Governor Clinton doesn't waffle.
He's surveyed the issue of foreign investment and come out
foresquare for -- you guessed it -- a tax increase.
He's proposed to increase taxes on foreign investment in the
it
United States, even though those companies employ a total of
Sue
4
Magnine
and one-half million Americans.
Comm
15
[[Governor Clinton says his new tax will raise $45 billion.
He might want to talk to his own Democrats on Capitol Hill. The
7
Joint Committee on Taxation says that estimate is about 45 times JCT
MEMO
too high. ]]
Governor Clinton says his tax increase will "crack down" on
foreign companies, but all it will really do is drive them out.
And if they go, they'll take those jobs with them.
Travel around this state. Go to New Madrid (MA-drid), talk
MO
to the 1200 employees at Noranda Aluminum -- or to Joplin, talk Advantage
to the 425 employees of Atlas Powder. Go to any of the 244
Fact
sheet
foreign-owned companies that employ 60,000 workers right here in
Missouri. I don't think you're going to find any of those
Missourians railing against the evils of foreign investment.
If Governor Clinton's tax hike had been in effect these past
few years, those companies wouldn't be here -- and those jobs
wouldn't have been created for Missourians.
NEXIS
And it's not just Missouri. Whether it's the Nissan plant
17
in Tennessee -- or the proposed BMW plant in South Carolina --
Governor Clinton's tax increase would be felt in every region of
every state of this country.
Governor Clinton needs to learn something about
international relations. If he raises this tax, our foreign
competitors are going to say: "What's good for the goose is good
for the gander." His tax is like a gilded invitation sent to
foreign governments where U.S. companies also do business. And
the invititation reads: "Please retaliate."
The result would be not just a reduction in investment here,
but a contraction worldwide. There was another occasion when
8
that happened. It was in 1930. Right before the great
depression.
[[No other major industrial nation favors the kind of tax
increase Governor Clinton proposes -- not Germany, not Japan.
But I can tell you one nation that does tax foreign investment as
he would like: India.
Well, here's a promise I am proud to make: As long as I am
president, India will not be a model for how to conduct economic
policy in the United States of America.
Let's review the facts about Governor Clinton's tax: It
won't raise revenue. It won't create a single job. It will
discourage investment. And it threatens to start a trade war at
the very moment when markets the world over are opening up to
American products.
We should ask why, given all this, Governor Clinton would
ever propose such a tax in the first place. I can tell you why.
Today change is accelerating, and change breeds uneasiness,
skepticism, even fear. And by disparaging foreign investment,
Governor Clinton hopes to exploit the darker fears of this
uncertain age -- fear of the future, fear of the unknown, fear of
foreigners.
Well, let me tell Governor Clinton something: Play politics
all you want, but those are American jobs you're playing politics
with. Those are American workers you're putting at risk.
9
The American people won't buy it. The proudest people on
earth have never stooped to fearmongers before, and we're not
going to start now.
In talking about America's future in the global economy, I
mentioned my own experience, because I want you to understand why
I believe what I do about America's ability to compete. I've
built a business; I've dealt with foreign nations; I know what it
takes to make America secure and strong at home and abroad.
Governor Clinton takes a different view, and it is borne of
his life experience -- a life spent in Arkansas government.
So the American people have a clear choice this year. It's
a choice between the patrons of the past and the architects of
the future. I believe we can shape what lies ahead -- not by
turning away from challenges but by doing what you here at PSE
have done -- meeting the competition head on, making foreign
markets your own.
I have faith in America's future -- because I have faith in
the American people. It's the same faith that brought me out to
Texas more than 40 years ago -- the same faith that brought me
into public life -- the same faith that has led me to fight for
open markets -- because I know that no challenge is too great for
the American heart.
Thank you and God bless you.
#
#
Ofü
Organization For
International Investment
MYTHS ABOUT FOREIGN INVESTMENT
IN THE UNITED STATES
Myth #1: Foreign investment hurts domestic business.
FACT: Foreign-owned U.S. companies contribute substantially to the
productivity of the U.S. economy. These companies generally have a good history
of investing in capital resources and increasing productivity. The latest Commerce
Department statistics show that in 1988 foreign-owned U.S. companies in
manufacturing spent almost 50 percent more on investment in plant and equipment
per worker than the average for all U.S. manufacturing.
Productivity also grew more rapidly in foreign-owned U.S. manufacturing
companies than in the manufacturing sector as a whole between 1980 and 1988.
In real terms, the gross product (i.e., value added) of foreign-owned U.S.
companies in manufacturing rose nearly four times as fast as all manufacturing
establishments in the U.S. between 1980 and 1987.
Foreign investment can also bring new technologies into an economy, potentially
increasing the competitiveness of U.S.-owned companies. According to an August
1991 Commerce Department study on foreign direct investment, "U.S. affiliates
have been contributors to the advance of technology in U.S. industry."
Notably, "[i]n the automobile industry, anecdotal evidence suggests that U.S.
affiliates of foreign firms appear to have encouraged the diffusion of new
technologies, including speeding the adoption of robotics to improve the efficiency
of the manufacturing process," according to the Commerce Department report.
Myth #2: Foreigners are buying up America.
FACT: As of 1990, foreign direct investment in the United States amounted to
approximately $466 billion, based on current or replacement cost measures. This
is about three percent of total U.S. domestic net worth.
Source: U.S. Commerce Department
Myth #3: Foreign investment in the U.S. only benefits the
investor.
FACT: Productive investment of any kind benefits an economy, regardless of
the nationality of the investor. Employment of American workers, increased
exports and taxes paid are just some of the benefits foreign-owned companies
bring to the United States.
Employment at U.S. subsidiaries of foreign-owned companies totaled 4.7 million in
1990, or about five percent of all U.S. nonbank employment. Employment at
foreign-owned U.S. manufacturing companies came to more than 2.0 million
workers about 10.8 percent of the total U.S. manufacturing
workforce. In 1990, foreign-owned companies exported $91 billion of
merchandise from the U.S. Foreign-owned companies paid $24.4 billion in direct
taxes (e.g. sales, property) in addition to income and payroll taxes in 1989.
Source: U.S. Commerce Department
Myth #4: Japan is the biggest investor in the U.S. economy.
FACT: As of the end of 1991, the United Kingdom was the largest investor in
the United States, accounting for 27.4 percent of total foreign direct investment.
Japanese (20.6 percent) and Dutch (14.9 percent) investors ranked second and third
respectively.
Myth #5: The success of U.S.-owned corporations is more
important to the U.S. economy than that of foreign-owned U.S.
corporations.
FACT: Harvard's Robert Reich, building on the work of many economists, has
pointed out that the ownership of a corporation is less important than the
corporation's willingness and ability to create and maintain high wage jobs in
the United States.
According to Reich, "
ownership of the corporation is profoundly less relevant
to America's economic future than the skills, training, and knowledge commanded
- 2 - -
by American workers -- workers who are increasingly employed within the United
States by foreign-owned corporations."
Myth #6: Foreign investment plays a larger role in the U.S.
economy than it does in all other major industrial nations.
FACT: Foreign investment from all sources plays a proportionally larger role
in the economies of all other major industrial nations (except Japan) than it
does in the United States.
For example, in 1986 (the most recently available data from all countries), in terms
of manufacturing employment, foreign-owned firms in the United States accounted
for seven percent of all manufacturing employment in the U.S. economy. By
contrast, foreign-owned firms accounted for two to almost five times as much in
the United Kingdom, France, Germany and Canada than that amount. In terms of
total assets, the foreign-owned company share for these four countries was one and
a half to almost three times as large as in the United States. This information is
summarized below.
SHARE OF FOREIGN-OWNED FIRMS
Percentage of
Percentage
Manufacturing
of
Employment
Total Assets
Canada
34
25*
France
21
26*
United Kingdom
14
14
Germany
13
17
United States
7
9
Japan
1
1
*1987
Source: D. Julius & S. Thomsen, "Foreign-owned Firms, Trade, and Economic Integration," Tokyo Club
Papers 2, Royal Institute of International Affairs, 1988 and Commerce Department.
- 3 -
Myth #7: Foreign businesses play a larger role in the U.S.
economy than U.S. businesses play in the home economies of
these foreign businesses.
FACT: U.S.-owned businesses are generally more active in the economies of
other major industrial countries than are foreign-owned businesses from these
countries in the U.S. economy.
For example in 1989, as a percentage of the host-country's gross domestic product,
the value of U.S.-owned businesses in the United Kingdom was three times that of
British businesses in the United States, 7.5 percent as compared with 2.3 percent.
Similar and even larger disparities hold for the other major industrial countries
other than Japan. This information is summarized below.
FOREIGN DIRECT INVESTMENT AS A PERCENT OF
HOST-COUNTRY GROSS DOMESTIC PRODUCT
Percentage of
Percentage of
Foreign Holdings
U.S. Holdings in
in the United States
the Foreign Country
United Kingdom
2.3
7.5
Netherlands
-1.2
6.9
Japan
1.3
0.7*
Canada
0.6
11.9
Germany
0.5
1.8
Switzerland
0.4
10.8
France
0.3
1.4
* 1988
Source: Commerce Department
- 4 -
Myth #8: U.S. businesses are no longer an important source of
foreign direct investment to the world economy.
FACT: The U.S. remains, by far, the largest source of foreign direct investment
in the world. At the end of 1989, the overall value of the stock of all foreign
direct investment from all sources around the world came to almost $1.4 trillion,
on a historic cost basis. Of this total, U.S. businesses held $380 billion, or 28.3
percent. The next largest national source for direct investment was the United
Kingdom. British businesses had $224 billion, or 16.7 percent. Japanese
businesses were in third place, with $154 billion in direct investment, or 11.5
percent of the overall total.
Source: Commerce Department
- 5 -
7
strongly endorsed in the past
"imperative." last year
April 14, 1992 Wush Post
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"endorsed the trade
position taking
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July 29
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applanding Sephardt's. efforts.
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in principle
"I'm when d have an openeon
defenitive.
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details of the agreement
THE WHITE HOUSE
WASHINGTON
Fundley - in a free trade zone
stayed in the U.S.
trying to export
call Mary foster
Theme: strong general economy
reailing loun whether
jobs - story commy.
the in job training
draw linkages
Nancy L. McLe
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Director, Washington
1747 Pennsylvania Avenue, N.W.
Suite 704
Washington, DC 20006
Organization for
(202) 659-1903
International Investment
Fax (202) 659-2293
DO FOREIGN-OWNED U.S. CORPORATIONS
PAY THEIR FAIR SHARE OF U.S. CORPORATE INCOME TAX?
There has been much discussion recently about whether foreign-owned U.S. corporations ("FO-USCs")
are paying their fair share of U.S. corporate income tax ("tax"). Those arguing that FO-USCs do not
pay their fair share of taxes have referred to Statistics Of Income ("SOI") data taken from federal
corporate income tax returns, particularly those from the 1986 tax year.
Although FO-USCs paid less tax in 1986 than in earlier or later years, THE SOI FIGURES CLEARLY
DEMONSTRATE THAT FO-USCS HAVE PAID THEIR FAIR SHARE OF U.S. INCOME TAX.
FO-USCs should be expected to pay U.S. tax in proportion to their share of U.S. business. Corporate
assets and receipts may be the most indicative measures of U.S. business activity. If FO-USCs over a
period of time, own on average 6% of all U.S. corporate assets and generate 6% of all U.S. receipts,
FO-USCs should pay about 6% of all U.S. corporate income tax. One would not expect FO-USCs to
pay significantly more or less than this amount.
The SOI data for the years 1984 through 1988 (the most recent years for which SOI data is available)
yield some consistent patterns (see Attachment):
FO-USC assets on average represent approximately 6% (actual 5.91%) of all U.S. corporation
assets.
FO-USC receipts on average represent approximately 6% (actual 6.69%) of all U.S.
corporation receipts.
One would therefore expect FO-USCs over this time period to pay approximately 6% of the income
taxes paid by all U.S. corporations, and this was in fact the case. FO-USCs paid approximately 6%
(actual 5.61%) of the tax, an amount not "out of line" with all U.S. corporations.
COMPARISON OF RECEIPTS, ASSETS & TAX OF
FOREIGN & U.S. OWNED U.S. CORPORATIONS
1984 - 1988
Actual Based on: SOI Tax Return Data:
ACTUAL:
RECEIPTS
ASSETS
TAX
0% 8%
25%
50%
75%
100%
% OF ALL U.S. CORPORATIONS
FOREIGN OWNED
U.S. OWNED
253-14A
Do FO-USCs Pay a Fair Share?
Page 2 of 3
During hearings of the House Ways and Means Oversight Subcommittee in August, 1990 and March,
1992, statements were made charging that FO-USCs should be paying an additional $30 billion in U.S.
tax per year. But the SOI data for 1984 through 1988 clearly show these charges are off the mark. If
$30 billion were added to the tax liabilities of FO-USCs, the following distortions would occur.
o
If FO-USCs had paid $30 billion more corporate income tax in each of the five years, their
share would have been 32% (actual 32.49%) of all U.S. corporate income tax paid in the
period, more than five times their 6% average of assets or receipts.
COMPARISON OF RECEIPTS, ASSETS & TAX OF
FOREIGN & U.S. OWNED U.S. CORPORATIONS
1984 1988
Actual Based on SOI- Tax Return Data:
ACTUAL:
RECEIPTS
ASSETS
TAX
TAX, IF FOREIGN
OWNED U.S.
CORPORATIONS:
PAID $30 BILLION
MORE TAX ANNUALLY
0%
6%
25%
50%
75%
100%
% OF ALL U.S. CORPORATIONS
FOREIGN OWNED
U.S. OWNED
259-148
o
If $30 billion were added to the tax that FO-USCs paid in just one year, say in 1986,
FO-USCs would have paid nearly 32% (actual 31.81%) of all U.S. corporate income tax for
that year.
o
Even if $30 billion of additional tax had been paid by FO-USCs over the entire 5 year period
of the years from 1984 to 1988 (i.e., equivalent to $6.0 billion per year), FO-USCs would have
paid 12% (actual 12.43%) of all U.S. corporate income tax paid during the five-year period;
twice their 6% average of assets or receipts.
COMPARISON OF RECEIPTS, ASSETS & TAX OF
FOREIGN & U.S. OWNED U.S. CORPORATIONS
1984 - 1988
Actual Based on SOI- Tax Return Data:
ACTUAL:
RECEIPTS
ASSETS
TAX
TAX, IF FOREIGN
OWNED U.S.
CORPORATIONS:
PAID $30 BILLION
MORE TAXANNUALLY
PAID $6.0 BILLION
MORE TAX ANNUALLY
0%
6%
25%
50%
75%
100%
% OF ALL U.S. CORPORATIONS
FOREIGN OWNED
U.S. OWNED
253-14
Do FO-USCs Pay a Fair Share?
Page 3 of 3
CLEARLY, THE ASSERTION THAT FO-USCS UNDERPAY BILLIONS IN CORPORATE
INCOME TAXES ANNUALLY IS UNFOUNDED AND UNREALISTIC.
Moreover, any exercise to break down the SOI data by industry or products to determine whether a
particular corporation or a particular industry is contributing its fair share of income tax would be
pointless. Even if it could be demonstrated that the earnings of a particular company or sector were
lower than some statistical "norm," one could not conclude that the company or sector was not paying
its proper taxes or that a "transfer pricing problem" existed. Unfortunately, the issue is not that simple.
Except for regulated industries, one would not expect all companies within an industry to have the same
level of profitability. There are too many variables. Each individual company has efficiencies or
inefficiencies in any number of areas, e.g., marketing, manufacturing, foreign currency exchange, raw
material sources, supply agreements, market share, market acceptance, labor, quality of facilities and
equipment, financing, technologies. Simply stated it does not follow that because Ford is profitable,
Chrysler must also be profitable.
This emphasizes the danger in using statistical extrapolation to justify changes in the law -- particularly,
if those changes could jeopardize the benefits the U.S. realizes from foreign investment. The SOI data
clearly show that FO-USCs on the whole pay their fair share of U.S. corporate income tax -- a share
proportionate to their share of U.S. business. Should individual U.S. corporations, whether
foreign-owned or U.S.-owned, manipulate their U.S. tax liabilities, the problem is best addressed, as
Treasury officials have repeatedly stated, through the audit process on an individual company basis --
not through broad based, discriminatory law changes.
TAH:dmb (wp362:2)
Attachment
July 15, 1992
TREASURY (SOI) DATA
1984
1985
1986
1987
1988
Total Assets:
FO-USCs
552.6
655.7
840.9
959.4
1,199.3
All U.S. Corp. 11,106.7 12,773.1 14,163.2 15,310.6 16,568.5
Total Receipts:
FO-USCs
459.2
513.8
542.7
686.8
825.6
All U.S. Corp.
7,860.7
3,398.3
8,669.4
9,580.7
10,264.9
Federal Income
Tax Liability:
FO-USCs
4.5
3.6
3.0
4.6
5.8
All U.S. Corp.
64.0
63.3
73.9
87.0
95.9
MONEY AMOUNTS IN BILLIONS
253-15
COMPARISON OF RECEIPTS, ASSETS & TAX OF
FOREIGN & U.S. OWNED U.S. CORPORATIONS
1984 - 1988
Actual Based on SOI - Tax Return Data:
ACTUAL:
RECEIPTS
ASSETS
TAX
TAX, IF FOREIGN
OWNED U.S.
CORPORATIONS:
PAID $30 BILLION
MORE TAX ANNUALLY
PAID $6.0 BILLION
MORE TAX ANNUALLY
0% 6%
25%
50%
75%
100%
% OF ALL U.S. CORPORATIONS
FOREIGN OWNED
U.S. OWNED
253-14
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1ST STORY of Level 1 printed in FULL format.
Copyright 1992 The Washington Post
The Washington Post
August 13, 1992, Thursday, Final Edition
SECTION: FIRST SECTION; PAGE A1
LENGTH: 1151 words
HEADLINE: U.S., Canada and Mexico Agree to Form Trade Bloc;
Pact Would Create World's Largest Commercial Zone
SERIES: Occasional
BYLINE: Stuart Auerbach, Washington Post Staff Writer
BODY:
The United States, Canada and Mexico concluded a hemispheric free-trade
agreement yesterday that would create the world's largest trade bloc, one
designed to make North American companies more competitive against their Asian
and European rivals.
The agreement covers a territory stretching from the Yukon to the Yucatan
with some 360 million people and an economy of $ 6 trillion.
Under the pact, known as the North American Free Trade Agreement, tariffs and
other barriers to the movement of goods, services and money between the United
States and its neighbors to the north and south will be erased over the next 15
years.
Just hours after the agreement was reached, President Bush stepped out into
the morning sun of the White House Rose Garden to announce the pact and call it
"the beginning of a new era" for North American economic cooperation that will
"create jobs and generate growth in all three countries."
While U.S. business cheered the announcement, Democrats, organized labor and
others immediately raised questions about its impact, signaling a difficult
ratification battle in Congress next year.
Democratic presidential nominee Bill Clinton said he supports a free-trade
pact if it "provides adequate protection for workers, farmers and the
environment on both sides of the border."
Two influential Democratic lawmakers -- House Majority Leader Richard A.
Gephardt (Mo.) and Sen. Max Baucus (Mont.), chairman of the Senate Finance
Committee's trade panel -- said the trade pact negotiated by the Bush
administration failed those tests. They called for a renegotiation of the
agreement to strengthen its provisions on protecting the environment and helping
workers who lose their jobs because of the accord.
Under the agreement, which is to take effect on Jan. 1, 1994, patterns of
trade are expected to change in all of North America, just as they changed
between the United States and Canada under a similar accord between those two
countries 3 1/2 years ago. The concept behind these agreements is that the
economy of the entire region will grow more vigorously and be more competitive
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The Washington Post, August 13, 1992
with foreign rivals as a whole than as separate national economies.
With Mexican tariffs now averaging 250 percent higher than U.S. tariffs,
American makers of cars, auto parts, telecommunications equipment, computers and
other products expect the lowering of barriers to vastly increase their sales in
Mexico. Further, the agreement opens new markets in Mexico for U.S. banks,
insurance companies, investment houses and oil service companies, all of which
faced restrictions or bans on doing business there.
"Mexico is our fastest growing export opportunity
and this agreement not
only locks in the economic reforms and export opportunities that we have secured
to date, but builds upon them and creates a real job machine at our back door,"
said U.S. Trade Representative Carla A. Hills.
She signed off on the trade pact shortly before 2 a.m. yesterday, after a
final, intense two-week round of talks that concluded 14 months of negotiations.
The White House, apparently anxious to gain political capital from the
conclusion of the trade pact, arranged for the presidential announcement hours
before final agreement was reached. Nonetheless, Hills said she was under no
political pressure to conclude the agreement before next week's Republican
convention.
Both President Carlos Salinas de Gortari of Mexico and Canadian Prime
Minister Brian Mulroney praised the accord yesterday. Salinas, who sought the
trade agreement with the United States, is banking on it to lift Mexico into an
economic force in the world.
Canada joined the talks late to gain improvements in its bilateral trade pact
with the United States.
Bush, in his short Rose Garden announcement, sounded themes that are certain
to be a part of his reelection campaign. He said that open markets in Canada and
Mexico mean more and higher-paying American jobs, "the kind that our nation
needs to grow and prosper, the kind that showcase American talent and
technology."
Congressional Democrats, however, attacked the pact on the jobs issue. Sen.
Donald W. Riegle Jr. (D-Mich.) called it "a real danger to Michigan and the
entire American economy because we have plants closing all across America
and moving to Mexico to take advantage of very low wage rates."
The Republican side was more supportive. Sen. John C. Danforth (R-Mo.) called
it "a bold and exciting idea" that ranks "among the most important economic
developments for the United States since World War II."
Hills and her chief negotiator, Deputy U.S. Trade Representative Julius Katz,
said lawyers will go over the agreement next week to make sure its language is
clear and all its provisions are consistent. At the same time, some 40 industry
advisory groups will prepare reports for Congress on the impact it will have on
their businesses.
The completed text and those reports will be presented to Congress when it
returns from the Labor Day recess in early September. Under the law, Congress
has 90 days to study the agreement and to work with the administration to
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The Washington Post, August 13, 1992
draft legislation that will implement the agreement into law. Congress then has
90 legislative days, which could stretch out for as long as eight months, to
pass that legislation under special "fast-track" provisions that permit no
delays or amendments.
This means the legislation will be acted on by a new Congress, with as many
as 125 new members, and could be presented by a new president with ideas of his
own on the contents of agreement.
Organized labor and major environmental groups joined in the attack on the
accord, which AFL-CIO Secretary-Treasurer Thomas Donahue called "a bad deal for
American workers, consumers and the long-term health of the American economy."
But practically across the board, the agreement was hailed by major U.S.
industrial groups and corporations, which feel it will help them sell more in
Mexico's previously closed markets, help them compete better against foreign
rivals in North America and allow them to manufacture across the continent so
they can become more efficient competitors in European and Asian markets.
Typical of comments on the agreement from big business, General Motors Corp.
Chairman Robert C. Stempel said, "It has the potential to create jobs in the
United States and increase trade by all three countries."
Despite attacks by environmental groups, Hills and Environmental Protection
Agency Administrator William K. Reilly praised the environmental sections of the
agreement, which they said preserves stringent U.S. health, safety and
environmental laws.
= NAFTA is the most environmentally sensitive trade agreement ever
negotiated anywhere, and it will be seen as a model for other countries.
Rejecting NAFTA on environmental grounds would be the environmental mistake of
the decade," Reilly said.
GRAPHIC: ILLUSTRATION, KEY PROVISIONS, PETER HOEY; ILLUSTRATION, TWP
TYPE: NATIONAL NEWS, FOREIGN NEWS
SUBJECT: CANADA; UNITED STATES; MEXICO; TREATIES; TRADE REGULATION; FOREIGN
INVESTMENTS; INTERNATIONAL TRADE
ORGANIZATION: NORTH AMERICAN FREE TRADE AGREEMENT
NAMED-PERSONS: GEORGE BUSH; BILL CLINTON; RICHARD A. GEPHARDT; MAX BAUCUS
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EXECUTIVE OFFICE OF THE PRESIDENT
25-Aug-1992 05:36pm
TO:
Andrew Ferguson
FROM:
Edward J. Walters
Office of Communications
SUBJECT: OHIO
In Ohio, exports are up percent over the last three years --
28.5 billion worth of goods shipped to 172 countries.
I'm not sure Ohio has recent enough figures to fill in the first
blank, but if they do, I'm going to find it.
Also, in the Missouri speech using the line above, you say they
export to every continent. Must be a tough trek to Antarctica.
EXECUTIVE OFFICE OF THE PRESIDENT
25-Aug-1992 05:29pm
TO:
Andrew Ferguson
FROM:
Edward J. Walters
Office of Communications
SUBJECT: Findlay, OH
This just in
...
Once again, you are prescient. Findlay Machine and Tool does not
export (although they assure me that they have sold to Japanese
and German companies in the U.S.). Some of their bigger customers
are Catepillar machinery, GM, and Briggs and Stratton.
They boast a new kind of machine-cleaning equipment that is
environmentally friendly. Two of their machine cleaners will
flank the stage area, as will two 30-ft. flags and a banner.
Expected audience is 1,500.
(Ferguson/Walters)
August 25, 1992
6:40 p.m.
2 AUG 25 P6: 43
STLOUIS
PRESIDENTIAL REMARKS: PUBLIC SAFETY EQUIPMENT, INC.
ST. LOUIS, MISSOURI
AUGUST 27, 1992
9:00 A.M. (??)
Thank you and good morning.
(Acknowledgments, humor)
Together we have seen a world transformed these past three
and a half years -- a world made new by American strength and
resolve. But now that the Cold War is over, the defining
challenge of the '90s is to win the economic competition of the
new global economy -- to win the peace.
Our goal is simple and profound: We must be a military
superpower, an economic superpower and an export superpower.
In this election, you'll hear two versions of how to do
this. My opponents' answer is to look inward, and protect what
we already have from the challenges of this new world. My
approach is to look forward -- to open new markets, prepare our
people to compete, to restore our social fabric -- to save and
invest, so that we can win.
Twenty five years ago, where you're standing was a patch of
bleak, undeveloped real estate. Now look around -- because of
your dreams and hard-work, that patch of ground is a bustling
factory, creating light bars and sirens that help save lives and
keep the peace from Manila to Santiago.
2
There was a time when companies like PSE could be satisfied
with a national market -- sell your goods in the fifty states and
leave it at that.
But you here at PSE know that's no longer good enough. So
five years ago, you took on the world. I'm told that now 35
percent of what you build right here is sold outside our borders,
in 66 different countries. That bold, forward-looking strategy
has helped you weather the uncertainties of the past few years.
PSE's story is a parable for our entire country's economic
future -- never settling for less, always pushing ahead,
embracing the challenges of foreign competition and reshaping
them as opportunities.
Let me offer a personal note -- tell you how I learned about
competing in the world.
I spent a good part of my life out in West Texas, in the oil
business. I painted rigs for a while, even lived out of a
suitcase as a traveling salesman. And all around me in those
days -- the fifties and early sixties -- I saw towns and
businesses bloom from those dusty plains like desert flowers.
Why? The reason was simple: The world wanted what Texas
had to offer -- cotton and cattle and crude.
We understood that the more goods we sold outside our
borders, the more jobs we could create within them.
Later on, when I started my own business, I learned again:
we had to take a global view to compete. I shopped for investors
on the west coast, on the east coast, but I couldn't stop there.
3
I traveled the world -- to Europe and the Far East. Every dollar
we could bring into this country was a dollar that went to expand
our company, create jobs in our community.
I've seen it over and over again: as U.N. ambassador, envoy
to China, and now as president. You learn how important America
is to the world, but you also learn how important the world is to
America -- not just for national security, not just for military
preparedness, but for creating jobs, right here at home.
We've held steady to this vision for three years now, and
with great success. As we knock down trade barriers, American
companies are rushing to meet the demand. Exports are up XXX in
the last five years; America is once again the world's leading
exporter.
What does that mean right here? I'll bring it closer to
home. In Missouri, exports are up 37 percent over the last three
years -- $4.5 billion worth of goods shipped to 166 countries on
every continent.
Impressive numbers, but when you get behind the abstractions
of export figures and trade statistics, you find the real benefit
of the new world economy -- in a word, it's jobs. Here in
Missouri, 100,000 jobs are supported by foreign trade. Across
the country, more than 7 million Americans are employed for the
same reason.
That's the way the world works these days. It's a world
where products can be shipped at the speed of sound and
investment money can cross borders at the speed of light.
4
Everyone recognizes that the world is moving at a faster
pace than ever, but I see something more: it's moving our way.
Right now we're building on the export success of the last three
years. Two weeks ago we entered a new era of open trade. Along
with Mexico and Canada, we initialed the North American Free
Trade Agreement, with the goal of creating one of the largest
free-trade areas in the world -- an integrated economy worth more
than $6 trillion dollars.
Here in Missouri, you already export $2 billion worth of
goods to Mexico and Canada. That's a lot of paychecks, but our
new agreement will make that success look like kid's stuff.
NAFTA is a solid agreement -- when you've been in as many
tough negotiations as I have, you learn to tell the difference.
It will protect the environment, and more important, it will
protect American workers. And more: it will create new jobs for
this generation and the next -- especially the kind of high-
tech, high-wage jobs we'll be proud to pass on to our children.
We're going to take this case to the liberal Democrats on
Capitol Hill, because they need to hear it. A free-trade
agreement isn't a way of dividing up the economic pie, where one
side's loss is another side's gain; it's a way of making the pie
bigger for everyone who participates.
The liberals don't seem to get it. Right now, in fact,
before our initials are even dry on the agreement, the liberals
in Congress -- led by somebody who might be familiar to you,
5
Congressman Dick Gephardt -- are calling for us to slap a tarriff
on any new trade that comes from NAFTA.
Think about that for a minute -- ((which is a minute longer
than they've thought about it)). After years of tough
negotiations with our two closest trading partners, we've agreed
to end tariffs. The congressional Democrats say: Okay, fine.
But first you have to put on a new tariff.
In other words, the only way they'll agree to reduce tariffs
is if they can raise tariffs.
That's like telling us they want us to hit a homerun, but
please don't hit it out of the park because we don't want to lose
the ball.
This "transaction tax," as they call it, will increase the
cost of goods you want to buy, and discourage the creation of new
jobs for you and your neighbors. It turns the agreement on its
head -- defeats the whole purpose.
Now, I suppose I could ask my opponent to help me out with
his liberal Democrat colleagues on Capitol Hill. Governor
Clinton says he's for free trade "in principle."
But "in practice" may be a different story. Actually, it's
not clear where the governor stands. Last year, Mr. Clinton
called a free-trade pact with Mexico "imperative." Then this
April, the Washinton Post reported that the protectionists were
"breathing easier" because he endorsed their trade position.
Then in July, he said he was "applauding Majority Leader
Gephardt's efforts."
6
This week, maybe the governor delivered his final word on
the subject. He said he was studying our agreement. Then he
said: "When I have a definitive opinion, I'll say so."
The way Governor Clinton wiggles on free trade, I'm not
surprised he compares himself to Elvis.
No matter how much Governor Clinton would like to fudge the
issue, the difference couldn't be clearer -- and the difference
is based on two very different views of America's future. My
opponents see trade barriers falling and they say: Hold
everything. They see new markets for American goods and they
say: Wait a minute. We can't compete. The American worker can't
cut it. So let's pull down the blinds, lock the doors and hope
the world goes away.
Well, let me tell them something you already know. The
American worker doesn't have to hide from anybody. We have the
most productive workforce in the world. Americans can outwork,
out-think, out-compete anybody, anywhere, anytime.
That's something everyone in the world seems to understand -
- everyone but the protectionist Democrats. Over the last
decade, we've seen a flood of foreign investment in the United
States, with businesses from all over the world setting up shop
from Portland, Oregon to Portland, Maine. These investors are
following a simple logic: if you want the best science and
universities in the world, if you want the best workers in the
world, you have to come to the U.S.A.
7
Now, this investment makes some people uneasy. I understand
that -- particularly when the other side tries to stir up fear
and resentment against foreign capital. I was in Utah not long
ago, and a very articulate woman confronted me on the issue. I
told her we probably couldn't see eye to eye on it, but I tried
to tell her why I felt so strongly against the isolationism that
would keep foreign investment out of America.
There was an irony in her timing. I had just returned from
meeting with the heads of the industrialized countries in Munich,
and while I was there I was pleased to team up with Governor
Carroll of South Carolina and the head of BMW to announce a new
BMW plant in South Carolina. That means 10,000 jobs to the
people of that state.
Now, I don't think the 10,000 South Carolinians who get
those jobs are going to argue against foreign investment. One
out of every ten manufacturing workers in the United States works
for a company supported by foreign investment. That's the bottom
line on foreign investment in the U.S.: jobs -- jobs for
Americans, and growth for the American economy.
That's the way the world works in a global economy. Again,
Governor Clinton just doesn't seem to understand. But he's not
wiggling on the issue of foreign investment -- not at all. He's
surveyed the issue and come out foresquare for -- you guessed it
-- a tax increase.
8
He's proposed to increase taxes on foreign investment in the
United States, each one of those companies that employ a total of
4 and one-half million Americans.
Governor Clinton says his new tax will raise $45 billion.
He might want to talk to his own Democrats on Capitol Hill. The
Joint Committee on Taxation says that estimate is about 45 times
too high.
Governor Clinton says his tax increase will "crack down" on
foreign companies, but all it will really do is drive them out.
And if they go, they'll take those jobs with them.
Travel around this state. Go to New Madrid (MA-drid), talk
to the 1200 employees at Noranda Aluminum -- or to Joplin, talk
to the 425 employees of Atlas Powder. Go to any of the 244
foreign-owned companies that employ 60,000 workers right here in
Missour.
If Governor Clinton's tax hike had been in effect these past
few years, few if any of those companies would have located in
the United States -- few if any of those jobs would have been
created for Missourians.
And it's not just Missouri. Whether it's the Nissan plant
in XX Tennessee -- whether it's the XX plant in xx, XX --
Governor Clinton's tax increase would be felt in every region of
every state of this country.
Governor Clinton forgets something about international
relations. If he raises this tax, our foreign competitors are
going to say: "What's good for the goose is good for the gander."
9
His tax is like a gilded invitation sent to foreign governments
where U.S. companies also do business. And the invititation
reads: "Please retaliate."
The result would be not just a reduction in investment here,
but a contraction worldwide. There was another occasion when
that happened. It was in 1930. Right before the great
depression.
No other major industrial nation has the kind of tax
Governor Clinton proposes -- not Germany, not Japan. But I can
tell you one nation that does tax foreign investment as he would
like: India.
Well, here's a promise I am proud to make: As long as I am
president, India will not be a model for how to conduct economic
policy in the United States of America.
So let's review the facts about Governor Clinton's tax: It
won't raise revenue. It won't create a single job. It will
discourage investment. And it threatens to start a trade war at
the very moment when markets the world over are opening up to
American products.
We should ask why, given all this, Governor Clinton would
ever propose such a tax in the first place. I can tell you why.
Today change is accelerating, and change breeds uneasiness,
skepticism, even fear. And by disparaging foreign investment,
Governor Clinton hopes to exploit the darker fears of this
uncertain age -- fear of the future, fear of the unknown, fear of
foreigners.
10
Well, let me tell Governor Clinton something: You can play
politics with, but those are American jobs you're playing
politics with. Those are American workers you're putting at
risk.
The American people won't buy it. We're bigger than that.
The proudest people on earth have never stooped to fearmongers
before, and we're not going to start now.
In talking about America's future in the global economy, I
mentioned my own experience, because I want you to understand why
I believe what I do about America's ability to compete. Governor
Clinton takes a different view, and it is borne of his life
experience -- a life spent in government.
You see the difference on issue after issue. I understand
that you boost the economy by cutting taxes. I understand that
you cut the deficit by cutting spending. I understand that you
open markets by tearing down barriers -- by sitting down at the
table and hammering out a tough and fair agreement.
So the American people have a clear choice this year. It's
a choice between the patrons of the past and the architects of
the future. I believe we can shape what lies ahead -- not by
turning away from challenges but by doing what you here at PSE
have done. You didn't shrink from challenge, you embraced it.
You didn't shrink from competition, you met it head on. You
didn't retreat from foreign markets, you conquered them.
I have faith in America's future -- because I have faith in
the American people. It's the same faith that brought me out to
11
Texas more than 40 years ago -- the same faith that brought me
into public life -- the same faith that has led me to fight for
open markets -- because I know that no challenge is too great for
the American heart.
Thank you and God bless you.
# #
EXECUTIVE OFFICE OF THE PRESIDENT
25-Aug-1992 03:29pm
TO:
Andrew Ferguson
FROM:
Edward J. Walters
Office of Communications
SUBJECT: OHIO trade numbers
25.8 billion dollars tied to exports (direct and indirect),
representing 6.5 percent of the state's economy.
315,000 workers in jobs tied to exports (1 in 7 jobs in the
state).
Andy
August 16, 1992
MEMORANDUM FOR SPEECHWRITERS/RESEARCHERS
FROM:
STEVEN D. PROVOST
Assistant to the President
for Speechwriting
RE:
Upcoming Speeches
Here's a synopsis of the speeches that will be delivered the week
after the convention. Please let me know if you have any
questions or comments. The only constant is change, so I'll
provide more information as it becomes available.
Friday, Saturday and Sunday rally remarks will all be "stump"
summaries of the acceptance speech. The one exception is the
National Affairs Briefing with the Evangelicals (Curt Smith)
which should cover the social issues of concern to that audience.
After the weekend, we will devote all the next week's events to
the economy, both explaining the President's new proposals and
attacking the Clinton-Gore economic platform.
If time allows, each speech should begin with the same litany,
covering specific points we want to drive home.
1. The President is the only candidate who has run a business.
(Example: "The simple fact is, there is only one candidate
for President who has lived a life beyond government, and
known a call above political ambition. Bill Clinton has
never created a single job -- since the day he graduated
from law school, every paycheck he has earned has come out
of the taxpayer's pocket. I built a company -- met a
payroll. Keep that in mind when you consider who you trust
to get this economy moving faster."
2. A concise philosophical indictment of the Clinton economic
strategy on two counts. First, he is a liberal in
moderates' clothing. (Example: "Governor Clinton says he
favors enterprise, but proposes the largest tax increase in
history. He says he wants smaller government, but of the
thousands of federal programs -- proposes only cutting the
vaunted honey bee subsidy. He says he is for fiscal
responsibility -- but came out against a balanced budget
amendment. Bill Clinton is the "Karaoke candidate" -- he'll
sing any tune he thinks will get him elected") Second,
Clinton-Gore are "patrons of the past, " wanting to protect
old jobs. We are "architects of the future," wanting to
create new jobs in a high-tech, information-based,
knowledge-driven world economy.
3.
A concise statement of the President's economic philosophy,
drawing the link between his success in foreign affairs
and the challenge of competing in a global economy.
(Example: In the past four years, more people have breathed
the first breath of freedom than in any time in human
history. America's leadership -- your leadership -- made it
happen. We've cornered the markets on American concepts,
now let' S get to work on creating good jobs by exporting
American commodities. Today, one out of 13 Americans owe
their jobs to foreign trade, and over the past five years,
one-third of our economic growth has come from selling
products outside our border. This is our future. We've
sold the world on our freedom -- now let's sell them farm
machinery. We've covered the world with democracy -- let's
introduce them to Diet Pepsi. They love liberty -- maybe
they'll try our Levis. How do we compete? At a time when
all the world is going our way, it doesn't make much
sense to go back their way, with big government and high
taxes. I offer a program of smaller government, with more
incentives for people to create jobs, save and produce. I
offer radical, conservative alternatives to improve the
fundamentals of our economy: our schools, our welfare
system, our research and development capabilities, and our
cities.
4.
Then go into the specific news of the day. This part of
the speech should be factual, loaded with substance, both
on the President's proposals and the Clinton criticism.
Our speeches continue to be criticized, somewhat fairly, for
relying too heavily on rhetoric, not enough on facts,
anecdotes, quotes, etc. Having said that, you should let
your creativity flow and identify the one "soundbite" that
captures the essence of the day's story. If the substance
of the issue requires a full 10-12 minutes to explain,
skip the stuff above, and we'll fold it into an economic
"stump" message later in the day.
5.
All speeches must include a pitch for voters to elect a
"responsible" Congress (not Republican, this is impractical)
that is willing to try new ideas and not tied to special
interests.
Here are the speeches, by day.
Monday, August 24: New Jersey and Connecticut: (McGroarty)
This day is devoted to explaining the President's new job
training initiatives (for both at-risk young people and
displaced workers) which may be touched upon briefly in
acceptance speech.
The New Jersey event is at Lincoln Technical Institute. It
should start with background on the economy, then explain the job
training initiatives in some detail and context. Tom Scully has
all the details, the main (and somewhat academic) points of
distinction with Clinton are a) Clinton wants to tax workers to
pay for their own retraining (there is a pattern here) and b)
Clinton's plan to gut the defense budget would throw a million
Americans out of work immediately, making more retraining
necessary.
The Connecticut event is a lunchtime rally, with members of
service clubs. The President should give the basic economic
stump message, as outlined above, with special attention to
Clinton's defense cuts (need to figure out exactly what
Connecticut industries will be effected), Clinton's effect on
small business, and then, finally, a condensed description of the
job training initiatives discussed that morning. As much as
possible, we want the story of the day to be the New Jersey
event.
Tuesday, August 25: American Legion (Smith) and Michigan Event
(Provost)
A decision will be made Tuesday morning on American Legion. One
of three speeches are possible. The basic "We won the Cold
War/Veteran's pander" (ala VFW) a pure "foreign policy of the
future" address or a speech that tries to drive home the
connection between foreign policy and domestic economic policy
The key factor will be whether we decide to have the news of the
day come out of the afternoon event in Michigan.
The Michigan event is a main street rally in Canton, Michigan, a
town in Western Wayne County outside of Detroit. Clinton will
have spoken at the Detroit Economic Club the Friday before and
met with the CEO's of the big auto companies. His bus tour will
be starting the next day from the same area.
At this outside event, the President should open with the same
abbreviated stump speech he gave the day before in Connecticut,
then devote specific attention to criticizing the Clinton-Gore
ticket for public statements that the automobile is evil and
should be abolished, and advocating higher CAFE standards and a
gas tax. The President should paint a picture of the havoc this
would wreak with the already weak Michigan economy.
Thursday, August 27th: Missouri, Cincinnati, Findley, Ohio.
(Ferguson)
The news event of the day is the Missouri event. The President
notso
will appear at a TBD plant that is an American subsidiary of a
foreign company. The speech should outline the President's free
trade philosophy and agenda, then make the case that Governor
Clinton is a closet protectionist, who doesn't understand the
world economy. Specific criticism should be levied at Clinton's
proposal to tax foreign investment, and the President should list
the plants and jobs that would threaten in key states. Andy
should call Dan Crippen with the campaign for help in researching
the true impact of Clinton's proposals and developing a fact
sheet to accompany the speech.
The noon rally in Cincinnati will be outside, off cards. The
President should deliver the basic economic stump speech he
delivered in Connecticut, with a specific insert on trade,
summarizing the speech of the morning (with local anecdotes). We
will use the same speech for Findlay, Ohio that evening.
Friday, August 28th: Louisiana:
This event has just been added, so I'm not sure of appropriate
topic. Tuesday morning we will decide topic and make the
assignment.
Transfer tax 300,000 notincluding
over 4 yrs.
(Ferguson/Walters)
August 24, 1992
Draft One
STLOUIS
PRESIDENTIAL REMARKS: PUBLIC SAFETY EQUIPMENT, INC.
ST. LOUIS, MISSOURI
AUGUST 24, 1992
9:00 A.M. (??)
Thank you and good morning.
humo
(Acknowledgments)
We're told this election is about change, and it is. The
world is in transition, and we re feeling that transition in our
homes, in our jobs, in the future we imagine for our kids.
The question we face is How do we take advantage of this
changing world, so that we make this transition work for us.
Now that the Cold War is over, the defining challenge of the
'90s is to win the economic competition of the new global economy
-- to win the peace.
Our goal is simple and profound: We must be a military
superpower, an economic superpower and an export superpower.
In this election, you'll hear two versions of how to do
this. My opponents' answer is to look inward, and protect what
we already have from the challenges of this new world. My
approach is to look forward -- to open new markets, prepare our
people to compete, to restore our social fabric -- to save and
invest, so that we can win.
I'll give you an example of the winning strategy -- of how
we turn change into unbounded opportunity. You're the example.
Twenty five years ago, where you're standing, was a corn-
field. Now look around -- because of your dreams and hard-work,
2
that cornfield is bustling factory, creating products that save
lives from XX to XX.
There was a time when companies like PSE could be satisfied
with a national market -- sell your goods in the fifty states and
leave it at that.
But you here at PSE know that's no longer good enough. So
five years ago, you took on the world. I'm told that now 35
percent of what you build right here is sold outside our borders,
in 66 different countries. That bold, forward-looking strategy
has helped you weather the uncertainties of the past few years.
PSE's story is a parable for our entire country's, economic
future -- never settling for less, always pushing forward,
embracing the challenges of foreign competition and reshaping
them as opportunities.
Let me offer a personal note -- tell you how I learned about
competing in the world.
I spent a good part of my life out in West Texas, in the oil
business. I painted rigs for a while, even lived out of a
suitcase as a traveling salesman. And all around me in those
days -- the fifties and early sixties -- I saw towns and
businesses bloom from those dusty plains of West Texas.
Why? The reason was simple: The world wanted what we had
to offer -- crude and cattle and cotton.
We understood that the more goods we sold outside our
borders, the more jobs we could create within them.
3
Later on, I started my own business, trying to build it from
the ground up, and I learned again: we had to take a global view
to compete. I shopped for investors on the west coast, on the
east coast, and around the world -- to Europe and the Far East.
Every dollar we could bring into this country was a dollar that
went to expand our company, create jobs in our community.
I've seen it over and over again: as U.N. ambassador, envoy
to China, and now as president. You learn how important America
is to the world, but you also learn how important the world is to
America -- not just for national security, not just for military
preparedness, but for creating jobs, right here at home.
We've held steady to this vision for three years now, and
with great success. Trade barriers are falling, and American
companies are rushing to meet the demand. Exports are up XXX in
the last five years.
Bring it still closer to home. In Missouri, exports are up
37 percent over the last three years -- $4.5 billion worth of
goods shipped to 166 different countries. Impressive numbers,
but when you get behind the abstractions of export figures and
trade statistics, you find the real benefit of the new world
economy -- that's jobs. Here in Missouri, 100,000 jobs are
supported by foreign trade. Across the country, more than 7
million Americans are employed for the same reason.
That's the way the world works these days. It's a world
where products can be shipped at the speed of sound and
investment money can cross borders at the speed of light.
4
Everyone recognizes that the world is moving at a faster
pace than ever, but I see something more: it's moving our way.
Right now we're building on the export success of the last three
years. are building on this success. Two weeks ago we entered a
new era of open trade. Along with Mexico and Canada, we
initialed the North American Free Trade Agreement, creating one
of the largest free-trade areas in the world -- an integrated
economy worth more than $6 trillion dollars.
Here in Missouri, you already export $2 billion worth of
goods to Mexico and Canada. Those manufactured exports alone
support 78,000 jobs for workers right here. Our new agreement
will make that success look like kid's stuff.
NAFTA is a solid agreement -- when you've been in as many
tough negotiations as I have, you learn to tell the difference.
It will protect the environment, and more important, it will
protect the jobs we have. Okemocthy. And more: it will create new jobs for
this generation and the next -- particularly the jobs that
showcase America's high-tech talent.
We're going to take this case to the liberal Democrats on
Capitol Hill, because they need to hear it. A free-trade
agreement isn't a way of dividing up the economic pie, where one
side's loss is another side's gain; it's a way of making the pie
bigger for everyone who participates.
The liberals don't seem to get it. Right now, in fact,
before our initials are even dry on the agreement, the liberals
gailby Missouri Congramen 5 Dick
in Congress are calling for us to slap a tarriff on any new trade
that comes from NAFTA.
Think about that for a minute (which is probably more than
they've done). After years of tough negotiations with our two
closest trading partners, we've agreed to end tariffs. The
congressional Democrats say: Okay, fine. But first you have to
put on a new tariff.
In other words, the only way they'll agree to reduce tariffs
is if they can raise tariffs.
That's like telling us they want us to hit a homerun, but
please don't hit it out of the park because they're afraid of
losing the ball.
This transaction tax, as they call it, will increase the
cost of goods you want to buy, and discourage the creation of new
jobs for you and your neighbors. It will defeat the purpose of
the agreement.
Now, I suppose I could ask my opponent to help me out with
his liberal Democrat colleagues on Capitol Hill. Governor
Clinton says he's for free trade "in principle."
But "in practice" may be a different story. [Clinton
quotes]
After watching him wiggle on this issue, I'm not surprise d he
compares himself to Elvis.
This whole approach is based on a way of seeing the future.
My opponents see trade barriers falling and they say: Hold
everything. They see new markets for American goods and they
6
say: Wait a minute. We can't compete. The American worker can't
cut it. So let's pull down the blinds, lock the doors and hope
the world goes away.
Well, let me tell them something you already know. The
American worker doesn't have to hide from anybody. We have the
most productive workforce in the world. Americans can outwork,
out-think, out-compete anybody, anywhere, anytime.
That's something everyone in the world seems to understand -
- everyone but the protectionist Democrats. Over the last
decade, we've seen a flood of foreign investment in the United
States, with businesses from all over the world setting up shop
from XX to XX. Their reasoning is simple: if you want the best
science and universities in the world, if you want the best
workers in the world, you have to come to the United States.
Now, this investment makes some people uneasy. I understand
that -- particularly when you have the other side trying to stir
up fear and resentment against foreign capital. I was in Utah
not long ago, and a very articulate woman confronted me on the
issue. I told her we probably couldn't see eye to eye on it, but
I tried to tell her why I felt so strongly against the
isolationism that would keep foreign investment out of America.
There was an irony in her timing. I had just returned from
negotiating with the heads of the industrialized countries in
Munich, and while I was there I was pleased to team up with
Governor Carroll of South Carolina and the head of BMW to
7
announce a new BMW plant in South Carolina. That means 10,000
jobs to the people of that state.
Now, I don't think the 10,000 South Carolinians are going to
argue against foreign investment. One out of every ten
manufacturing workers in the United States works for a company
supported by foreign investment. That's the bottom line on
foreign investment in the U.S.: jobs -- jobs for Americans, and
growth for the American economy.
That's the way the world works in a global economy. Again,
Governor Clinton just doesn't seem to understand. He's proposed
to increase taxes on foreign investment in the United States,
especially those companies that employ a total of 4 and one-half
million Americans.
Governor Clinton says his new tax will raise $45 billion.
He might want to talk to his own Democrats on Capitol Hill. The
Joint Economic Committee says that estimate is about 25 times too
high.
Governor Clinton says his tax increase will "crack down" on
foreign companies, but all it will really do is drive them out.
And if they go, they'll take those jobs with them.
Travel around this state. Go to New Madrid, talk to the
1200 employees at Noranda Aluminum -- or to Joplin, talk to the
425 employees of Atlas Powder. Go to any of the 244 foreign-
owned companies that employ 60,000 workers in this state.
If Governor Clinton's tax hike had been in effect these past
few years, few if any of those companies would have located in
8
from states
the United States -- few if any of those jobs would have been
created for Missourians.
And it's whether not just its Mo. his the new fast tar in every he state requirem of the ciunty
Governor Clinton forgets something about international
relations. If he raises this tax, our foreign competitors are
going to say: "What's good for the goose is good for the gander."
His tax is like a gilded invitation sent to foreign governments
where U.S. companies also do business. And the invititation
reads: "Please retaliate."
The result would be not just a reduction in investment here,
but a contraction worldwide. There was another occasion when
that happened. It was in 1930. Right before the great
depression.
No other major industrial nation has the kind of tax
Governor Clinton proposes. But I can tell you one nation that
does tax foreign investment has he would like: India.
Well, here's a promise I am proud to make: As long as I am
president, India will not be a model for how to conduct economic
policy in the United States of America.
In talking about America's future in the global economy, I
mentioned my own experience, because I want you to understand why
I believe what I do about America's ability to compete. Governor
Clinton takes a different view, and it is borne of a very
different life experience a lifergent in government
He has spent almost his entire working life inside a
government office building, so it's not surprising that when he
talks about the economy he puts government first. He thinks you
9
can fix the economy by raising taxes by $150 billion. He thinks
you can cut the deficit by increasing spending by $220 billion.
He thinks you can open markets by raising new tariffs.
NO/
If you ask me this guy not only inhaled -- he never exhaled.
There's a clear choice here. I understand that you boost
the economy by cutting taxes. I understand that you cut the
deficit by cutting spending. I understand that you open markets
by sitting down at the table and hammering out a tough and fair
agreement to open markets.
So we have a clear choice. Do we turn to the tattered
blanket of bigger government that other nations are tossing away?
Or do we giver our people the freedom and incentives to build
security for themselves?
Here's what I'm fighting for: lower government spending; tax
relief: opportunities for small business; legal and health
reform; job training; and new schools, built on competition,
ready for the 21st century.
And I'm fighting for this: Open markets for American
products -- your products. I won't rest until every American
business is given a fair shake in every country in the world. I
know what those opportunities mean to every American who has a
job or wants one. Because I know that this country -- this
country that has changed the world -- is destined to lead in the
new century now being born.
mar personal, emotional conclusity
JULAUG 24 '92 17:46
The
T OF
Missouri
Post-It™ brand fax transmittal memo 7671
# of pages 3
IENT
EDWALTERS
From R. McCLURE
D2
Co WHOUSE RESEARCH Co.
Advantage™
TM
Dept.
Phone # 314/751-3292
Fax 2021456-6218
Fax #
751-2128
NEWS RELEASE
For Immediate Release
Contact: Dan Barber
March 16th, 1992
314-751-9065
FOREIGN INVESTMENT SUMMARY
(Jefferson city)--The State of Missouri actively seeks
foreign investment from all parts of the world. The Department of
Economic Development has overseas offices in Duesseldorf,
Germany; Tokyo, Japan; Seoul, Korea; and Taipei, Taiwan to assist
in promoting economic growth and job creation in our state.
To date there are 244 foreign companies from 21 countries in
Missouri. These foreign investments amount to an estimated $3.5
billion and employ more than sixty-thousand Missourians. The
major countries investing in our state are Japan, United Kingdom,
Germany and Canada. These four countries account for 62% of the
jobs and approximately 60% of the investments.
The next four major investors are Ireland, The Netherlands,
Switzerland, and France. These four account for another 28% of
the jobs and approximately 15% of the investments.
The state takes several different approaches to attracting
foreign investment. The local office and the overseas offices do
direct mail campaigns and attend international trade shows. The
Department of Economic Development has a joint venture program
that matches Missouri companies with interested foreign
companies. The state also has a number of cooperative agreements
with Japanese banks and securities companies, international
chambers of commerce, and foreign governments.
- more -
JUL
AUG 24_'92_17:47
DEPT OF ECONOMIC DEV
Department of Economic Development - add one
The state is open to foreign investment and has no laws or
regulations prohibiting investment. For more information contact
Dan Barber, Public Information officer at the Missouri Department
of Economic Development (314) 751-9065.
- 30 -
JUL-AUG 24_'92_17:47
DEPT OF ECONOMIC DEU
FOREIGN INVESTMENT IN MISSOURISAP
CANADA
NORANDA ALUMINUM COMPANY - NEW MADRID
1200
EMPLOYEES
POLYTAINERS * LEE'S SUMMIT - 65 EMPLOYEES
FRANCE
ELF AQUITAINE ASPHALT. INC. ST. LOUIS
190 EMPLOYEES
PHONE POULENC. INC. -, ST. JOSPEH - 40 EMPLOYESS
GERMANY
F.A.G. BEARINGS - JOPLIN - 305 EMPLOYEES
FRU-CON CONSTRUCTION CORP. - BALLWIN - 350 EMPLOYEES
M & in PACKAGING INC. - CAPE GIRARDEAU - 190 EMPLOYEES
MEMC ELECTRONICS - ST. PETERS - 1500 EMPLOYEES
IRELAND
BILLY GOAT INDUSTRIES - LEE'S SUMMIT - 62 EMPLOYEES
JEFFERSON SMURFIT - ST. LOUIS - 4500 EMPLOYEES
JAPAN
BIOKYOWA INC. - CAPE GIRARDEAU - 86 EMPLOYEES
KAWASAKI MOTORS - MARYVILLE . 115 EMPLOYEES
OPTEC D.D. - MEXICO - EMPLOYEES
SONY CORP. - KANSAS CITY - 73 EMPLOYEES
NETHERLANDS
AMERICAN INGREDIENTS COMPANY - KANSAS CITY - 50 EMPLOYEES
LEVER BROTHERS COMPANY - ST. LOUIS - 600 EMPLOYEES
SWITZERLAND
CONSOLIDATED ALUMINUM CORP. - ST. LOUIS - 60 EMPLOYEES
SUNMARK - ST. LOUIS - 900 EMPLOYEES
UNITED KINGDOM
ATLAS POWDER*COMPANY - JOPLIN - 425 EMPLOYEES
DRG PLASTICS - UNION - 180 EMPLOYEES
FASCO INDUSTRIES - OZARK 2900 EMPLOYEES
TRIMFOOT COMPANY - FARMINGTON - 425 EMPLOYEES
9
government plan. Play-or-pay would quickly lead to most
Americans being in a government-run health plan.
-- According to the cBo, $80 billion in new taxes would be
required to finance play-or-pay.*
o
Clinton also proposes to collect $45 billion over four years
by imposing higher taxes on foreign companies operating in
the U.S."
-- Contradicting Clinton's accounting, the Democratic-
dominated Joint Committee on Taxation has said that
this tax could generate at most $1 billion, and that
over four years."
-- The tax jeopardizes current and future American jobs by
penalizing foreign firms that want to invest in jobs
here at home. Thus, firms like BMW, which have been
attracted by America's high worker productivity and
hospitable business climate, will likely turn their
backs on creating new jobs in the U.S.
-- In Ohio, for example, 215,000 persons are employed in
industries related to foreign-owned businesses. These
businesses have invested $5 billion in the state and
have created millions of dollars in tax revenue for
communities and school districts."
--
Coming at a time when President Bush is pushing the
Europeans to cut unfair subsidies to their farmers, and
other nations to end barriers to American goods, the
Clinton tax will invite retaliation against American
products and cost more American jobs. One of the IRS's
former top international tax experts described as "just
nuts" the thinking that underlies a Clinton-style
tax.
30
Preliminary CBO estimate of the cost of play-or-pay,
(H.R. 3205, August 2, 1991).
Ed-
31
"Putting People First: A National Economic Strategy,"
June 20, 1992. See Table 2 for tax revenue estimates.
Be sure
32
Joint Committee on Taxation revenue estimate, conveyed
via letter to Senator Pete Domenici, dated July 15, 1992.
to get
a
Copies of
"Republican Development Director Criticizes Clinton's
Economics," AP, July 19, 1992.
these
34
Kevin Dolan, former IRS Associate Chief
Counsel/International, quoted in BNA Tax Management
A.
Report on Transfer Pricing, June 10, 1992.
ID:
AUG 24'92
15:58 No.010 P.02
FOOTNOTE 30 BACKUP
(including next page)
102D CONGRESS. 20 SESSION
77
HARRY L GUTMAN
CHIEF OF STAFF
ALAN J. AVERSACH
SENATE
HOUSE
DEPUTY CHIEF OF STAFF
LLOYD BENTSEN, TEXAS.
DAN ROSTENKOWSKI, ILLINOIS.
MARY M. SCHMITT
CHAIRMAN
VICE CHAIRMAN
DANIEL PATRICK MOYNIHAN.
6AM CISSONS, FLORIDA
NEW YORK
JJ. PICKIS, TEXAS
Congress of the United States
ASSOCIATE CHIEF OF STAFF
(LAW)
MAX BAUCUS. MONTANA
BILL ARCHER TEXAS
38 PACKWOOD. OREGON
JOINT COMMITTEE ON TAXATION
BERNARD A, SCHMITT
GUY VANDER JACT. MICHIGAN
ASSOCIATE CHIEF OF STAFF
OBERT DOLE KANSAS
1015 LONGWORTH HOUSE OFFICE BUILDING
(REVENUE ANALYSIS)
WASHINGTON, DC 20515-6453
(202) 225-3621
18
JUL 15 1992
Honorable Pete V. Domenici
Committee on the Budget
United States Senate
Washington, DC 20510-3101
Dear Senator Domenici:
This is in response to your request dated June 30,
1992, for revenue estimates of H.R. 5270, the Foreign
Tax Simplification Act of 1992.
Enclosed is our Table #92-1139 which provides the
estimated effects on Federal revenues for fiscal years
1993 through 1997 on a provision-by-provision basis.
Sincerely,
Harry L Suton
Harry L. Gutman
Enclosure
Revenue Effects of H.R. 5270, Foreign Tax Simplification Act of 1992
(Fiscal years, billions of dollars)
1993
1994.
1995
1996
1997
1993-97
Revenue losers (largest to smallest):
Revise application of interest allocation rules
-0.7
-1.2
-1.3
-1.3
-1.4
-5.9
Recharacterization of overall domestic loss
-0.3
-0.4
-0.5
-0.5
-1.6
Repeal limitation on AMT foreign tax credit
-0.2
-0.3
-0.2
-0.2
-0.2
-1.1
Controlled foreign corporation election
_*
-0.2
-0.2
-0.2
-0.2
-0.7
ID:
Extend period of foreign tax credit carryback/canyover.
-0.1
-0.1
-0.1
-0.1
-0.2
-0.5
Modification of certain look-through rules
_*
_*
n*
_*
_*
-0.1
Estate tax marital credit
_*
_*
_*
_*
_*
-0.1
Title V Simplification
_*
_*
_*
_*
i
-0.1
Regulatory authority for uniform capitalization rules
--
:
Subtotal, revenue losers
-1.0
-2.1
-2.2
-2.3
-2,5
-10.1
Revenue raisers (largest to smallest):
Treatment of passive income related to foreign oil and gas extraction
income and shipping income
0.3
0.5
0.6
0.6
0.6
2.6
Reduction of Puerto Rico and possessions tax credit
0.2
0.5
0.5
0.6
0.6
2.4
Repeal deferral, election to treat controlled foreign corporations
as domestic corporations
0.6
0.8
0.3
0.1
0,1
1.8
Special section 482 rules for foreign and foreign-owned corporations
0.1
0.2
0.3
0.4
sub
0.5
1.5
Source of income from certain sales of inventory property
5
0.3
0.3
0.3
0.4
#
Taxation of certain stock gains of foreign persons
0.1
0.3
0.2
0.2
0.1
0.8
Excise tax on certain premiums paid to certain foreign persons
0.1
0.1
0.1
0.1
0.1
0.5
Limitation on treaty benefits
*
0.1
0.1
0.1
0.1
0.3
AUG 24'92
Treatment of certain grants
*
*
*
*
*
0.1
Subtotal, revenue raisers
1.5
2.8
2.4
2.4
2.5
11.5
GRAND TOTALS
0.5
0.7
0.2
0.1
0.0
1.4
CLINTON PROPOSAL
15:59 No.010 P.03
ID:
AUG 24'92 15:59 No. 010 P.04
G7380 r P poloh OH-Ohio Economy-Clinton
J7-19 2:14p
Recublican Development Director Criticizes Clinton's Economics
12
COLUMBUS, Ohio (AP) - Democrat Bill Clinton as president would
raise taxes and strictly regulate small businesses in Ohio, a state
official said.
Ohio Development Director Don Jakeway, a Republican, said
Linton's economic plans would hurt Ohio's agriculture-related
businesses and many of its 600 foreign-owned corporations as well.
Jakeway and Columbus Mayor Greg Lashutka, also a Republican,
spokes saturday at a news conference. Clinton and running-mate Al
Gore are campaigning in the state.
Jakeway said about 215,000 Ohioans are employed in industries
related to foreign-owned businesses. Those corporations have
investments of about $5 billion in the state and create millions of
dollars in tax revenue for communities and school districts
"That kind of protectionism is not good, " Jakeway said about
Democratic plans to raise taxes for those companies.
But a state Democratic Party spokesman said the Republicans are
feeling desperate.
"They're down 25 percent in the polls," David Duffey said.
Duffey said the only taxes Clinton has spoken about are those
for people with incomes of $200,000 or more.
"They better research their facts a little better," Duffey
said. "We finally have a presidential candidate who has a plan,
and they're trying to scare people and say it's tax and spend.
"It's not. It's investment to bring jobs back to America."
1 copy - Phil 19ay
1 copy - Tody C,
budget & Ohio
Pls put m
king Thank
Jeremy- Good fact let's
use in our budget
fact sheet.
Jim
ID:
AUG 24'92
16:00 No 010 P.05
I
BNA
TM
FOOTNOTE 32 BACKUP
Vol. 1, No. 3
A blweekly update on transfer pricing and related Issues
June 10, 1992
HIGHLIGHTS
IN THIS ISSUE
IRS Officials Discuss Litigation Designation, Competent Authority: A
company should not expect access to competent authority without
At The IRS
[p. 59]
an agreement with the Internal Revenue Service regarding adjust-
Treasury International Tax
ments. Assistant Commissioner (International) Regina Deanehan
Counsel Philip Morrison says the
and Director of International Programs Stanley Nevack say. Ip- 75)
IRS may not penalize taxpayers
for transfer pricing valuation
Rostenkowski Bill Would Draw Retaliation, Practitioners Say: Legis-
misstatements if they prepare a
lation designed to help U.S. business compete globally would
regulatory analysis of their trans.
violate treaties and draw retaliation from U.S. trading partners,
Ter pricing situation and main-
practitioners say. [p. 69}
Law Professor Stanley Langbein Bays
tain contemporaneous documen-
the bill would radically change transfer pricing rules for foreign
tation. [p. 59]
firms. and mitigate U.S. taxation of U.S. companies' foreign
In The Courts
[p. 65]
income. (p. 88]
Peter Barnes of General Electric Co. says the
The IRS says Exxon and Tex-
bill's minimum tax formula could produce unfair results. (p. 86]
aco consented to and profited
from the 1979 price restrictions
Chevron Argues Against Designated Summons: Chevron asks an
on Saudi oll and must pay taxes
appeals court to overturn an IRS designated summons, contending
on those earnings. [p. 66]
violations of the Constitution and Congress' intent. ip. 65]
In Congress
[p. 69]
No Matches In Second Round For Apple Arbitrators: Apple Com-
Around The World
[p. 73]
puter Inc. and the IRS again fail to exchange matching names in
0 The proposed $482 regula-
the second round of nominations for a panel to settle the dispute
tions' comparable profit interval
over the company's Singapore subsidiary. [p. 68)
should be delayed until other
countries accept the method, a
IRS Group Reviewing Availability Of $482 Data: An IRS task force
Japanese trade group says.
is investigating the availability of data needed to comply with
[p. 73]
proposed $482 regulations and may recommend legislation to
The IRS should limit the pro-
resolve data sharing issues, an IRS official says. [p. 59}
posed CPI to clearly abusive
transfer pricing, says an interna-
IRS To Issue Guidance On Currency Fluctuations: The IRS plans a
tional business group. [p. 74)
memorandum on the effect of currency fluctuations On Its transfer
Interview
pricing decisions, Ernst & Young's Michael Patton says. [p. 68]
[p. 75]
Full Text
[p, 30]
Attorney Says Competitiveness Issues Ignored: The IRS' proposal to
Rep. Rostenkowski's HR 5270
change the 5482 regulations needs revision to better reflect efforts
$304 proposing a new $482(b)
by U.S. companies to remain competitive globally, says Joel
for inbound transfer pricing is
Williamson, partner at Mayer, Brown & Platt, Chicago. [p. 62)
printed in full. Ip. 80]
Subs Blocked From Claiming Intangible Profits, Economist Says:
Analysis
[p. 06]
U.S.-contrelled overseas affiliates may be unable to claim prefits
Perspective
[p. 88]
from intangibles, such as manufacturing savings, under proposed
482 regulations. Arthur D. Little's Irving Plotkin tells a confer-
Journal
[p. 91]
once. Ip. 61].
Directory
[p. 92]
ID:
AUG 24'92
16:01 No 010 P.06
TRANSFER PRICING
nes, international tux counsel for General Electric
plied by an appropriate markup percentage or appro-
and
priste gross profit percentage, the technical explane-
Observations from University of Miami Law
tion said.
School Professor Stanley 1. Langbein on transfer
The document also said the minimum tax provision
icing reform.
is in some ways analogous LU the approach taken In
the Service's proposed $482 regulations In that they
would adopt comparability of net profit as a check on
Minimum Tax
the reliability of intercompany transfer prices.
The tochnical explanation discusses in detail the
difficulty of obtaining information to allow the IRS to
determine a true arm'alength price. Simulating trans-
Section 304 of the bill would add a new subsection
ecilons that the controlled parties would have entered
to $482 that would establish a minimum tax on
into had they not been related, the explanation said,
foreign-owned companies operating in the United
"may require access to significant amounts of Infor-
States whose U.S. groys receipts total either $2 mil-
mation from each of the related parties that might be
lion or more, or 10% or more of the corporation's
considered comparable to the transactions between
overall gross income.
the related parties. In 2 multinational context it may
According to the Joint Committee on Taxation
be especially difficult for the IRS to obtain the
staff's technical explanation. shifting profits of # for-
desired information from foreign members of the
eign-controlled U.S. company to its parent through
multinational enterprise.
transfer pricing would no longer shelter the income,
"It may also be difficult 10 obtain adequate infor-
under $304 of the legislation.
mation about comparable or near-comparable trans-
The bill would provide an exception for companies
actions involving unrelated persons." the explanation
that either make advance pricing agreements with the
continued. This information may be proprietary, the
government, or are granted permission to avoid the
congressional staff wrote. and the parties involved
minimum tax after satisfying the Treasury Depart-
may not include the taxpayer. "Even if the IRS could
ment that the intercompany prices yielded a fair result,
use its powers to obtain such information, disclosing it
according to the technical explanation of the bill.
to the taxpayer may constitute a breach of confiden-
The provision would set a floor for the income on
tiality laws," the explanation continued.
which a foreign-owned U.S. company would be taxed.
The floor would be 75% of the average taxable income
Normative Rule Said Unconstitutional
of the company's industry In the United States, as
But Terr said proposed 482(b) would be discrimi-
prescribed by the Treasury Department for the calen-
natory because it would subject companies to a nor-
dar year.
mative rule based on domestic industry averages that
would, by definition, be skewed. "This very clearly
Proposal Labeled 'Draconian'
would impose on the world # system, a formula, that
Leonard Terr of Baker & McKenzie's Washington.
would bear no relation to the results of the companies
D.C., office said he was surprised by the stoepness of
involved." he stated.
the proposed minimum tax for foreign-owned U.S.
Dolan said the proposal does not make sense because
corporations. Terr, a former Treasury international
it assumes that every business in 2 certain category is
tax counsel, said that the Rostenkowski bill is "far
equally profitable. "That's just nuts," he said.
more draconian" than many in the multinational tax
Robert Mattson, assistant treasurer of Internation-
world had expected.
al Business Machines Corp.. questioned whether Con-
The minimum tax approach is contained in
gress could impose A minimum tax on gross receipts
842(b), the minimum effective investment income
because the Constitution requires that income be
provision for foreign-owned insurance businesses oper-
earned before there can be taxation.
ating in the United States. he noted. Sec. 842(b) has
Mattson also said the provision "tells the world we're
created controversy because it departs from the arm's-
going to discriminate" between foreign parent compa-
length standard, and so the tax floor proposed in HR
nies and U.S. parents. He said the legislation "clearly
5270 will be considered monumentally controversial,
goes back to the high tariffs of the 1930s" which are
Terr said. (For a discussion of the 8342(b) exper-
thought to have contributed to the depression.
lence, see the Analysis section of this Issue.)
Richard V.L. Cooper of Ernst & Young, Chicago,
The JCT staff said the minimum tax approach does
told Tax Management that the proposed 75% tax
not necessarily depart from the m's-length standard.
floor 15 "within the ballpark" of the alternative mini-
It is in some ways analogous to applying the resale
mum tax that U.S. parent companies have been pro-
price. method or the cost-plus method under Regs.
testing since it was enacted in 1986. What is rancor-
§ 1.482-2(e)(3) and (4), in which gross amounts of the
ous about the proposed 482(b), he said. is that
taxpayer's actual m's-length transactions are multi-
calculations would be based on gross revenue rather
8-10-92
0 1902 TAY Management Inc.. a subsidery of The Buloau of Notional sHore, inc.
THE WHITE HOUSE
Office of the Press Secretary
(Hoover, Alabama)
For Immediate Release
August 22, 1992
REMARKS BY THE PRESIDENT
TO MAIN STREET WELCOME
Woodstock, Georgia
1:06 P.M. EDT
THE PRESIDENT: Thank you very much. You know, this
reminds me of a great country song -- if you want to see a
rainbow, you've got to take a little rain. (Applause.) And
we're going to show the American people a rainbow.
May I salute Mayor Rogers and thank my friend of
longstanding, and I hope your next senator, Paul Coverdell, for
that introduction. (Applause.) Salute our leader, Newt
Gingrich, who helps us so much in Washington. (Applause.)
Members of the City Council here, the cheerleaders and bands from
Cherokee, and Etoyah and Sequoia High schools -- (applause.) And
Daron Norwood, the Spirit of Atlanta; and of course, Dr. Johnny
Hunt, who I'm told is not only a spiritual leader here but that
First Baptist Church here in Woodstock stands for family --
family values, one nation under God. (Applause.)
Jane Hancock and Audra Dinsmore and Johnny Isaacson,
thank you all. And, of course, I'm glad to be standing here with
one of Woodstock's own, my friend, Orlando Wilson, who is a good
-- if anybody likes bass fishing they know all about this guy.
Now, Fred Cooper, my chairman; and Alec Poitevint,
our leaders, thank you all. And it's great to be here in
Cherokee County, the land of the free and the home of the
Warriors. (Applause.) Okay, and let's not forget the Chiefs and
the Eagles. (Applause.)
And, frankly, it's great to be out of that D.C. mode
and out on the campaign trail, taking our case to the American
people. And we are going to give them something to talk about
down at Dean's Store here in Woodstock. (Applause.)
And so I want to talk briefly -- and the skies have
cleared now, I'm glad to say -- about the sharp choice; the
clear, sharp choice that we're going to offer every American.
And it's a choice between different agendas, different directions
for our great country, and it's a choice about the character of
the man that you want to lead this nation for another four years.
(Applause.)
They say this election is about change. Well,
they Ie rignt. But let's not forget the things that must guide
change are the things that never change -- our belief in a strong
defense, in strong families, and in leaving the world a better
and more prosperous place for the young kids here today. That's
what this election is about. (Applause.)
Think for a minute about the world we've already
seen, a world of change: the Berlin Wall down; millions of
people around the world took that first breath of freedom; and
America, her ideals and her strengths intact, won the Cold War.
And that is good for every American. (Applause.)
And I can't come to Georgia without saluting one
other thing; thanks for the contribution that this state made to
that wonderful victory of Desert Storm. It says something strong
about the American spirit. (Applause.)
And all this change didn't come about by accident.
The world changed because we, the American people, stayed true to
our unchanging principles. And my opponents -- let them say this
-- they say I spent too much time on national security and
foreign policy. Well, let me tell you, when I took office I saw
a chance to help finish off imperial communism and I did it, with
your help. (Applause.)
And perhaps even more important, I saw a chance to
help rid our children's dreams of the nuclear nightmare, to help
them live in a safer world. And I did that, with your help. And
that is good. (Applause.)
And so let the Clinton-Gore ticket understand one
thing: I am not going to apologize for one minute for having
spent time making the world a place of peace for all the children
in this country. (Applause.)
For 40 -- I'll get to that -- for 40 years this was
a change that Americans fought and died for. And now it offers
us a defining challenge of the '90s, to take advantage of our
victory around the world and then to build a stronger and more
prosperous nation right here at home.
And so for these next 73 days I'm going to ask the
American people: Who do you trust to bring it all home --
foreign policy, security policy, and economic policy -- who do
you trust?
AUDIENCE: Bush! Bush! Bush!
THE PRESIDENT: And so I came here to Georgia today
to ask the good people of this patriotic state to give me your
support based on my experience, my ideas, and my character. I
will not let you down. (Applause.)
Here we go. Let me spell out the differences.
Okay, we're going to start it right here, right now in Woodstock.
I believe our government is too big and it spends too much of
your money. (Applause.) And I believe the deficit is a dark
cloud on the future of these young people. And you know it and I
know it. And Clinton does not know it, and Gore does not know
it. (Applause.)
Hey, listen, you listen to these guys and you think
the deficit is a big game of the Wheel of Fortune. You know that
one? They want to buy three vowels -- I, 0, U. That's not good
enough for the American taxpayer. (Applause.)
In Houston two nights ago, I announced a freeze on
government spending, and let me repeat it right here. If
Congress sends me a bill spending one penny more than I
requested, I will veto it faster than a spinner bait after
Orlando's lure. We're going right after it. (Applause.) For
the past three years -- past three years -- we've endorsed and
proposed significant cuts in federal spending, but that
gridlocked, liberal, Democrat-controlled Congress has chosen to
direct your taxpayer dollars to their favorite projects. And if
they need more help curing the pork addiction, I'll say as I said
the other night, let's give the taxpayers the power to dedicate
up to 10 percent of their tax dollars to the deficit. And if
Congress won't cut that spending, the people of America will.
It's just that clear. (Applause.)
And, yes, we must cut spending. And with a new
Congress, cutting that spending -- I'll propose a tax cut to give
you more of the money to pay the bills; to give the businesses
the incentives to create the new jobs that this economy so
desperately needs; and we will do more to jump-start the economy.
Frankly, it's the small businesspeople that are
hurting. They're the ones that create the jobs. And I want to
give small business a shot in the arm -- small businesses, they
create two-thirds of the jobs in this country. And you take
places like the Cost Plus on South Main Street, or Morgan's
Hardware -- and if we're going to get this country moving, small
business needs relief from taxation, these awful lawsuits, and
from regulation. (Applause.) And we are going to give it to
them.
Now, let me tell you this: the Governor of
Arkansas, the Commander of the Arkansas National Guard, he wants
a different kind of change.
AUDIENCE: B0000 --
THE PRESIDENT: He is -- now, wait a minute. This
is a fact. He has actually proposed already -- isn't even in
there yet and he's proposed raising government spending by $220
billion, and raising taxes, the biggest increase in history, by
$150 billion. And we cannot have that.
AUDIENCE: Booo --
THE PRESIDENT: You think those guys only know one
word -- change. They talk about it. Well, that's change all
right; that's about all you 11 have left in your pocket when they
get through with you. (Applause.) Yes, we want change. But
it's also a question of trust. Look at every big issue we face
and you're going to see a choice between the people who put their
faith in everyday Americans and those who put their faith in the
government.
And I trust you, the families and the parents, to
make the decisions that matter in life. And I trust the parents,
not the government, to choose their children's schools --
private, public, or religious. (Applause.) And very, very
candidly, the Congress opens a meeting with a prayer; I think the
school children ought to have a voluntary prayer in schools.
(Applause.)
You could argue that Congress needs it more, but I
think everybody ought to have that option.
And I trust the parents, not the government, to
choose the children's child care. It's better to have parents do
it than have some subcommittee in Washington tell you how to look
after your kids. (Applause.)
Frankly, it all sums up to this: I think the
government is already big enough and they tax people too much.
It's that simple. And if you want fewer lawsuits and fewer
regulations, and more opportunity for small business, vote for
me. (Applause.)
I wonder about the Governor of Arkansas. I wonder
why it is that whenever he's faced with any problem his solution
is always to put government first. But, you know, it's not so
surprising, when you spent more of your life in government like
he has, government is all you know anything about. I've got my
believe in trust, about limited government from working out in
the oil fields of West Texas, from trying to build a business,
and trying to meet a payroll. And that's where I learned how
jobs are created. And that's where I learned this: In this
country, the government works for the people, not the other way
around. (Applause.)
But Bill Clinton isn't the only one who's forgotten
that lesson, if he ever knew it, there's a whole party of his
colleagues up there on Capitol Hill who have spent their lives on
the government payroll. They, that liberal Democratic gridlock
has been controlled by one party for 38 years -- 38 years. And I
call them the gridlocked Congress. And I'm going to remind the
American people, 38 years -- clean the House, clean the House,
clean the House. You have to do it; we ought to do it.
AUDIENCE: Clean the House! Clean the House! Clean
the House!
THE PRESIDENT: Let me just put it parenthetically,
the last thing this country needs is a rubber check Congress and
a rubber stamp President. We don't need it and we're not going
to have it. (Applause.)
I think the American people know this. That I've
tried to work with these people. You remember when I said we
didn't come here to bicker we came here to do something for the
people? I held out my hand and that liberal, Democrat-controlled
Congress bit it off. And now I'm going to take that case to the
American people and say, change the Congress. (Applause.)
Every American knows the truth that Congress has
become corrupt and conceited and confused, a body of these PACs
and privileges and partisanship and paralysis. They can't run a
tiny bank. They can't run a tiny post office and, yet, they're
running your lives. And we've got to change it. (Applause.)
You know, Harry Truman took it this way. He went
out across the country. He got in his sights the Congress, took
his case to the people, and then he linked his opponent right
into those sights. Well, let me tell you this. I'm going to do
the same thing.
And I am for Paul Coverdell, and here's why. He was
willing to stand up and think anew. As Truman did, he's willing
to single out those who talk one way and vote another. And the
thing in this Senate race is this: I stand for a balanced budget
amendment; Wyche Fowler is against it. I stand for the line item
veto; Whyche Fowler is against it. I stand for those who stood
at Desert Storm; and he opposed me. And now we want a change.
(Applause.) That is the fact. It's fine to talk one way in
downtown Woodstock and vote differently in Washington, but we
cannot have that anymore. (Applause.)
You know, I know this race is long. Know it -- read
all these polls about being behind. But, yes, I really believe
and have a confidence that we will win. We're going to win not
because of a victory for me, but because we trust the American
people. We win because our ideas are strong and we win because
we understand the American way. And we'll win also because I
think we've got a great First Lady who stands for the family and
family values. (Applause.)
so you tell Governor Clinton and that gridlocked
Congress, if you can't run with the big dogs, stay under the
porch. We're coming after them. (Applause.)
And thank you very, very much. And may God bless
the greatest, freest country on the face of the Earth. And thank
you for this fantastic rally. Thank you so very much.
END
1:22 P.M. EDT
STATE OF MISSOURI
FACSIMILE TRANSMITTAL SHEET
DATE 8-24-92
TO red Walters
FROM
Jolanda Murchy
FAX NUMBER
FAX NUMBER
RE
SPECIAL INSTRUCTIONS/REMARKS
Ed- Here's the stuff Dor. askengt
recognized 12 inport Companies on
his Export Toren act month
ANY PROBLEMS WITH TRANSMITTAL, CALL 314-751-3222
TOTAL NUMBER OF PAGES (INCLUDING TRANSMITTAL SHEET)
9
MO 999-9012 (12-90)
PUBLIC SAFETY EQUIPMENT
Public Safety Equipment is a privately owned firm located at
10986 N Warson Road in St. Louis, Missouri. Mike Latta is
President of the company, Ed Ryan is Executive Vice-President.
The phone number is 314-426-2700. The Fax is 314-426-1337.
Governor Ashcroft recently honored Public Safety during a
statewide tour highlighting Missouri's export successes. During
the last three years, exports from Missouri have increased 37% -
more than 1600 Missouri businesses exported a combined $4.5
billion in products, services and goods to 166 countries in 1991.
Missouri exports support an estimated 100,000 jobs in the state.
Public Safety Equipment's 200 employees are literally lighting up
the world with police sirens, light bars, and other warning
devices used by police and fire departments in 48 countries. The
company's exports have grown from 15% to 35% over the last five
years.
The company builds most equipment to order, allowing employees to
define their work flow and work with end users -- often highway
patrols -- to meet changing needs and design improved products.
Public Safety Equipment has been assisted by Missouri's export
business development office. "We've participated in international
meetings, catalog shows, etc., " said Ed Ryan, vice president of
marketing. II The state office in Tokyo also has helped us in
locating distributors on the Pacific rim."
The state of Missouri has international trade offices in Germany,
Japan, Korea and Taiwan. The state will soon open a fifth
international trade office in Mexico.
Public Safety is a very employee oriented firm and the plant is
very clean and colorful providing many visual opportunities.
Public Safety Equipment was very appreciative of the Governor's
recent visit and the company went out of its way to include its
employees and local community leaders in what was a very
successful and enjoyable stop on the "Exports for Success" tour.
AUG 24 '92 08:49
PUBLIC SAFETY EQUIPMENT, 7/22/92, ST. LOUIS
I'm pleased to be in St. Louis today to focus attention on a
local company that is excelling in the international
marketplace. Missourians are grateful to Mr. Michael
Latta and the hard-working employees here at Public
Safety Equipment who are supplying world-class products
to nations all around the globe.
Exporting is no longer the province of large companies in
major port cities. The world market is fast becoming the
new frontier for small- to medium-sized firms in Missouri.
Businesses across the state are adding jobs, breaking
ground for additional plant space and purchasing new
equipment to keep pace with fast-growing export sales. In
many cases, international sales allowed these companies
to continue growing during the recession,
and now with
the U.S. recovery, they're looking to expand and hire.
During the last four years, exports from Missouri have
increased 31 percent -- more than sixteen hundred
Missouri businesses exported a combined $4.5 (b) billion
in products, services, and goods to 166 countries in 1991.
Missouri exports support an estimated 100,000 jobs in the
state.
1
HUG
The state of Missouri, through the Department of
Economic Development, is assisting the sixteen hundred
exporters in Missouri and actively seeking out the
unlimited number of firms with export potential that is not
yet being realized.
World Trade magazine recently recognized the work and
dedication of the state's export development staff. The
article says Missouri runs a top-notch economic
development program for companies that want to expand
their business overseas.
The state has trade development offices in Kansas City,
Jefferson City, and St. Louis. Missouri also has offices and
very capable staff in Duesseldorf, Germany; Tokyo, Japan;
Seoul, Korea; and Taipei, Taiwan. We soon will be
opening a new trade office in Mexico.
During this two-day salute to companies exporting for
success, we will visit and honor 12 Missouri businesses. I
commend the Hawthorn Foundation for sponsoring this
tour. Hawthorn Vice-chairman Al Fleischer Sr. is here with
us today. Al, thank you for the opportunity to honor this
deserving company and to raise awareness about the
importance of exporting.
2
It is a pleasure to meet the people here at Public Safety
Equipment who literally are lighting up the world with
these Missouri-made products.
Five years ago, Public Safety made a commitment to the
export business, and today, the company's exports
account for about 35 percent of its total annual sales.
Public Safety's sirens, light bars and other warning devices
clear the way for police and fire vehicles in at least 48
countries. I am pleased the state's export development
staff has been able to assist Public Safety with locating
sales leads and international distributors.
On behalf of all Missourians, I commend Mr. Michael
Latta and the dedicated employees of Public Safety for
excellence in exporting, becoming a worldwide innovator
and leader in the field of emergency warning equipment.
(PRESENT AWARD)
Thank you and may God richly bless you with a productive
and profitable-future here in St. Louis.
3
202-347-9570
POLITICAL ANALYSIS:
This morning, the Bulletin invites Stephen Entin, former
Deputy Assistant Secretary of the Treasury for Economic Policy
in the Reagan Administration who is now a Resident Scholar at
the Institute for Research on the Economics of Taxation, and
Robert Shapiro, an economic advisor to Bill Clinton who is
Vice President of the Progressive Policy Institute, to discuss
Governor Clinton's proposal to increase taxes on foreign
companies doing business in the United States.
BULLETIN: Bill Clinton believes that foreign companies are
getting unfair tax breaks and they should pay more for doing
business in our country. Economically speaking, what do you
think of that proposal?
ENTIN: First of all, Clinton's economic proposal not only
raises taxes on foreign companies operating in the US, but
also US companies operating abroad. Contrary to Clinton's
assertions, those additional taxes on foreign investment by
American firms will not cause them to shift the investment
back to the United States. It will merely reduce the foreign
investment. The US firms will become less able to service
their foreign customers efficiently. They will become less®
competitive in world markets. They will order fewer US made
parts to supply their plants abroad. US savings, investment,
employment, and income will be lower than otherwise, and tax
revenue will be lower, not higher.
Clinton also claims that foreign firms operating in the
US have an unfair tax advantage. Specifically, he claims that
they overcharge their US subsidiaries for parts and products
to reduce taxable profits in the US and inflate them abroad.
It would not make sense for them to be doing this, and the IRS
has found little or no evidence of this. It would not pay
most foreign investors to shift reported income from the
United States to Japan or Europe, where corporate tax levels
generally exceed US levels. They'd actually lose money by
doing it. Foreign firms that have expanded here in recent
years have little taxable income because they are still
legitimately writing off major outlays for plant, equipment,
structures, and other start up costs. It would take
discriminatory taxation of non-existent income to collect the
additional $13.5 billion per year assumed in the Clinton plan.
Such taxation would drive foreign investment out of the United
States, and retard the growth of US productivity, employment,
and wages. It would also invite retaliation by foreign
governments against US firms operating abroad. It would have
the effect of contracting the world economy. And the last
time we had a major contraction, it was in the early 1930s,
with all the good that did.
SHAPIRO: As a point of clarification, the US subsidiaries of
foreign corporations aren't getting a special tax break, they
are evading US taxation almost entirely. Today, the foreign
J.D. Foster
Revenue estimate
no est of underpayment - some is going on
but refuse to
Harry Suber (Treas) $40
b
airtight auditing: $456 $156
using the tax code as a trade barrier
dissuade any from coming
another example of protectionism
discourage them from investing
any place- there will be some formen-crimed
chamber of
manufacturing plant
Commerce or Treasury
w/in 100 miles
Fred Goldberg at Treasury testimory
the company would never have come if clinton
USTR - David Walters
antia nativist - duet for investment has diopped off
who ours Rochefeller
X
Nussans in Tennessee
Playing on a darker impube:
SENT BY:DEPT. COMMERCE/BEA/IID ; 8-21-92 ; 5:21PM ;
2025236569-
2024566218:#
UNITED STATES DEPARTMENT OF COMMERCE
Economics and Statistics Administration
Bureau of Economic Analysis
Washington. D.C. 20230
REA
FACSIMILE TRANSMISSION SHEET
8/21/92
Date
Ed Walters
TO:
Name
White House - Speech writing
Agency/Office/Room number
456 456-7750
456 6218
Voice number
Fax number
FROM:
Dave Belli
BEA/IID/Ren.1009 BEA 1009
Division/Room
523-0657
(202) 523-6569
Voice number
Fax number
TRANSMITTED:
Foreign Subject direct invstmnt in us, by State
5 + Cover Sheet
No of pages
Copies also to
X
Per our
Per your
For your
For your
conversation
request
information
comments
COMMENTS:
SENT BY:DEPT. COMMERCE/BEA/IID ; 8-21-92 ; 5:22PM ;
2025236569-
2024565218 6
SURVEY OF CURRENT BUSINESS
May 1992 . 53
Table 7.-Employment by Nonbank U.S. Affiliates and All U.S. Businesses, by State
1988
1989
1990
U.S. affili-
U.S. affili-
U.S. affili-
All U.S.
ates as a
All U.S.
ates as a
All U.S.
ates as a
U.S. at-
U.S. at.
U.S. at
filates
busi-
percentage
busi-
percentage
busi-
filates
percentage
fillates
nesses¹
of al U.S.
nesses¹
of at U.S.
nessee 1
of all U.S.
businesses
businesses
businesses
Total²
3,844.2
91,344.0
4.2
4,511.5
93,754.0
4.8
4,705.3
94,974.0
4.9
New England
249.5
5,894.3
4.2
290.3
5,868.1
4.9
284.1
5,685.2
5.0
Connecticut
72.3
1,511.6
4.8
87.6
1,508.4
5.8
78.3
1,488.9
5.3
Maine
24.4
452.9
5.4
27.1
464.3
5.6
27.1
456.0
5.9
Massachusetts
110.3
2,817.5
3.9
129.1
2,797.9
4.8
131.8
2,684.9
4.9
New Hampehire
22.4
473.8
4.7
25.1
471.7
5.3
28.3
449.3
5.8
Rhode Island
12.2
415.9
2.9
13.1
418.4
3.1
12.7
404.2
3.1
Vermont
7.9
222A
3.5
8.3
227.5
3.7
8.0
221.9
3.8
Mideast
538.4
17,137.3
4.9
928.1
17,368.7
5.3
826.3
17,292.5
5.4
Delaware
41.8
295.4
14.1
41.9
306.5
13.7
43.1
308.8
14.0
District of Columbia
8.8
413.8
2.1
10.5
418.3
2.5
10.5
422.4
2.5
Maryland
62.1
1,776.7
3.5
71.7
1,818.2
3.9
50.9
1,824.1
4.4
New Jersey
203.9
3,182.4
5.4
222.8
3,215.5
6.9
225.5
3,153.3
7.2
New York
342.8
6,999.7
4.9
376.8
7,044.1
5.4
348.2
8,994.5
5.0
Pennsylvania
178.0
4,468.4
4.0
204.3
4,585.1
4.5
217.0
4,589.6
4.7
Great Lakes
655.0
15,903.4
4.1
772.4
16,364.6
4.7
806.8
16,602.6
4.9
Illinois
214.1
4,500.5
4.B
244.8
4,808.9
5.3
242.8
4,687.3
5.2
indiana
83.4
2,091.9
4.0
98.1
2,187.1
4.5
124.5
2,199.7
6.7
Michigan
118.2
3,290.0
3.5
142.8
3,404.8
4.2
142.8
3,449.1
4.1
Ohio
170.2
4,118.7
4.1
207.9
4,223.7
4.9
217.9
4,273.2
5.1
Wisconsin
71.1
1,904.3
3.7
78.9
1,960.1
4.0
78.8
2,013.5
3.9
185.1
5,605.8
2.8
235.5
6,797.5
3.5
248.3
6,817.8
36
Plains
lowe
26.6
988.3
2.9
30.9
1,030.8
3.0
36.7
1,051.2
3.5
Kansas
27.8
870.4
3.2
30.7
891.6
3.4
28.1
911.2
3.1
Minnesota
51.4
1,774.7
2.9
81.9
1,822.5
4.5
89.5
1,857.5
4.8
Missouri
59.0
1,967.4
3.0
72.1
2,018.3
3.5
71.0
2,031.3
3.5
620.9
2.4
Nebraska
12.7
588.0
2.2
13.7
605.1
2.3
14.8
North Dakota
2.7
203.7
1.3
2.9
205.9
1.4
3.0
210.6
1.4
South Dakota
2.9
215.4
1.4
3.2
223.3
1.5
4.5
234.8
1.9
Southeast
948.5
20,516.7
4.8
1,105.5
21,114.9
5.2
1,140.2
21,487.3
5.3
Alabama
42.0
1,283.0
3.3
84.7
1,317.9
4.9
55.0
1,344.6
4.1
Arkansas
26.7
750.5
3.4
32.2
770.9
4.2
28.7
792.2
3.7
Florida
154.1
4,505.4
3.4
175.3
4,654.4
3.8
200.1
4,747.2
4.2
Georgia
143.7
2,452.9
5.9
157.2
2,501.7
6.3
159.8
2,527.5
6.3
Kentucky
47.7
1,189.8
4.1
56.0
1,216.5
4.6
63.4
1,247.8
5.1
Louisiana
56.2
1,237.2
4.5
65.2
1,261.7
5.2
61.2
1,306.4
4.7
Mississippi
20.2
722.8
2.8
24.1
741.0
3.2
22.8
753.5
3.0
North Carolina
157.4
2,597.2
8.1
176.7
2,657.8
6.6
180.8
2,895.2
8.7
South Carolina
85.1
1,220.3
7.0
101.4
1,258.6
8.1
104.2
1,295.8
5.0
Tennessee
98.2
1,504.7
5.4
114.1
1,670.0
6.1
115.8
1,891.9
8.1
Virginia
92.7
2,288.0
4.1
106.2
2,380.0
4.5
112.2
2,377.8
4.7
West Virginia
26.8
484.9
5.5
29.4
494.7
5.9
35.2
507.3
6.9
Southwest
337.9
8,216.8
4.1
381.5
8,412.5
4.5
417.5
8,687.8
4.8
Arizona
48.0
1,244.0
3.9
54.4
1,272.7
4.3
56.1
1,294.0
4.3
New Mexico
15.1
423.3
3.6
15.8
435.2
3.6
17.4
450.3
3.9
Oklahoma
38.4
908.0
4.2
41.5
929.6
4.5
44.0
956.0
4.6
Texas
236.4
5,541.6
4.2
269.7
5,775.0
4.7
300.0
5,987.5
5.0
Rocky Mountain
62.8
2,432.1
2.5
74.0
2,526.2
29
98.9
2,819.3
3.8
Colorado
34.2
1,223.4
2.8
42.0
1,264.1
3.3
53.1
1,300.8
4.1
Idaho
5.8
301.0
1.9
8.0
318.0
2.5
11.4
332.5
3.4
Montana
3.8
228.7
1.7
4.1
236.1
1.7
5.1
241.8
2.1
Utah
15.4
535.2
2.9
15.8
582.9
2.8
19.7
582.4
3.3
Wyoming
3.9
143.9
2.7
4.2
147.1
2.8
9.6
151.8
5.3
Far West
501.7
14,082.1
3.6
635.0
14,588.8
4.3
588.9
15,059.5
4.6
California
407.1
10,932.7
3.7
514.9
11,344.2
4.5
552.5
11,555.8
4.8
Nevada
13.7
492.1
2.8
19.5
533.8
3.6
22.4
570.0
3.9
Oregon
25.1
987.2
2.6
30.8
1,038.2
3.0
38.1
1,072.8
3.8
Washington
55.8
1,570.0
3.3
59.9
1,772.8
3.9
75.9
1,881.1
4.1
Alaska
7.6
151.5
5.0
10.6
162.7
6.5
13.2
171.4
7.7
Haweli
34.8
404.1
8.8
46.0
429.9
10.5
50.2
450.4
11.2
Puerto Rico
14.7
n.a.
n.a.
19.0
n.a.
n.a.
15.3
n.a.
n.a.
Other U.S. was
4.8
n.a.
n.a.
8.6
n.a.
n.a.
9.0
n.a.
n.a.
Foreign
2.6
n.a.
na
5.9
n.a.
n.a.
8.9
n.a.
n.a.
n.a. Not gvailable.
paranty employed abroad by U.S. businesses. They also differ from the NIPA estimates because
1. The data on employment of all nontank U.S. businesses A/P from BEAN Regional Economic
of different date sources and revision schedules.
Information System. The 1000$ are equal to employment in private Industries less employment
2. For consistency with the coverage of the all-U.S. business employment data, U.S. affiliate
of banks and private households. The all-U.&-business employment totals shown in this table dit-
employment in Pueno Rico, in "other territories and offshore." and in "foreign" WBB excluded from
for sightly from those shown in Table 6. which are from Table B.4C of the "National income
the U.S. affiliate employment total when the percentage shares on this Time were computed.
and Product Accounts (NIPA) Tables" in the January 1892 SURVEY. The all-U.R. employment data
3. See foothots 2 B table 6.
in this vible are derived as the sum of the State estimates. They differ from the MPA estimates
4. See footnote 3 to table 6.
of employment because they include banking and, by definition. they exclude U.S. residents term-
SENT BY:DEPT. COMMERCE/BEA/IID 8-21-92 5:22PM
2025236569-
2024566218;#
54
May 1992
SURVEY OF CURRENT BUSINESS
Table 8.-Manufacturing Employment by U.S. Affiliates and An U.S. Businesses, 1988-90, by State
1958
1989
1990
U.S. affili-
U.S. 5
All U.S.
U.S. aftili-
U.S. af-
mes as 8
U.S. at
AM U.S.
its as @
fliates
busi-
percentage
filiates
busi-
percentage
U.S. of-
All U.S.
ates as a
neeses
of all U.S.
of all U.S.
filigtes
busi-
percentage
nesses ,
businesses
nesses¹
of all U.S.
businesses
businesses
Total ²
1,811.9
19,495.0
8.2
1,855.4
19,536.0
0.6
2,005.4
19,261.0
10.4
New England
98.7
1,353.6
7.3
11a.3
Connecticut
1,302.7
9.1
28.4
116.5
374.7
7.6
1,223.1
9.5
Maine
38.3
381.5
10.6
8.4
34.9
343.7
10.2
108.7
Massachusetts
7.7
8.7
106.2
8.2
41.7
7.7
588.2
7.1
102.8
7.5
49.0
New Hampshire
582.4
8.7
10.2
52.0
522.5
10.0
118.4
8.6
Rhode Island
11.8
114.1
10.4
7.6
11.3
113.7
106.3
10.6
6.5
Vermont
7.5
109.7
5.8
2.5
8.8
50.0
101.2
6.8
5.0
3.0
48.8
8.1
3.8
46.7
8.1
Midesat
302.2
$,254.2
as
Delaware
348.6
3,196.5
10.9
353.2
13.3
70.8
3,064.3
11.5
District of Columbia
18.7
12.8
73.8
17.1
11.9
4
72.2
16.7
18.5
25
Maryland
4
16.1
24
24.1
$
18.5
212.2
4.8
11.4
28.0
New Jersey
208.6
13.4
30.7
78.6
207.3
686.8
14.8
New York
11.8
97.0
645.8
15.0
95.3
91.8
1,222.2
504.2
15.8
7.5
Pennaylvania
99.1
1,196.6
8.3
101.5
93.9
1,139.7
1,065.4
8.9
8.8
111.4
1,055.5
10.6
113.0
1,024.5
11.0
Great Lakes
$43.3
4,250.3
8.1
Illinois
398.7
4,209.6
9.3
430.8
94.0
990.3
4,244.7
10.4
indiana
9.5
108.0
988.2
10.9
113.0
53.8
638.6
985.9
11.5
8.4
Michigan
65.1
647.7
10.0
85.2
E7.0
953.2
639.3
13.3
7.0
Ohio
69.4
989.2
7.2
75.3
88.3
945.0
1,113.7
8.0
7.9
Wisconsin
113.5
1,124.2
10.1
120.0
40.2
554.6
1,113.2
7.2
10.8
42.8
560.4
7.8
46.3
561.3
8.2
Plains
82.1
1,386.5
5.9
100.8
lows
1,409.9
7.2
106.1
17.3
228.3
1,418.0
7.5
7.5
Kansas
20.0
235.8
8.5
21.8
236.9
8.0
183.0
4.9
9.1
Minnesota
10.1
184.4
6.5
22.1
10.7
188.2
395.0
Missouri
5.6
5,7
29.8
400.7
7.4
30.5
401.1
26.1
435.4
8.0
7.6
Nebraska
31.4
442.0
7.1
32.5
5.0
439.2
96.7
5.1
7,4
North Dakota
8.5
96.1
6.7
7.3
101.0
1.1
16.5
6.5
7.3
South Dakota
1.2
16.6
7.0
1.1
17.5
1.5
31.6
4.8
8.3
1.8
32.4
5.4
2.4
34.2
7.0
Southeast
450.7
4,718.0
9.8
515.9
Alabama
4,739.6
10.9
555.7
25.0
4,711.0
383.2
6.5
11.8
Arkansas
27.0
387.6
7.0
34.8
387.2
15.2
228.4
6.8
9.0
Florida
18.3
231.3
7.9
18.7
233.2
33.7
543.4
6.2
8.0
44.8
Georgia
538.6
8.3
47.4
523.1
82.2
580.5
10.7
68.4
9.1
Kentucky
570.5
12.0
71.8
552.3
27.1
275.3
9.8
37.4
12.7
Louisiana
284.5
13.1
41.1
287.6
16.8
171.3
9.8
20.4
14.3
Mississippi
178.5
11.5
20.9
184.1
13.8
240.1
5.7
15.2
11.4
North Carolina
244.5
6.2
14.5
247.3
93.4
873.3
10.7
101.1
8.0
South Carolina
873.5
11.6
107.3
8527
47.4
388.3
12.2
52.3
12.4
Tennessee
390.6
13.4
63.4
384.5
82.0
512.3
121
68.3
16.5
Virginia
523.5
13.0
39.6
68.5
521.3
432.1
9.2
45.1
13.1
West Virginia
430.2
10.5
49.3
429.7
14.7
87.7
16.8
17.5
11.5
88.2
20.0
17.9
87.9
20.3
Southwest
113.4
1,361.8
8.3
126.2
Arizona
1,374.5
8.2
138.3
1,396.5
12.7
192.3
8.8
13.4
9.8
New Mexico
188.4
7.1
2.6
12.1
187.2
40.9
8.3
2.6
6.4
Oklahoma
43.0
6.1
3.3
43.8
12.0
163.4
7.4
13.3
7.4
Texas
184.7
8.1
16.6
168.9
86.1
985.2
8.8
96.9
9.8
978.5
9.9
108.4
996.5
10.7
Rocky Mountain
20.4
378.2
5.4
24.1
Colorado
389.$
6.2
25.0
385.9
9.4
190.8
4.9
10.4
6.3
idého
193.9
5.4
11.0
2.3
193.5
58.1
4.0
4.3
5.7
Momane
61.0
7.0
4.5
1.4
53.4
21.7
6.5
1.4
7.1
Utah
22.4
6.2
1.4
22.5
6.5
98.9
6.5
7.3
6.2
Wyoming
103.1
7.1
7.4
107.1
.8
8.8
8.7
.7
6.9
8.9
8.1
.7
8.5
7.2
Far West
187.7
2,758.2
6.8
230.3
California
2,798.0
as
252.4
157.0
2,770.8
2,173.1
7.2
196.6
2,186.5
9.1
Nevada
9.0
1.2
25.1
4.7
1.7
214.2
2,151.0
Oregon
25.0
10.0
6.6
10.8
2.1
218.1
26.5
Washington
4.9
11.8
220.5
8.1
5.2
18.9
13.8
342.0
20.5
222.1
5.5
383.4
6.2
5.8
22.3
371.3
6.0
Alaska
2.9
Hawaii
15.5
18.8
2.3
16.1
14.3
1.8
3.9
Puerto Rico
21.8
7.2
2.6
21.7
17.4
22.7
11,8
7.9
2.8
12.3
21.3
Other U.S. areas⁴
n.a.
n.a.
n.a.
13.1
n.a.
.2
n.a.
2.1
8.9
n.a.
n.a.
na
n.a.
Foreign
n.a.
2.0
to
n.a.
3.0
n.a.
n.a.
n.a.
n.a.
n.a.
.7
n.a.
n.a.
f.a. Not available.
The data on the manufacturing employment of ai nonbank U.S. businesses are from BEAT
note 4 to abie 6).
employment accounted for by amilistes in this table differ from those shown in table 6 (see toot-
2. Total affiliate manufacturing employment and the shares of aii-U.S.-business manfacturing
Regional Economic information System. The all-U.S.-busines manufacturing totally shown in this
acie differ sightly from those shown in table 6 (see footnote 2 to table $). The all-U.S.-busings
employment date in this table are derived as the sum of the State estimates They differ from
3. For consistency with the coverage of the all-U.S.-business employment data, U.S. affiliate
P.S. NPA estimates of employment because, by definition. they exclude U.S. residents temporarily
employment in Pueno Rico, in "other territories and offshare," and in "foreign" was excluded from
employed abroad by U.S. businesses. They also differ from the NIPA estimates because of dine/-
the U.S. affiliate employment total when the percentage shares on this line were computed.
- data sources and revision schedules.
4. See foothots 2 to table 5.
6. See toomote 3 to table 5.
SENT BY:DEPT. COMMERCE/BEA/IID ; 8-21-92 5:23PM
2025236569-
2024566218;# 4
66 May 1992
SURVEY OF CURRENT BUSINESS
Table 15.1-Employment by Nonbank U.S. Affiliates, State by Country of Ultimate Beneficial Owner, 1989
Europe
Latin
Asia and Pacific
of which:
America
All cour-
and
or which:
tries
Canada
Other
Africa
Middle
United
Total
Germany,
France
Federal
Nether
Swit-
United
Western
East
States
Total
Republic
lends
zerland
Heml-
Austra-
Kingdom
B
aphere
lla
Japan
Total
4,511.5
T21A
2,711.1
278.4
4430
214.4
me
1,621.5
227.7
17A
30.3
761.8
188.1
EZS.D
32.1
New England:
Connection
87.6
as
70.9
as
13.2
12.4
Mains
11.9
18.0
23
27.1
125
12.4
,O
1.0
1.8
1.2
5.3
DC
.5
5.4
9
4.3
&
Massachusetts
1,1
129.1
21.1
81.3
9.1
115
EA
1.0
3
.4
New Hampshire
4.5
37.5
6.5
25.1
5
(b)
15.2
21
,8
a.4
1.0
17.9
a.4
14.0
7
Rhode Island
lake
.9
7.4
2
13.1
0
28
95
3
1.6
28
4
.1
22
3
Vermont
4.2
3
as
.1
27
4.9
2
5
2
4
.1
L
2
D
Air
.5
1.1
0
.4
(*)
A
Widesart:
Delaware
41.8
(9)
99
a
1A
A
District of Columbia
5
5,9
B
10.5
19
6.7
B
(P)
A
3
1.0
5
(")
1.1
Maryland
3.4
71.7
A
15.1
48.1
.1
72
1.4
3
72
1.0
73
5.8
New Jersey
14.8
1.9
2228
26.4
154.2
1.0
15.1
38.0
5.3
1.5
3.8
3
New York
15.7
28.9
42.1
5.5
278.8
55.7
232.7
18.5
(b)
&
33.0
48.7
4.0
25.0
15.5
Pennsylvania
23.8
83.3
13.5
204.3
27.0
A
148.4
21
16.7
65.7
16.5
27.1
43.1
ECⁿ2³E
6.3
12.5
10.9
54.1
8.1
A
(b)
16.2
4.9
10.8
Great Lakes:
Minols
244B
27.9
158.3
11.4
242
11.4
Indiana
19.5
70.4
9.8
98.1
152
.4
59.1
1.0
11.9
46.3
123
4.6
40.3
1.4
Michigan
8.8
3.3
16.2
24
1428
18.7
-85.3
A
2
10.9
25.2
19.8
9
11.4
4.7
Onlo
a:
29.0
207.9
6.2
S
27.3
.1
120.2
30.8
10.5
9.7
18.8
20.2
1.2
Wisconsin
13.9
12.1
45.8
18.1
78.9
13
11.6
3
58.4
44.3
5.8
4D
10.5
34.2
8.9
1.4
8.7
18.3
1.6
.1
1.0
6.1
30230
2.8
2.9
Plains:
lowa
30.9
5.2
202
1.7
8.8
17
15
Kansas
4.1
30.7
3
8.0
A
18.5
21
1.8
4.0
0
4.2
.1
3.0
1.7
Minnesota
a.9
1.3
81.9
9.4
2
48.0
as
59
4.7
22.4
1
2.9
8.7
8
1.4
Missouri
27
72.1
16.9
.1
44.4
21.2
3.9
5.2
E3
(b)
3.4
Nebraska
5.0
14.0
4.5
13.7
1.5
10.0
19
5.3
.9
1.3
3.4
(D)
3.3
18
2
North Dakota
12
4.D
5
2.9
7.0
0
1.5
.1
.1
1.7
5
.1
&
1.1
South Dakota
.1
9
a
82
1.1
18
2
.1
.1
(*)
(")
5
.1
.9
E
(")
0
3
.1
2
0
Southmast:
Alabama
64.7
16.2
25.7
5.4
29
1.3
Arkansas
23
8.9
(b)
822
62
17.7
29
7
;
A
11.0
48
6.4
Florida
42
1.6
5.5
16
175.3
31.6
101.4
9.7
10.3
M
6.5
as
1,1
5.3
7.0
Georgia
45.2
21.9
C,
1572
33.6
1.4
92.7
39
7.5
13.5
17.7
8.4
9,4
9.5
as
Kentucky
32.2
(b)
56.0
10.8
27.9
P
21
8.5
22.8
7.7
29
4.0
17.5
B
Louisiana
$
11.4
1.0
65.2
9.7
,
42.0
9
S.O
15.0
5.1
12
13.8
Mississippi
11.1
26
.1
188
7.7
24.1
35
.1
138
1.8
38
3.0
1.3
by
North Carolina
12
1.7
24
A
4.4
3A
176.7
30.6
2
125.2
9.5
80.9
(*)
12
5.5
B
7A
2.4
1
South Caroins
46.8
6.7
101.4
9.4
2
695
1.1
10.5
12.3
1.0
15.8
15.3
8.7
5.0
Termissee
14.4
114.1
92
19.6
2
29
70.4
a.y
9.9
as
1.0
11.1
5.8
7.6
23.1
a
(*)
Virginia
100.2
21
70.2
Ref
5.4
19.4
4.0
14.1
5.2
13.4
5.1
Wast Virginia
24.4
8.9
29.4
127
2
152
1.9
1.6
8.0
1.1
4.8
27
20
33
3.8
.5
(*)
2
&
.1
.7
Southwest:
Arizona
54.4
11.4
23.2
39
18
New Mexico
5.1
1.9
72
15.8
ao
2.1
(D)
.1
2
(9
16.0
11.0
Oidahoma
(b)
1.5
4.4
63
2
22
.8
41.5
9.4
24.4
22
1.1
11.4
50
(*)
.1
2.7
23
3.9
(D)
1,5
Texas
3.1
259.7
36.5
2
174.8
2
39
18.8
35.7
&
25.5
3.0
19.4
86.1
3
14.5
18
7A
332
9.6
19.5
12
Rocky Mountains:
Colorado
42.0
7.8
24.2
28
Idaho
1.8
23
as
11.6
22
8.0
:
1.8
4.8
.5
Montana
&
8.8
2
2
9
1.8
28
4.4
.5
$
4.1
1.4
1.8
be
Utah
7.3
2
2
$
(*)
18
1.2
"cc"e
1.8
5
(D)
15.8
23
11.0
Be
1.0
4.3
.7
2
Wyoming
in
4.2
2
9
8.0
1.1
(*)
to
1.5
2
.3
,
14
to
3
"cc"o
.1
(")
.1
0
Far West:
California
514.9
83.8
205.0
23.0
30.0
#:
Navada
31.1
118.8
32.7
1.1
19.5
4.3
2.6
as
2
5
3.5
148.0
20.0
1.1
13
4.7
109.4
1.0
4.0
Oregon
1
$0.8
8.6
18.5
(*)
5.4
.B
4.7
1.5
J
1.4
3.8
Weantigton
6.0
B
36
(*)
69.9
13.8
33.0
21
5.0
38
14.1
4.2
3
19"
9.4
4.8
1.6
7.1
17.9
8.0
10.1
Aleska
10.6
1.0
26
Hawall
1
.1
2
2
20
3
45.0
,
4.0
to
Puens Rico
.1
.7
4
3.7
8
D
6.0
B
6.3
1.8
0
19.0
14
$8.1
11.8
2.6
3
30.3
Other U.S. areas'
14
,
1.8
5.4
4
0
as
0
2
6.7
1.5
1
0
2
(*)
2.8
2
Foreign
103
3
15
5.9
(9)
E
to
(*)
?
to
4.9
25
5
2
1
8
18
1.5
(P)
(b)
of
P Suppressed = evoid disocure of data of individual companies,
2 See betrets 3 b table 6.
Less man 50 comployers.
1. See footnote 2 = time 5
NOTE-Esbmetes for 1909 are revised.
SENT
BY:DEPT.
COMMERCE/BEA/IID
3-21-92
5:24PM
2025236568-
2024566218,#
SURVEY OF CURRENT BUSINESS
May 1992
.
67
Table 15.2-Employment by Nonbank U.S. Affiliates, State by Country of Ultimate Beneficial Owner, 1990
Europe
Laon
AMA and Pacific
America
All coun-
Cana-
of which:
and
da
Other
Alta
Middle
or which:
mes
United
Total
Prance
Germa-
Nether-
Swit-
United
Western
East
Total
States
zeriand
Kingdom
Heml-
Austra-
ny
Lands
sphere
M
Japan
Total
4,708.3
748.0
2,090.5
$$4.8
513.3
290.2
2775
1,039.2
132.1
19.2
25.5
NO.2
165.3
616.7
27.7
Htw England:
Connecticut
783
7.5
53.4
7.0
120
12.3
as
17.3
1.!
Mana
27.1
124
124
a
1.0
1,3
&
?
3
5.8
12
1.0
4.4
of
5.7
Massachusetts
131.8
(D)
23.3
A
.7
85.3
127
13.8
3.4
4.7
New Hampshire
39.3
28.3
&
21
16.4
16.0
1.2
26
123
6
13
3.3
1.2
.9
8.3
Rhode Island
E
12.7
A
5.8
CCO
20
,1
10.6
1.0
.8
18
5
Vermont
.1
8.0
.7
3.1
3.8
.1
.5
0
1.0
S
1.1
5
2
0
0
3
(*)
9
.1
Mideast:
Delaware
42.1
(P)
14.1
1.1
1.5
.4
5
6.2
District of Columbia
2
10.5
1.9
too
(7.7
21
as
.1
A
B
1.4
.7
.7
Maryland
3.3
3
80.9
18.4
1.9
I
18
7.3
3
84.0
83
7.4
1.4
7.7
17.5
New Jersey
225.5
.4
5.0
28.4
152.6
14.0
31.0
1.9
17
13.7
I
27.5
New York
44.1
4.2
3
349.2
213.9
36.8
58.9
22.0
3.0
28.3
36.8
17.4
22.9
92.0
Pennsylvania
6.9
A
217.0
1.8
62.0
28.9
160.9
23.5
13.8
29.3
41.3
15.0
7.5
10.6
54.5
as
A
12
19.8
5.7
13.1
.6
Creat Lakes:
Blinois
2428
295
152.5
12.7
24.0
11.3
20.3
indiana
57.8
5.7
A
124.5
15.8
68.5
6
524
16.5
12.5
5.6
44.4
8.0
1.7
3.7
Michigan
20.7
22
3
142.6
214
81.3
2
37.8
11.2
1.4
233
283
4.7
Onio
29
29.2
3.0
FC"NE
(*)
5
2179
28.6
125.8
.1
35.1
16.7
11.1
18.4
22.9
13.3
12.8
48.5
Wisconsin
9.8
1.7
2
78.8
13.1
57.5
52.4
7.3
5.0
38.6
14.8
a.7
5.6
15.3
.0
.1
1.0
5.8
3.0
3.1
(*)
Flains:
lows
36.7
10.0
21.7
1.7
4.0
4.1
1.8
Kansas
a.e
28.1
8.7
17.2
26
20
15
3
B
(*)
4.1
.1
Minnesota
2.3
3.1
La
6.8
89.5
2
10.3
54.4
.1
3.5
3.6
12.0
6
82
21
B.A
Missouri
20.8
,1
a
71.8
A
17.1
.1
40.3
23.7
5.8
6.3
4.4
4.6
Nebraska
5.4
15.9
.1
1.3
14.6
1.5
3
.4
10.9
63
1.1
24
12
4.0
1.2
.4
North Dakese
4.8
3
3.0
9
1.7
2
3
.7
.1
DCC
1.0
6
2
1.1
South Dekota
.1
4.5
1.1
29
2
lat
,
2
.7
.7
.1
1.6
M
D
5
,
1
D
Southeast:
Alabama
55.0
7.8
34.5
11.2
4.1
1.1
as
Arkansas
10.4
1.7
29.7
5.8
A
15.7
A
31
10.0
22
.7
Forida
2.1
7.2
1.7
8.5
.1
-1.2
200.1
of
402
120.8
11.0
17.3
(*)
6.7
1.0
5.3
10.9
7.6
45.9
121
(*)
Georgia
159.8
30.4
13
19
96.0
23.3
11.9
13.6
6.4
11.4
13.8
as
4
Kentucky
34.8
24
24
63.4
10.7
1.8
$2.1
4.8
26.8
7.8
82
27
18.7
.9
Louisians
1.0
14.1
B
61.2
10.5
A
38.8
3.8
5
18.6
8.7
15
15.4
Mississippi
7.6
27
14.1
75
.1
22.8
.1
3.8
13.5
.7
as
2.1
1.5
1.0
1.0
25
1.7
4.8
is
North Carolina
21
180.8
28.7
2
134.1
(*)
at
11.2
31.8
1.0
5.1
20
8.3
43.3
.1
South Carotina
1.5
104.2
9.3
78.8
2
.7
14.9
13.1
16.7
1.0
Tennessee
126
17.8
4.8
9
17.1
27
1158
19.0
a
73.0
&
13.9
10.4
8.6
.6
7.7
8.0
11.8
27.7
.6
Virginia
13
112.2
1
17.9
.4
80.8
6.7
21.5
14.6
3.7
4.5
15.6
4.8
.4
Wast Virginia
29.6
6.0
S5.2
13.0
3
.8
20.1
20
7.9
1.0
3.7
2.0
6.1
23
.1
84
.4
0
2
1.4
3
1.1
(*)
Southwest:
Arizona
86.1
10.4
23.7
4.4
2.5
2.3
New Mexico
1.7
9.1
1.5
17.4
27
.1
11.0
1.7
18.5
1.0
6.8
1,3
28
N°2
13.0
4.4
2
2
Oklahoma
24
b
44.0
9.6
20.1
(")
0
50
22
as
15
1.4
1,5
Texas
.
125
2
E
300.0
40.1
200.6
229
35.5
is
4.0
24.8
A
17A
4.0
65.2
2
13.2
21
35.9
10.0
21,6
.8
Rocky Mountains:
Colorado
53.1
7.8
35.5
32
5.4
Idaho
2.7
3.7
10.7
1.1
11.4
1.4
8.0
(b)
A
7.8
.4
1.8
2
5.4
(D)
23
B
Montana
5.1
.1
1.5
20
4
e
A
3
1.0
.6
1.1
(b)
Utah
18.7
22
15.8
,7
0
.8
J
4.4
Wyoming
1.9
1.8
.t
5.8
0.6
to
2
as
1.3
.7
2
1.5
2
3
(9)
A
0
21
&
(*)
0
4
(*)
3
0
Far West:
Callfornia
552.2
63.5
290.0
28.2
48.0
Nevada
24.5
23.0
108.5
15.1
22.4
48
10.5
13
7
1.1
2.7
178.1
21.7
Oregon
33
134.5
4
2.6
25
2
39.1
4.9
21.1
1.0
as
6.2
20
Washington
1.0
1.3
4.0
8.1
2
(")
14.8
2
75.0
37.9
25
92
11.8
1.5
4.4
4.5
8.3
13.4
P.
.1
(9
19.8
5.2
11.7
Alaska
13.2
1.8
3.7
Hawpi
2
4
2
2.7
50.2
4
5
5.9
6.9
to
&
No
$
.7
6.0
Puento Rico
A
1.5
15.3
28
1.5
&
10.4
2
39.8
Other U.S. was'
12
3.1
1.8
32.7
4.6
4
9.0
to
C
1.6
o
27
Foreign
bet
14
0
A
.7
(*)
1.6
6.9
7
15
2
2.6
6.5
2
1.B
&
1.2
.1
(a)
3
(0)
8
D Suppressed a avoid discharge = date of individual companies.
Less than 50 employees.
2 Ese factnols 2 = table 5.
1. See footnote 1 to table 4.
2 See footnots 3 to table 5.
NOTE-Estiment for 1830 as prefiminary.
SENT BY:DEPT. COMMERCE/BEA/IID ; 8-21-92 ; 5:25PM ;
2025236569-
2024566218:# D
68 . May 1992
SURVEY OF CURRENT BUSINESS
Table 16.-Gross Property, Plant, and Equipment of Nonbank U.S. Affiliates, by State, 1988-90
[Millons of dollars)
1988
1989'
1990'
Change in commercial property
of which:
or which:
Of which:
Total
Commercial
Total
Commercial
Total
Commerce
1968-88
1889-00
property
property
property
Total
418,089
104,048
488,481
124,830
572,342
146,811
20,791
21,771
New Englane:
Connecticut
3,810
1,488
4,841
1,597
5,334
1,753
129
186
Maine
2.035
426
1,843
391
2,077
326
-83
-65
Massachusetts
6,516
2,847
7,285
3,314
8,848
1470
466
157
New Hampshire
994
258
1,119
256
1,437
370
7
121
Rhode Island
580
168
887
242
1,081
335
74
a
Vermont
449
56
492
82
625
151
26
8
Midewat:
Delaware
4,789
580
5,343
636
5,811
736
59
97
District of Columbia
2,230
2,086
3,004
2.788
3,489
3,220
751
433
Maryland
3,766
1,291
4.722
1,472
5,784
1,844
182
372
New Jersey
13,950
3,721
18,275
3,884
18,447
4,306
-
643
New York
26,356
14,387
33,554
16,864
36,203
21.158
4,497
2.274
Pennsylvania
11.582
2,523
14,509
3,012
16,488
3,350
489
338
Great Laws:
lilinois
16,800
4,726
19,570
6.070
23,228
6,558
1,344
488
Indiana
5,326
788
7,995
1,048
13,255
1,011
263
-30
Michigan
5.774
1,097
10,537
1,187
11,910
1.413
89
226
Ohio
12,912
2,868
17,282
2,821
20,308
3.177
-245
538
Wisconsin
3.574
549
4,323
518
5,044
$19
&
102
Plains:
DMB
2.219
273
2,244
235
2,615
262
$
27
Kansas
8,254
239
4,780
330
5,031
285
91
7
Minnesota
5,540
1,432
11,516
1,888
12,420
1,811
456
-77
Missour
4,484
915
5,006
980
5,778
1,064
46
104
Nebraska
558
R
710
110
780
102
36
T
North Dake
1,169
9
1,109
24
1.200
35
18
"
South Detects
441
36
465
28
552
47
9
20
Southeast:
Alabama
4,852
466
5,873
sce
7.346
480
143
-129
Arkansas
1,707
375
2,312
485
2.478
480
109
Florida
-
11,905
6,190
14.902
7,317
17,677
8.527
Georgia
1,127
1,211
10,856
3,678
13,895
4,806
16,508
5,485
1,128
679
Kentucky
5.581
658
6,788
601
9,011
835
&
233
Louisiana
15,896
1,323
15,994
1,216
17,221
1,482
-108
276
Mississippi
2,579
193
2,688
224
2,912
238
31
12
North Caroine
11,792
1.584
13,819
1,702
15,160
2,000
117
298
South Caroina
7,200
1,002
8.654
1,516
10,153
1,400
Tennessee
514
-118
7,292
1,135
6.940
1,488
10,124
1,681
352
195
Virginia
7,962
2,040
9,155
2,503
10,618
3.052
553
459
West Virginia
5,020
191
5,532
271
8,023
185
ao
₹
Southwest:
Arizona
5,080
1,866
6.070
2,288
7,208
2,548
New Mexico
402
257
3,559
275
3,780
296
4,334
427
21
Oklahoma
131
5,709
680
5,765
761
6,082
746
131
-16
Texas
46,213
10.421
47,958
11,329
57.170
12,767
soa
1,439
Rodky Mountain:
Colorado
5,489
2.494
5,822
2.841
5,268
3.087
347
Idaho
258
432
X
616
38
768
Montana
200
15
162
1,801
71
1.916
(P)
2,151
97
Utah
(D)
@
3,502
120
3,547
264
4,009
#1
143
Wyoming
217
2,990
30
2,008
35
2,872
175
8
140
Par West:
California
52.411
19,876
53,706
23,809
77,487
25.396
Nevaga
3,933
6.087
2.853
549
3.885
586
5,377
is
36
375
Oregon
2,089
654
2.467
673
3,205
1,578
Washington
119
405
4,803
1,372
6.062
1.645
8,086
2.188
273
523
Alaska
18,312
284
18,114
(D)
19,435
249
Hawaii
€
€
4,990
3,318
8,224
5,160
10,658
Puerto Rico
7,495
1,853
2.327
663
145
1,245
185
1,303
175
Other U.S. Inc:
9
20
17247
212
17,415
277
19.057
Foreign'
a
65
277
2,548
193
1,881
133
1,841
225
&
a
, Revised.
2. See fontnots 2 to table 5.
, Prefiminary
b Suppressed to avoid disclosure of data of individual companies.
1 Consists primarily of movable fored assess temporarily located outside the United States and
of any foreign assets, including mineral note, carried DC. the U.S. affiliates' books.
1. See instruct 1 to table 1.
Please
see
page 10.
Statement of
Shirley D. Peterson
Commissioner of Internal Revenue
Before the
Subcommittee on Oversight
House Committee on Ways and Means
International Tax Administration Issues
April 9, 1992
STATEMENT OF
SHIRLEY D. PETERSON
COMMISSIONER OF INTERNAL REVENUE
BEFORE THE SUBCOMMITTEE ON OVERSIGHT
HOUSE WAYS AND MEANS COMMITTEE
HEARING ON TAX UNDERPAYMENTS
BY U.S. SUBSIDIARIES OF FOREIGN CORPORATIONS
APRIL 9, 1992
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today in my first appearance as
Commissioner before this Subcommittee to discuss the U.S.
taxation of foreign controlled corporations doing business in the
United States and the issue of transfer pricing. with me today
are Chief Counsel Abraham "Hap" Shashy, Assistant Commissioner
(International) Regina Deanehan, and Deputy Associate Chief
Counsel (International) Charles Triplett.
I. INTRODUCTION
The Internal Revenue Service testified on this issue in
1990. At that time, my predecessor Fred Goldberg indicated that
the IRS was concerned with the transfer pricing practices of both
foreign controlled corporations and U.S. controlled corporations.
Congress responded to these concerns and enacted legislation to
assist the IRS in enforcing section 482, which governs transfer
pricing. The IRS for its part undertook an intense effort to
develop and to implement administrative means to improve
compliance with section 482.
My testimony today will speak to how the picture has changed
since the 1990 hearing. In so doing, I will respond generally to
a series of questions this subcommittee sent us less than a month
ago in the context of its investigation of tax underpayments by
foreign controlled corporations, or FCCs.
Mr. Chairman, you asked important questions that focused on
four general topics. These topics are:
--
How the IRS has used the new legislative tools, in
particular the designated summons and expert witness
procurement procedures;
-- What staffing, enforcement, and other administrative
efforts the IRS has committed to the transfer pricing
area;
- 2 -
-- The status of our advance pricing agreement or APA
program; and
-- The degree to which the IRS coordinates transfer
pricing issues with our treaty partners.
These topics are very similar to those that Congress asked
us to address in our Report on the Application and Administration
of Section 482, which we are releasing today. The topics can be
summarized in two direct questions: Has the 1989 and 1990
legislation been effective; and has the IRS taken appropriate and
effective steps to implement the legislation and to respond
administratively where possible to police transfer pricing
noncompliance? Mr. Chairman, in answer to these questions, much
remains to be done, but we have a positive story to tell. Before
I provide you with the details, let me summarize:
First, our field experience suggests that the legislative
amendments are responsive to the problems identified in 1990.
Our experience is that the changes are increasing compliance with
the transfer pricing rules.
Second, we have undertaken numerous administrative efforts
to enhance the administration of section 482. These efforts have
three aims: to increase voluntary compliance, to strengthen
enforcement, and to improve our litigation experience. Our
efforts on the compliance front include our successful APA
program and the publication of proposed regulations under section
482. Our efforts on the enforcement front include a marked
increase in international examinations, increased coordination
and centralization of transfer pricing issues, improvements to
the competent authority process, and better coordination with
treaty partners. In litigation, our efforts include earlier
development of our legal position and arguments and greater use
of outside experts.
Third, the efforts I have mentioned above are only the
beginning. We are looking actively for more innovative ways to
address transfer pricing problems. To improve voluntary
compliance, we are undertaking an in-depth study of methods to
collect and to analyze financial data relevant to transfer
pricing issues. We hope to work with the business community to
develop a voluntary program for obtaining this information. To
strengthen enforcement, we are working to develop more
sophisticated case selection criteria. One approach is to
establish baseline reporting statistics for specific markets.
This baseline data will allow us to target more precisely those
companies that are not complying with section 482. To improve
our litigation experience, we will continue to involve the Office
of Chief Counsel in the early development of cases, and we will
continue to seek the assistance of experts. We are also
- 3 -
experimenting with arbitration as a means of reducing the cost
and time required to resolve transfer pricing cases.
I now will address each of these points in greater detail.
II. Impact of the Legislation
To assess the impact of the recent legislative changes, we
looked to our field experience as a guide. Our field experience
suggests that the legislation is responsive to the problems
identified in 1990 and is increasing compliance with section 482.
I will address three principal legislative provisions: the
record-keeping and reporting requirements of section 6038A; the
designated summons procedures of section 6503 (k), and the
expedited procurement procedures for expert witnesses.
A. Record-keeping and Production of Records
Section 6038A, as amended in 1989 and 1990, imposes
reporting and record-keeping requirements on U.S. corporations
that are 25 percent or more owned by a foreign person. These
corporations, known as "reporting corporations, must file Form
5472 disclosing transactions with related parties, and they must
maintain records sufficient to determine the correct federal
income tax treatment of those transactions.
The IRS issued proposed regulations under section 6038A in
December of 1990. The IRS took into account over 70 written
comments on the regulations. Six months later, in June of 1991,
final regulations were issued. As this chronology demonstrates,
the IRS acted expeditiously to implement the legislation.
Our field offices report that the legislation and
regulations are working. More taxpayers are complying
voluntarily with information requests, and doing so more quickly;
the field offices attribute this success in part to the
noncompliance penalties adopted under section 6038A. For
example, if a taxpayer fails to provide adequate documentation
under section 6038A, the IRS may use its discretion to disallow
questionable deductions, subject to very limited judicial review.
Taxpayers are anxious to avoid this potentially severe result.
Consequently, there is greater compliance, and more issues are
resolved at the exam level. As one typical District indicated,
"the amendments strengthening [section] 6038A [have] proven their
value."
The effectiveness of section 6038A is likely to increase
even from its current level. The IRS is near the end of a
project to revise Form 5472 to require more detailed information
about related party transactions. The change to the Form, when
- 4 -
coupled with the noncompliance penalties, should enhance the
ability of the IRS to identify noncompliance with section 482.
B. Designated Summons Procedure
Congress provided IRS with the designated summons as a new
tool to use when taxpayers refuse to provide requested
information or delay their response in the hope that the statute
of limitations will expire. The designated summons procedure
extends the statute of limitations during the period that a
summons is the subject of judicial enforcement proceedings. The
designated summons is an extraordinary procedure that the IRS
invokes judiciously, only following high level review within
Examination and the Office of Chief Counsel.
To date, the IRS has issued three designated summonses
relating to transfer pricing issues. Two of these summonses
relate to outbound transactions, and the other relates to an
inbound transaction. In two of the cases, the taxpayers complied
with the summons without the need for judicial enforcement. The
IRS believes that compliance resulted in large part from the
threat that the statute of limitations would be suspended.
In the third case, a District Court has ordered the taxpayer
to comply, and the taxpayer is appealing the order. The
designated summons procedure is protecting the government in this
instance by keeping the statute of limitations open during the
pendency of the appeal.
C. Expedited Procurement of Expert Witnesses
Legislation adopted in 1991 has made outside experts more
accessible to the IRS. The assistance of outside experts is of
great importance in section 482 cases, which are factually
complicated as a rule. Frequently, the products at issue have
unique characteristics that complicate our efforts to find
comparables. In addition, transfer pricing cases may require
valuation of sophisticated intangibles on both sides of a related
party transaction. The factual development often requires in-
depth knowledge of a particular industry or of economics
principles that often are beyond the experience of an examining
agent.
The IRS now is able to address this problem through the
early involvement of expert witnesses. Under the expedited
procurement procedures, the IRS can hire an expert for the
examination and litigation phases of a transfer pricing case
without substantial delay.
The IRS spent $14.6 million for expert witness procurements
during FY 1991. Since the new procurement procedures went into
- 5 -
effect, 112 expert witnesses have been engaged for section 482
cases. In FY 1991, expert witnesses provided assistance in nine
transfer pricing cases at the examination level. Three of those
cases are now complete, with adjustments amounting to $766
million. exam The FY 1992 budget for expert witnesses exceeds $16
million.
D. Summary
In summary, the majority of our international examiners
indicate that taxpayers have been more forthcoming with the
information that the IRS needs to develop its transfer pricing
cases adequately and to assess the proper amount of tax. As a
direct result, taxpayers are more likely to settle cases at the
exam level. This result is just beginning to show in our
numbers.
For example, in our Manhattan District, a key location for
FCCs, settlement rates have increased dramatically in the past
two years. In FY 1990, the agreed rate at the examination level
was only 2.8 percent. In 1991 that rate increased substantially
to 54.7 percent. The favorable trend is continuing upward in the
first six months of FY 1992.
These numbers, while encouraging, do not tell the whole
story. Too little time has elapsed to obtain a comprehensive
picture of the impact of the legislation. Our "hard" tax return
data is available only through 1989. Accordingly, additional
legislation would be premature at this time.
III.
IRS ADMINISTRATIVE EFFORTS
The IRS has three important goals in developing
administrative means to address transfer pricing. These goals, a
part of Compliance 2000, are: to encourage voluntary compliance;
to strengthen enforcement, and to enhance our litigation
experience. With these goals we aim to deliver a better audit
experience and to ease administrative burdens for taxpayers who
comply, and to deal swiftly and firmly with those who do not. I
will discuss separately the ongoing administrative efforts that
relate to each goal.
A. Encourage Voluntary Compliance
There are two major developments to report concerning
voluntary compliance. These are the advance pricing agreement
program and the publication of proposed regulations under section
482.
The IRS developed the APA program as an alternative to the
ordinary administrative, judicial, and treaty dispute resolution
- 6 -
mechanisms for resolving intercompany pricing issues. The APA
process is a cooperative one; both taxpayers and the government
derive significant benefits. Taxpayers welcome the concept as a
way to obtain certainty in a complex area and to avoid a lengthy
confrontation with the IRS and possibly with a foreign tax
administration. In addition, both the IRS and the taxpayer
benefit from a more rapid and less costly resolution of the
transfer pricing issues.
From its recent inception, the APA program has grown
quickly. From a small beginning -- seven APA requests -- the IRS
program now includes 38 taxpayers, involving 15 different
countries. One agreement is fully complete and has been approved
by the relevant foreign competent authority. Six others are in
their final stages.
The APA process offers an efficient and speedy resolution of
transfer pricing issues. The average APA takes about 12 months
to complete, far less time than it takes to resolve a significant
section 482 issue through the course of examination,
administrative appeals, and litigation. The APA process clearly
is a win-win situation for taxpayers and the IRS. We are proud
of our success with the APA program; we are pleased that
taxpayers are willing to work with us cooperatively in this
difficult area of the law.
A second aspect of our voluntary compliance effort is the
publication of proposed regulations under section 482. The
regulations provide specific rules that taxpayers can follow to
evaluate the adequacy of their intercompany transfer prices.
Consistent with Congressional intent, the actual profit
experience of the taxpayer provides an important reference point.
If the operating income reported by the taxpayer is within a
comparable profit interval, the IRS generally will not make any
adjustment under this method. If the operating income is outside
of, but not far from the boundary of, the comparable profit
interval, the IRS generally will limit the size of any
adjustment, based on the proximity of the taxpayer's reported
income to the profit interval. These important rules are
designed to promote reasonable reporting positions and to
streamline the examination process.
B.
Strengthen Enforcement
During the past two years, the IRS has instituted a number
of changes to improve our enforcement of section 482 issues.
Paramount among these changes is an increased commitment of
resources and attention to transfer pricing in the international
context.
- 7 -
1.
Increased Resources
In August, 1991, the IRS began to implement a strategic
initiative, called SVC-17, to provide an effective means for
identifying and addressing noncompliance with international tax
laws, to measure the effectiveness of compliance efforts, and to
determine the most effective staffing levels.
As part of this program, we have increased the number of
individuals assigned to enforce transfer pricing in the
international context. In the past two years we have:
--
increased the number of international examiners by
almost 100, from 490 to 582;
--
nearly doubled the number of economists, from 36 to 68;
and
--
increased the number of international attorneys, from
122 to 125.
We also have increased the number of FCCs under examination.
The number of FCC returns under examination has more than
doubled, from 1100 in July of 1990 to 2500 today.
There are two other important initiatives we have undertaken
to enable us to use our resources more effectively. First, we
established an International Compliance Analysis Division. This
Division analyzes multinational trends for their effect on tax
administration, identifies significant international tax issues
and market segments that warrant greater examination coverage,
and develops training sources and materials for specialized
international training.
A second initiative is the International Field Assistance
Specialist Program, established at the beginning of FY 1992.
This program provides greater centralization of section 482
issues. It is designed to provide practical "how-to" technical
assistance to the field and to achieve consistency in the
administration of section 482 and other international tax issues.
The experienced audit specialists assigned to this program
develop and disseminate audit techniques, consult with Counsel,
and train other examiners.
Our Appeals division also is developing an experienced group
of international specialists and has made significant innovations
in statistical issue tracking. In addition, Appeals has
emphasized improved communications with the Examination Division
in the international context and more generally.
- 8 -
2.
Coordination With Treaty Partners
Another aspect of our efforts to strengthen enforcement
relates to coordination with our treaty partners. We will be
looking more frequently to our treaty partners to provide
information relevant to transfer pricing issues under our
existing information exchange agreements. In addition, we intend
to implement a more vigorous use of the simultaneous examination
program. Under this program, we can work together with a foreign
tax authority to investigate the activities of a multinational
taxpayer. Our goal is to explore fully every avenue with our
treaty partners to access the information we need for effective
enforcement of section 482. In the process, we hope to improve
our competent authority procedures to allow taxpayers to resolve
double taxation issues more easily.
C. Improved Litigation Experience
We must improve our litigation success rate. We believe the
keys are better factual development at the examination level, and
earlier identification of our legal position and arguments.
The legislative changes that the Congress adopted in 1989
and 1990 will aid in improving factual development of transfer
pricing cases at the exam level. For example, the designated
summons rule I discussed earlier prevents taxpayers from taking
unfair advantage of a delay in responding to IRS information
requests. The penalties under section 6038A provide a strong
incentive for taxpayers to comply with reporting and
recordkeeping requirements. We also can look more readily to
outside experts for assistance, and use our regulations, when
issued in final form, for guidance.
The IRS is improving its development of its legal position
by involving the Office of Chief Counsel at an earlier stage of
the examination process. In the past, examining agents may not
have requested the financial information most relevant to the
legal approach ultimately pursued in court. One object of
earlier Counsel involvement is to develop strong legal arguments
along with the facts needed to support those arguments.
IV. INNOVATIONS FOR THE FUTURE
We believe that the administrative programs I have just
reviewed with you demonstrate our dedication to addressing
transfer pricing issues effectively and swiftly. But we will not
stop there. We are continuing to seek out and develop innovative
ways to respond to this complex problem. I will give you an
example of our pending initiatives in each one of our areas of
focus -- compliance, enforcement, and litigation.
- 9 -
Compliance. On the compliance side, we are making an effort
to improve access to financial data from business entities other
than the taxpayer under examination (i.e., from "third parties")
This information is highly relevant in applying the arm's length
standard to determine the proper transfer price among related
parties.
We are now undertaking an in-depth study of methods to
obtain and analyze third party information outside the context of
a particular examination. In the past, we have not made an
integrated effort to compile third party information, but instead
have sought it out on a case-by-case basis.
Our new approach is to work with the business community,
trade associations, and other industry groups to develop a
voluntary program to collect and analyze third party information.
As part of this program, we will address methods to balance the
taxpayer's interest in evaluating and protesting the IRS position
against the concern of third parties to preserve the
confidentiality of sensitive financial data. We also plan to
supplement the voluntary information program by using information
that is available in public databases and from other government
agencies.
One positive side effect of this program is that we may be
able to release information that will help all taxpayers comply.
The degree of specificity of the information will depend upon how
we ultimately resolve the confidentiality issue I mentioned. At
a minimum, we should be able to provide general information that
will be of assistance. In this respect, we already plan to
release some general conceptual information based on our APA
experience, once we have enough participants per industry so that
the information disclosed cannot be correlated with any
particular taxpayer.
Enforcement. On the enforcement side, our goal is to
develop more detailed and sophisticated case selection criteria
-- a type of audit screening process -- to direct our resources
to those cases most likely to present serious transfer pricing
issues. We have two approaches in mind. First, we can use the
third party data obtained in our information program, perhaps
with the help of statistical analysis, to develop an audit
screen. For example, we might construct a range of profitability
that our agents could use to assess the likelihood of a
substantial transfer pricing issue.
Second, we are targeting certain market segments for in-
depth analysis. A market segment is a classification of
commercial activity according to the nature of the activity, for
example, manufacturing or wholesale trade. Our hope is to
identify baseline reporting statistics against which to measure
- 10 -
taxpayer compliance in these market segments. We have convened a
task force to carry out this analysis.
Overall, we hope to achieve smarter enforcement that will
direct our resources where they are most needed.
Litigation. On the litigation front, we are hoping to
streamline the resolution of transfer pricing controversies
through the use of innovative procedures such as binding
arbitration. We are experimenting with arbitration in one
docketed Tax Court case. The government and the taxpayer have
both agreed to be bound by the decision of the arbitration panel.
The panel is required to choose a figure submitted by one of the
parties. As a result, the parties should have a greater
incentive to take reasonable positions.
This case is the first transfer pricing dispute that has
been submitted to arbitration. We believe this process has great
potential as a cost-effective and rapid means of resolving
transfer pricing disputes.
V. REVENUE SHORTFALL
Before I conclude, I would like to address an issue I know
to be of interest to this committee. That issue is the size of
the revenue shortfall, or "tax gap," that results from
noncompliance by FCCs with section 482. Our view is that none of
the available data allows us to make a reliable estimate of this
"tax gap."
The FCC tax gap controversy has yielded claims of unpaid
taxes as high as $30 billion and as low as zero. We cannot
substantiate any of these speculations. We know that many FCCs
have reported sizeable profits and paid substantial amounts of
taxes. We also know that in 1989 only 28 percent of all FCCs
reported taxable income. In comparison, taxable income was
reported by 41 percent of all corporations controlled by United
States persons, which I will refer to as USCCs. Measures of
profitability also are lower in 1989 for FCCs as compared with
USCCs. I have attached charts to my statement that demonstrate
this result using the rate of return on assets and using net
income (less deficit) as a percentage of total receipts.
Economic analyses of the differential in measures of
profitability, as shown on the charts, suggest that the
differential is not due wholly to transfer pricing noncompliance.
According to a study released last November, as much as 50
percent of the differential was thought to be explainable by non-
tax factors. If the remainder were due wholly to transfer
pricing noncompliance, the tax gap would be about $3 billion --
but there is no certainty that the remainder is due to transfer
- 11 -
pricing abuse or that the comparison of measures of profitability
is valid in this aggregate form.
We believe there is a compliance problem under section 482,
but we cannot quantify it. We believe the problem exists in the
case of our own U.S.-based multinationals as well as for FCCs.
We believe the only reliable way to measure noncompliance with
section 482 to audit every company -- not a feasible or
attractive solution. Our other option is to change the way we do
business. We must shift the balance in our favor by making
voluntary compliance more attractive and noncompliance more
risky.
VI. CONCLUSION
I began this testimony by indicating that I would speak to
how the section 482 picture has changed since the 1990 hearings.
I believe the picture I have presented demonstrates that our
prospects are substantially improved from when the earlier
hearings were convened. With the help of the Congress and the
Administration, we have put into motion a plethora of tools and
programs that have improved the administration of section 482.
Now these efforts are beginning to show results. We need more
time to assess the ultimate impact before considering additional
legislation.
Under my administration, we will redouble our efforts to
carry out the philosophy and strategies I have outlined today.
My hope is to form a true working partnership with taxpayers.
Our experience is that we can all win by working together
cooperatively in an atmosphere of mutual trust and respect. We
will succeed only if we can find new ways to help taxpayers
comply with the law and to assure those compliant taxpayers that
we will not tolerate noncompliance by their competitors.
We would be happy to answer any questions you may have.
FCC Returns Currently Under Examination
3000
2500
2500
2000
Number of Returns
1550
1500
1100
1000
500
500
375
425
0
July 90
Jan 91
June 91
Jan 92
April 92
Total FCCs
CEP
NET INCOME (LESS DEFICIT) AS A PERCENT
OF TOTAL RECEIPTS
4
3.7
3
3.1
3.1
27
27
27
26
2.3
2
PERCENT
1.6
1.4
1.4
1
1
0.9
0.8
0.6
0.5
0.4
0
0.3
-1
1981
1982
1983
1984
1985
1986
1987
1988
1989
FCC's
USCC's
Rate Of Return On Assets
25
22
2.2
1.9
1.9
2
1.8
1.7
1.7
1.6
1.5
1.4
1.3
Percent
0.9
1
0.8
0.6
0.6
0.5
0.5
0.3
0.3
0
0.2
0.5
1981
1982
1983
1984
1985
1986
1987
1988
1989
FCC's
USCC's
(Ferguson/Walters)
August 26, 1992
11:00 p.m.
STLOUIS
PRESIDENTIAL REMARKS: PUBLIC SAFETY EQUIPMENT, INC.
ST. LOUIS, MISSOURI
AUGUST 27, 1992
9:00 A.M. (??)
Thank you and good morning.
(Acknowledgments, humor)
Together we have seen a world transformed these past three
and a half years -- a world made new by American strength and
resolve. But now that the Cold War is over, the defining
challenge of the '90s is to win the economic competition of the
new global economy -- to win the peace.
Our goal is simple and profound: We must be a military
superpower, an economic superpower and an export superpower.
In this election, you'll hear two versions of how to do
this. My opponents' answer is to look inward, and protect what
we already have from the challenges of this new world. My
approach is to look forward -- to open new markets, prepare our
people to compete, to restore our social fabric -- to save and
invest, so that we can win.
I wanted to come here today to St. Louis to lay out the
sharp difference between Governor Clinton and me on the crucial
issue of investment and open trade. My policies encourage both -
- because my experience in business and foreign affairs has shown
me that trade and investment create jobs.
2
In contrast, my opponent and the Democratic Congress want to
tax both trade and investment. But taxes stifle things -- and in
this case, their taxes would chase away business and jobs.
I know my opponent has lots of slogans and policy buzzwords
that sound appealing when you first hear them -- but America
can't afford them.
Take the story of PSE as an example. There was a time when
companies like PSE could be satisfied with a national market --
sell your goods in the fifty states and leave it at that.
But you know that's no longer good enough. So five years
ago, you took on the world. I'm told that now 35 percent of what
you build is sold outside our borders, in 48 66 different countries. Rypn
Today your light bars and sirens help save lives not only on the
E]
streets of Detroit and Peoria, but in Israel, Hong Kong and
2
X
Ryan
Spain.
PSE's story is a parable for our entire country's economic
future -- never settling for less, always pushing ahead,
embracing the challenges of foreign competition and reshaping
them as opportunities.
Let me offer a personal note -- tell you how I learned about
competing in the world.
I spent a good part of my life out in West Texas, in the oil
business. I painted rigs for a while, even lived out of a
3
suitcase as a salesman. And all around me in those days I saw
towns and businesses rise up from nothing, for a simple reason:
3
The world wanted what Texas had to offer -- cotton and cattle and
4
crude.
We understood that the more goods we sold outside our
borders, the more jobs we could create within them.
Later on, when I started my own business, I learned again:
we had to take a global view to compete. I shopped for investors
on the west coast, on the east coast, but I couldn't stop there.
5
I traveled the world -- to Europe and the Far East. Every dollar
we could bring into this country was a dollar that went to expand
our company, create jobs in our community.
I've seen it over and over again in my work with other
nations. You learn how important America is to the world, but
you also learn how important the world is to America -- not just
for national security in the traditional sense, but for our
economic security, for creating jobs, right here at home.
David
We've held steady to this vision for three years now, and Walters
with great success. As we knock down trade barriers, American
2/3
YES.
companies are rushing to meet the demand. Exports are up *** in 63.7%
much
the last five years. America is the greatest exporter the world 67.5
6
gas
has ever seen -- $422 billion dollars of exports last year alone.
2/3
Let me bring it close to home. In Missouri, exports are up
37 percent over the last three years -- $4.5 billion worth of
7
goods shipped to 166 countries around the world.
Impressive numbers, but when you dig behind the trade
statistics, you find the real benefit of the new world economy -
- in a word, it's jobs. Here in Missouri, 100,000 jobs are
David Walters
4
X
1.5
7.5 for
supported by foreign trade. Across the country, 8 million
1991
Americans X owe their jobs to trade.
X
>7
8
Everyone recognizes that the world is moving at a faster
pace, but I see something more: it's moving our way. Right now
we're building on the export success of the last three years.
Two weeks ago we entered a new era of open trade. Along with
Mexico and Canada, we initialed the North American Free Trade
Agreement, with the goal of knocking down tariffs and creating
one of the largest free-trade areas in the world -- an integrated
DW
a
economy worth more than $6 trillion dollars.
Here in Missouri, you already export $2 billion worth of
10
goods to Mexico and Canada. That's a lot of paychecks, but our
new agreement will create still more jobs, and make us even more
competitive against our European and Asian competitors.
NAFTA is a solid agreement -- when you've been in as many
tough negotiations as I have, you learn to tell the difference.
We're going to take this case to the protectionists on Capitol
Hill, because they need to hear it. Right now, before our
initials are even dry on the agreement, the Democratic leadership
in Congress is calling for us to slap a tarriff on any new trade
that comes from NAFTA.
Think about that for a minute -- ((that's a minute longer
than they've thought about it)). After years of tough
negotiations with our two closest trading partners, we've agreed
to end tariffs. The congressional Democrats say: Okay, fine.
But first you have to put on a new tariff.
5
In other words, they think the way to eliminate trade
barriers is to build a new trade barrier.
That's like telling us they want us to hit a homerun, but
please don't hit it out of the park because we don't want to lose
the ball.
This "transaction tax,' as they call it, will make it more
"
expensive for our businesses to compete with the European and
Asians -- and it will discourage the creation of new jobs for you
and your neighbors. It turns the agreement on its head --
defeats the whole purpose.
What about Governor Clinton? Where does he stand? Well,
Detroit
just last week, when asked about our new trade agreement, he
8/21
hemmed and hawed, and at last he said: "When I have a definitive
will
opinion, I'll 11 say so.
No matter how much Governor Clinton would like to fudge the
issue, the difference couldn't be clearer -- and the difference
is based on two very different views of America's future. My
opponents see us knocking down trade barriers and they say: Hold
everything. They see us open new markets for American goods and
they say: Wait a minute. Maybe we can't compete. The American
worker can't cut it. So let's pull down the blinds, lock the
doors and hope the world goes away.
Well, let me tell them something you already know. The
American worker doesn't have to hide from anybody. Americans can
outwork, out-think, out-compete anybody, anywhere, anytime.
6
That's something everyone in the world seems to understand -
- everyone but the protectionist Democrats. Over the last
decade, we've seen a flood of foreign investment in the United
States -- businesses from all over the world setting up shop from
Portland, Oregon to Portland, Maine. These investors follow a
simple logic: if you want the best science and universities in
the world, if you want the best workers in the world, you have to
come to the U.S.A.
Sue
Maynire
The result has been jobs: One out of every ten manufacturing
workers in the United States works for a company supported by
13
foreign investment. And that's the bottom line: jobs for
Americans, a growing economic pie for everyone.
Now, here's one issue where Governor Clinton doesn't waffle.
He's surveyed the issue of foreign investment and come out
foresquare for -- you guessed it -- a tax increase.
He's proposed to increase taxes on foreign investment in the
United States, even though those companies employ a total of 4
14
and one-half million Americans.
Governor Clinton says his new tax will raise $45 billion.
He might want to talk to his own Democrats on Capitol Hill. The
Joint Committee on Taxation says that estimate X is about 45 times MEMO
JCT
too high.
7/15/92
Governor Clinton says his tax increase will "crack down" on
foreign companies, but all it will really do is drive them out.
And if they go, they'll take those jobs with them.
7
Travel around this state. Go to New Madrid (MA-drid), talk
to the 1200 employees at Noranda Aluminum -- or to Joplin, talk
Missouri
16
to the 425 employees of Atlas Powder. Go to any of the 244
Advantage
foreign-owned companies that employ 60,000 workers right here in
Fact
Sheet
Missouri. I don't think you're going to find any of those
Missourians railing against the evils of foreign investment.
If Governor Clinton's tax hike had been in effect these past
few years, few if any of those companies would have located in
the United States -- few if any of those jobs would have been
created for Missourians.
And it's not just Missouri. Whether it's the Nissan plant
17
in Tennessee -- or the proposed BMW plant in South Carolina --
Governor Clinton's tax increase would be felt in every region of
every state of this country.
Governor Clinton forgets something about international
relations. If he raises this tax, our foreign competitors are
going to say: "What's good for the goose is good for the gander."
His tax is like a gilded invitation sent to foreign governments
where U.S. companies also do business. And the invititation
reads: "Please retaliate."
The result would be not just a reduction in investment here,
but a contraction worldwide. There was another occasion when
that happened. It was in 1930. Right before the great
18
depression.
No other major industrial nation favors the kind of tax
19
increase Governor Clinton proposes -- not Germany, not Japan.
8
But I can tell you one nation that does tax foreign investment as
20
he would like: India.
Well, here's a promise I am proud to make: As long as I am
president, India will not be a model for how to conduct economic
policy in the United States of America.
Let's review the facts about Governor Clinton's tax: It
won't raise revenue. It won't create a single job. It will
discourage investment. And it threatens to start a trade war at
the very moment when markets the world over are opening up to
American products.
We should ask why, given all this, Governor Clinton would
ever propose such a tax in the first place. I can tell you why.
Today change is accelerating, and change breeds uneasiness,
skepticism, even fear. And by disparaging foreign investment,
Governor Clinton hopes to exploit the darker fears of this
uncertain age -- fear of the future, fear of the unknown, fear of
foreigners.
Well, let me tell Governor Clinton something: Play politics
all you want, but those are American jobs you're playing politics
with. Those are American workers you're putting at risk.
The American people won't buy it. The proudest people on
earth have never stooped to fearmongers before, and we're not
going to start now.
In talking about America's future in the global economy, I
mentioned my own experience, because I want you to understand why
I believe what I do about America's ability to compete. I've
9
of
built a business; I've dealt with foreign nations; I know what it
takes to make America secure and strong at home and abroad.
Governor Clinton takes a different view, and it is borne of
his life experience -- a life spent in Arkansas government.
So the American people have a clear choice this year. It's
a choice between the patrons of the past and the architects of
the future. I believe we can shape what lies ahead -- not by
turning away from challenges but by doing what you here at PSE
have done -- meeting the competition head on, making foreign
markets your own.
I have faith in America's future -- because I have faith in
the American people. It's the same faith that brought me out to
Texas more than 40 years ago -- the same faith that brought me
into public life -- the same faith that has led me to fight for
open markets -- because I know that no challenge is too great for
the American heart.
Thank you and God bless you.
# #
They don't understand sacceler would
where standing change still means falling behind
STATEMENT OF THE ORGANIZATION FOR INTERNATIONAL
INVESTMENT ("OFII")
BEFORE THE HOUSE COMMITTEE ON WAYS AND MEANS
REGARDING H.R. 5270
where'd he get that
JULY 21, 1992
cragy ideas
Preface
The Organization for International Investment Inc., commonly known as OFII, is
composed exclusively of the U.S. subsidiaries of global companies domiciled outside
the United States. Many of their parent companies have U.S. persons as shareholders
and are listed on stock exchanges in the United States. Most of these global
companies are predominantly engaged in manufacturing or producing goods, although
a number of them are engaged in rendering services. These parent companies,
collectively, have invested billions of dollars in the U.S. economy. Their subsidiaries,
OFII's members, employ more than one-half million U.S. citizens as workers in the
United States. OFII's members directly contribute to the economy of the United
States and plan to do so indefinitely into the future. A list of members is appended.
The names of most of them will be quite familiar.
sumple
OFII members regard themselves as good corporate citizens of the United States.
They are here because the United States is seen as a secure base for manufacturing,
using the skills of the world's most productive workforce. The United States is also
seen as a secure base for research and development because of protections afforded
intellectual property and access to the faculties and facilities of more major
universities than can be found in the entire rest of the world. While some doubts
the
have been expressed about the effectiveness of secondary education in the United
States, there is no doubt that U.S. colleges and universities attain a standard of
excellence not found elsewhere.
Governing there 3/2 Rul Cluston 03 Av. x 35 want
OFII's members do not believe that they should be regarded or treated as "foreign."
Their employees are American and, with only minor exceptions, their officers and
managers are American. OFII's members make their corporate decisions based on the
same criteria as companies with predominantly U.S. shareholders -- economic and
market considerations, not nationalism.
Foreign direct investments were made in the United States in reliance on the assurance
mg
that they would receive national treatment by law and treaty. This means that the
domestic companies created by these investments should be subject to the same laws
and taxed in the same manner as if they were owned by domestic persons. Foreign
direct investors and their subsidiary companies have contributed immensely to the
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS, JULY 21, 1992
economic well-being of the United States. They have employed capital to create or
preserve jobs, responded to consumer demands, exported goods, and participated in
community affairs. OFII's members as well as all foreign direct investors who
comply with federal and state laws are, therefore, entitled to receive the same tax
treatment that all domestic corporations receive.
Comments on Title III of H.R. 5270
The focus of OFII's interest in H.R. 5270 is Title III, since it is aimed specifically at
domestic corporations that represent, in varying degrees, foreign direct investment in
the United States. It hardly need be stated that OFII's members resolutely oppose this
title in its entirety and seek removal of its principles from this and any future tax
legislation that may be proposed. The underlying reason for this opposition is that the
concepts found in Title III are in derogation of the principle of national treatment that
has been the linchpin of international commerce for nearly three decades. Enactment
of this title will signal a return to the economic isolation of the 1930s and start a
gradual decline of U.S. participation in the global economy.
Section 304, Minimum Income Tax on Foreign Related Companies
OFII opposes Section 304 with particular vigor. This section not only could affect
all of OFII's members adversely, it could have similarly detrimental effects on
companies with predominantly (75 percent or less) shareholders that are domiciled in
the United States. The thresholds for its application are so low ($2 million or
10 percent of gross income) as to include all corporations with any pretense of global
operations. It is driven by the same isolationist/protectionis sentiments that gave us
the Smoot-Hawley Tariff in 1930 and kept us in economic depression for eight years.
The most damning criticism of this section is that it virtually denounces the
international arm's length method of allocating taxes on multijurisdictional income.
There can be no question that it is in derogation of bilateral tax treaties and that it has
the capacity for taxing nonexistent income. It is not only discriminatory in the
extreme, completely denying national treatment to taxpayers on the basis of their
shareholders' nationalities, it is absolutely contrary to the principle of Internal
Revenue Code § 482 and the elaborate Treasury regulations which are only now in
proposed form.
Section 304 could, under easily conceivable circumstances, become a gross receipts
tax instead of an income tax. If the controlled company group incurs a book loss, i.e.,
has no income to report, there is also unlikely to be any taxable income to tax.
- 2 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS, JULY 21, 1992
Section 304, nevertheless, says that if a (25 percent or more) foreign-owned
company's competitors averaged a profit on their sales, then the foreign-owned
company pays a tax on a deemed profit of 75 percent of the competitors' average
profit. If there is no income, then this tax is clearly on something other than income.
The courts have long ago decided that the government cannot invent taxable income
for a taxpayer where no economic gain exists, and it is very likely that the courts will
come to the same conclusion under appropriate circumstances for Section 304, should
it become law. But this is not the point - a law that does not benefit the nation
should not be passed even if one is secure in the knowledge that the courts will not
enforce them. Section 304 will not benefit the nation or the economy, and it likely
will raise very little revenue.
Since 1982 Congress has enacted a series of laws designed, more or less, to improve
enforcement and application of transfer pricing rules in international transactions.
Some of these laws are so vague, but complex nevertheless, that it has taken the U.S.
Treasury many years to write regulations to put these legislative changes into effect.
Treasury officials have stated clearly that no new laws are needed. There hasn't
been enough time to tell if the existing ones work. Every change in the law affecting
international trade means more regulations, more rulings, more audits, more litigation,
and an exponential increase in paperwork, compliance costs, and professional experts
(to say nothing of accountants, lawyers, and lobbyists).
If there is any intention at all to keep the United States competitive in the global
economy, the never-ending process of enacting congeries of tax laws upon tax laws
had better be curtailed with celerity. When the cost of administration, compliance,
record production and record keeping equals the cost of goods sold, U.S. industry will
simply fall out of the race with other nations that take a more realistic view of free
enterprise. Government cannot manage a national economy. If that is not yet clear,
Yeltsin and Gorbachev should be called as witnesses. It is the supreme irony of the
century that while our old cold war enemy is struggling to free itself of the failures
wrought by government planning, some members of the U.S. Congress are seeking
ever increasing government intrusion into the most enduring free economy in history.
Section 301, 10 Percent Capital Gain Tax on Foreign Shareholders
This provision would put the United States in concert with India, Brazil, and those
few nations that essay to tax gain on sales of domestic capital stock held by
nonresident aliens. It is no coincidence that these same nations also have a difficult
time attracting the foreign investment that they desperately need to stimulate their
struggling economies. Until now, at least, the United States has been receptive to
- 3 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21, 1992
foreign investment and has prospered from it. Enactment of this section would be a
long step down the dim road of economic isolation. It is also difficult to see how it
will produce more than minimal tax revenue.
While the immediate effect of Section 301 would be to drive off portfolio investment,
it ultimately will affect direct investment as well. Both are important sources of
capital for the U.S. economy, and measures should be considered that will attract, not
turn away, both. This section is in derogation of accepted principles of international
law giving the host nation the right to tax its citizens and residents, but not foreign
citizens to whom it provides no direct services or protection. Although Section 301
does not override newer treaties that deal specifically with the subject, it would
unfairly target our oldest and most reliable ally, the United Kingdom, as well as a
number of other European trading partners, to say nothing of Australia. It never
before occurred to these allies and trading partners that the subject needed to be
addressed by treaty because it simply wasn't done by economically progressive
nations.
This proposal is a petty revenue grab at the expense of foresighted economic policy,
and it is not worthy of the United States of America. It will surely prove ineffective
because nonresidents will simply place their funds in less hostile jurisdictions.
Section 302, Limitation on Treaty Benefits
Of the provisions of Title III here considered, this has the least effect on OFII
members because they already represent well-established and substantial direct
investments in the United States by investors from high-tax countries. What is
objectionable to OFII is that the Congress would entertain an enactment that declares
international treaties to be unilaterally subject to political expediency. Barring acts
of war or violent overthrow of governments, treaties rest on the honor of nations. A
nation that unilaterally renounces treaties when their observance becomes inconvenient
will soon find itself unable to rely on convenient ones.
If changes are to be made in the way treaty benefits for residents of low-tax nations
will be applied, those treaties should be bilaterally renegotiated, not unilaterally
abrogated. What will happen to U.S.-owned businesses with direct investments in a
foreign country that finds its tax treaty with the United States summarily revoked?
Could the United States even intervene to protect its own nationals when the problem
lies with an Act of Congress?
The harm in this provision is not that it will have a direct and immediate effect on
OFII members, but that it presages an unfortunate turn of mind that may eventuate in
- 4
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21, 1992
a substantial diminution of commerce among the United States and its trading
partners.
Comment on Assumptions Apparently Underlying Title III
It is believed that the pressure to enact statutes so egregiously unfair and unwise as
Title III arises from widespread acceptance of some basic and erroneous --
assumptions about foreign direct investment. These assumptions, more properly
termed "myths," have been often repeated in the news media, particularly television,
and appear from time to time in statements by politicians.
OFII has undertaken to address and rebut some of the more ubiquitous of these myths.
OFII believes that exposure of the fundamental untruths of these myths will go a long
way toward dispelling the attitudes of fear and distrust about foreign direct investment
that these myths represent.
Myths about the Taxes Paid by Foreign-Owned Companies
Myth #1: Foreign-owned companies are not paying their fair share
of taxes.
FACT: According to IRS Statistics of Income (SOI), foreign-owned companies paid
federal income taxes at essentially the same rates as domestically-owned companies.
The most recent IRS data for the period 1983-1988 reveal that the average effective
tax rate as a percentage of net worth for foreign owned companies was 2.1 percent.
The average, effective tax rate for domestically-owned companies for the same period
was 2.2 percent. These percentages are calculated by dividing the total federal income
taxes paid by each group by the net worth of all the companies in the group
(including those companies which did not pay any taxes because they had no income
for the year). The year by year effective tax rates on net worth are as follows:
- 5 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21. 1992
YEAR-BY-YEAR COMPARISONS FOR
EFFECTIVE TAX RATES BASED UPON NET
WORTH
Foreign-owned
All Other
Year
Companies.
U.S. Companies
1988
2.0 percent
2.4 percent
1987
1.8 percent
2.5 percent
1986
1.4 percent
2.1 percent
1985
2.0 percent
1.9 percent
1984
2.9 percent
2.2 percent
1983
2.5 percent
2.0 percent
Comparing effective tax rates using total assets instead of net worth over the same
time period reveals that the foreign-owned and domestically owned companies paid
identical effective tax rates of 0.6 percent. Calculating an effective tax rate based
upon total receipts (i.e., total taxes paid divided by total receipts), foreign-owned
corporations paid a slightly lower average rate of 0.7 percent, while other U.S.
corporations paid an average effective tax rate of 0.9 percent. Comparing effective
tax rates based upon assets or total receipts is less accurate because such comparisons
do not take into consideration the differences in the level of debt of the companies.
Tax rates based upon net worth are considered a more accurate comparison.
Myth #2: In 1986, foreign-owned companies doing business in the
United States were entitled to a tax refund (i.e., a "negative tax
liability") of $1 billion.
FACT: Foreign-owned companies had net losses of $1.5 billion in 1986 but paid,
nevertheless, $3 billion in federal income taxes. Even though many foreign-owned
companies lost money in 1986, there were enough foreign-owned companies with
income to pay $3 billion in taxes. The most recent available IRS Statistics of Income
(SOI) data show that foreign-owned companies have paid the following aggregate
amounts of federal income tax for each of the years listed.
- 6 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS, JULY 21, 1992
AGGREGATE FEDERAL INCOME TAX LIABILITY
OF FOREIGN-OWNED COMPANIES
1988 - $5.8 billion
1987 - $4.6 billion
1986 - $3.0 billion
1985 - $3.6 billion
1984 - $4.5 billion
1983 - $1.8 billion
The 1986 net loss figure has been misstated consistently in the press and in some
political speeches as a "negative tax liability" or refund of moneys from the U.S.
government. As can be seen from the following table of SOI data listing the total
income of foreign-owned companies, 1986 was the only year in recent IRS statistics
in which the foreign-owned companies as a group incurred a net loss.
AGGREGATE NET INCOME
OF FOREIGN-OWNED COMPANIES
1988 - $11.2 billion
1987 - $5.6 billion
1986 - ($1.5 billion)
1985 - $3.0 billion
1984 - $4.5 billion
1983 - $1.8 billion
7 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS, JULY 21, 1992
Myth #3: Foreign-owned companies are avoiding paying taxes by
using a "scheme" called "transfer pricing" to reduce their income
in the United States.
FACT: Transfer pricing is not a tax avoidance "scheme" or device. The term
"transfer pricing" refers to the price for a product, service, or intangible that a
corporation charges to an affiliated corporation. All multinational companies,
domestic and foreign, must establish transfer prices for international transactions.
Income tax rates of major industrial nations are similar or, in many cases, higher than
U.S. income tax rates. Income of a multinational enterprise that is not reported in one
nation must be reported in another. Transfer pricing determines the portion of income
arising from an international transaction that is taxed by each nation involved in the
transaction. Unless one of the concerned jurisdictions is a "tax haven," i.e., one with
markedly lower tax rates, there is little advantage to shifting income artificially from
one jurisdiction to another. It should be noted, for example, that both Japan and
Germany have higher corporate income tax rates than the United States.
Since members of a multinational group are located in different nations, the tax
authorities of each nation concerned are extremely anxious to ensure that the transfer
price is "arm's length" - that is, the same price at which the seller would have sold
the same product to an unrelated buyer.
If, for example, a U.S.-owned company manufactures computers in the United States
and sells them to its foreign subsidiary to market abroad, both the parent and its
subsidiary may recognize some portion of the total profit from the final sale to
consumers. The portion that is reportable in each country is determined by the
"transfer price" between parent and subsidiary. If that price is high, the subsidiary has
less profit, but the parent has more. If the price is low, the parent has less profit but
the subsidiary has more. The total income from the computer sales will be taxed, but
the split between the United States and the foreign country may depend on the transfer
price. All tax authorities have the power to challenge transfer prices and regularly do
so, frequently disagreeing with one another as to the correct income split. These
disagreements must be resolved among the taxing authorities themselves in
proceedings referred to as "competent authority".
Myth #4: Additional laws are needed to enforce transfer pricing
regulations and prevent abuse.
Fact: In 1989 and 1990, Congress passed legislation to foster compliance with
transfer pricing rules. New reporting and record-keeping legislation was enacted,
- 8 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21. 1992
providing much additional information from foreign-owned companies and imposing
penalties on companies that fail to comply. Enforcement tools given to the IRS
include a designated summons procedure (for those companies that refuse to provide
requested information in the hope that the statute of limitations will expire) and
expedited availability of outside experts.
In April 1992 testimony before a House Ways & Means Subcommittee, IRS
Commissioner Shirley Peterson stated that
the legislation [passed in 1989 and
1990] is responsive to the problems identified in 1990 and is increasing
compliance. " At the same hearing, Alan J. Wilensky, Deputy Assistant Secretary
(Tax Policy) of the U.S. Treasury Department, "
urg[ed] that these new measures
be given adequate time to work before introduction of major new initiatives
"
Myth #5: Foreign-owned companies manipulate transfer prices to
report lower U.S. taxable income than domestically-owned
companies.
FACT: While foreign-owned companies have generally earned lower rates of
return on their assets, sales, and net worth than domestically-owned companies, the
disparity does not result from transfer pricing abuse.
Both the IRS Commissioner and the Deputy Assistant Secretary of the Treasury
recently explained the difference in levels of profitability for foreign-owned firms in
testimony before the Oversight Subcommittee of the House Committee on Ways and
Means on April 9, 1992. According to their testimony, "as much as 50 percent of the
differential" in profitability between foreign-owned and domestically-owned
companies is explained by nontax factors such as start up costs or currency
fluctuations. Over the period 1985-1988, foreign investment in the United States
increased three times faster than domestic investment. This high growth rate, coupled
with historic cost accounting methods used throughout the United States, distorted
comparisons between the two groups. Older investments show a higher rate of return
than new ones which are valued at closer to current market value. In addition, start-
up losses of the new investments decreased the actual rates of return.
The IRS Commissioner went on to state that there is "no certainty that the remainder
(of the difference in rates of return) is due to transfer pricing abuse or that the
comparison of measures of profitability is valid in this aggregate form."
In June 1992, the U.S. General Accounting Office ("GAO") issued a report on the tax
effects of pricing, which confirmed that the lower profitability of foreign-owned
companies does not prove transfer pricing abuse. (International Taxation: Problems
- 9 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS, JULY 21, 1992
Persist in Determining Tax Effects of Intercompany Prices, June 1992 (GAO/GGD-92-
89).) The GAO study states that other factors, such as "attempts to increase market
share, newness of investment, extent of leverage, fluctuating exchange rates, and
managerial skills and experience" could account for this difference in profitability.
Myth #6: There is $30 billion in taxes going uncollected annually
from foreign-owned companies who are inflating their transfer
prices and reporting too little profit in the United States.
FACT: This is a total fabrication that has no foundation in fact and is not
supported by the U.S. Treasury.
The IRS Commissioner specifically discussed this $30 billion myth in her testimony
on April 9, 1992 and stated unequivocally that such an estimate could not be
substantiated. She further stated that if the unexplained differential in the profitability
of foreign-owned companies, described above, were due wholly to transfer pricing
abuse (and she specifically states that there is no certainty that this is the case) the
"tax gap" would be "about $3 billion," not $30 billion.
The Commissioner went on to state that although transfer pricing problems do exist,
they are not presently quantifiable and the problems exist equally for foreign-owned
and U.S.-based multinational companies. Indeed, the June 1992 GAO study
referenced above makes clear that foreign-owned companies are a small part of the
overall transfer pricing problem.
Myth #7: Foreign-owned companies which sell large amounts of
popular products, such as automobiles and electronics, should pay
more taxes.
FACT: All U.S. corporations pay taxes based upon their net taxable income, i.e.,
their profits. A company that has large sales and many assets is not automatically
profitable. An example is the "Big Three" U.S. automobile companies which
apparently have not reported taxable profits for years. It is entirely wrong to assume
that any company, foreign or domestic, should pay income taxes based upon a
percentage of its sales or assets irrespective of profits. This concept is that of a
"wealth tax" practiced in only a few countries, notably India, which have a small
gross national product in comparison to government expenditures. It is not a formula
that will promote prosperity. The $30 billion myth discussed above is the result of
assumptions that foreign-owned companies should be reporting income based upon
- 10 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21, 1992
a certain percentage of their assets or receipts. In testimony before a House Ways &
Means Subcommittee, IRS Commissioner Peterson noted that 59 percent of U.S.-
owned companies report no taxable income.
Myths about Foreign Investment in the United States
Myth #1: Foreign investment hurts domestic business.
FACT: Foreign-owned U.S. companies contribute substantially to the productivity
of the U.S. economy. These companies generally have a good history of investing
in capital resources and increasing productivity. The latest Commerce Department
statistics show that in 1988 foreign-owned U.S. companies in manufacturing spent
almost 50 percent more on investment in plant and equipment per worker than the
average for all U.S. manufacturing.
Productivity also grew more rapidly in foreign-owned U.S. manufacturing companies
than in the manufacturing sector as a whole between 1980 and 1988. In real terms,
the gross product (i.e., value added) of foreign-owned U.S. companies in
manufacturing rose nearly four times as fast as all manufacturing establishments in
the United States between 1980 and 1987.
Foreign investment can also bring new technologies into an economy, potentially
increasing the competitiveness of U.S.-owned companies. According to an August
1991 Commerce Department study on foreign direct investment, "U.S. affiliates have
been contributors to the advance of technology in U.S. industry."
Notably, "[i]n the automobile industry, anecdotal evidence suggests that U.S. affiliates
of foreign firms appear to have encouraged the diffusion of new technologies,
including speeding the adoption of robotics to improve the efficiency of the
manufacturing process," according to the Commerce Department report.
Myth #2: Foreigners are buying up America.
FACT: As of 1990, foreign direct investment in the United States amounted to
approximately $466 billion, based on current or replacement cost measures. This
is about 3 percent of total U.S. domestic net worth.
Source: U.S. Commerce Department
- 11 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21. 1992
Myth #3: Foreign investment in the United States only benefits the
investor.
FACT: Productive investment of any kind benefits an economy, regardless of the
nationality of the investor. Employment of American workers, increased exports and
taxes paid are just some of the benefits foreign-owned companies bring to the United
States.
Employment at U.S. subsidiaries of foreign-owned companies totaled 4.7 million in
1990, or about 5 percent of all U.S. nonbank employment. Employment at foreign-
owned U.S. manufacturing companies came to more than 2.0 million workers -- about
10.8 percent of the total U.S. manufacturing workforce. In 1990, foreign-owned
companies exported $91 billion of merchandise from the United States. Foreign-
owned companies paid $24.4 billion in direct taxes (e.g., sales, property) in addition
to income and payroll taxes in 1989.
Source: U.S. Commerce Department
Myth #4: Japan is the biggest investor in the U.S. economy.
FACT: As of the end of 1991, the United Kingdom was the largest investor in the
United States, accounting for 27.4 percent of total foreign direct investment.
Japanese (20.6 percent) and Dutch (14.9 percent) investors ranked second and third
respectively.
Myth #5: The success of U.S.-owned corporations is more
important to the U.S. economy than that of foreign-owned U.S.
corporations.
FACT: Harvard's Robert Reich, building on the work of many economists, has
pointed out that the ownership of a corporation is less important than the
corporation's willingness and ability to create and maintain high wage jobs in the
United States.
According to Reich,
ownership of the corporation is profoundly less relevant to
America's economic future than the skills, training, and knowledge commanded by
American workers - workers who are increasingly employed within the United States
by foreign-owned corporations."
- 12 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21, 1992
Myth #6: Foreign investment plays a larger role in the U.S.
economy than it does in all other major industrial nations.
FACT: Foreign investment from all sources plays a proportionally larger role in
the economies of all other major industrial nations (except Japan) than it does in
the United States.
For example, in 1986 (the most recently available data from all countries), in terms
of manufacturing employment, foreign-owned firms in the United States accounted for
7 percent of all manufacturing employment in the U.S. economy. By contrast,
foreign-owned firms accounted for two to almost five times as much in the United
Kingdom, France, Germany and Canada than that amount. In terms of total assets,
the foreign-owned company share for these four countries was one and a half to
almost three times as large as in the United States. This information is summarized
below.
SHARE OF FOREIGN-OWNED FIRMS
Percentage of
Percentage
Manufacturing
of
Employment
Total Assets
Canada
34
25*
France
21
26*
United Kingdom
14
14
Germany
13
17
United States
7
9
Japan
1
1
*1987
Source: D. Julius & S. Thomsen, "Foreign-owned Firms, Trade, and Economic Integration," Tokyo Club
Papers 2, Royal Institute of International Affairs, 1988 and Commerce Department.
- 13 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21, 1992
Myth #7: Foreign businesses play a larger role in the U.S. economy
than U.S. businesses play in the home economies of these foreign
businesses.
FACT: U.S.-owned businesses are generally more active in the economies of other
major industrial countries than are foreign-owned businesses from these countries
in the U.S. economy.
For example in 1989, the value of U.S.-owned businesses in the United Kingdom, as
a percentage of the host-country's gross domestic product, was three times that of
British businesses in the United States, 7.5 percent as compared with 2.3 percent.
Similar and even larger disparities hold for the other major industrial countries other
than Japan. This information is summarized below.
FOREIGN DIRECT INVESTMENT AS A PERCENT OF
HOST-COUNTRY GROSS DOMESTIC PRODUCT
Percentage of
Percentage of
Foreign Holdings
U.S. Holdings in
in the United States
the Foreign Country
United Kingdom
2.3
7.5
Netherlands
1.2
6.9
Japan
1.3
0.7*
Canada
0.6
11.9
Germany
0.5
1.8
Switzerland
0.4
10.8
France
0.3
1.4
* 1988
Source: Commerce Department
Myth #8: U.S. businesses are no longer an important source of
foreign direct investment to the world economy.
FACT: The United States remains, by far, the largest source of foreign direct
investment in the world. At the end of 1989, the overall value of the stock of all
foreign direct investment from all sources around the world came to almost $1.4
- 14 -
OFII STATEMENT TO HOUSE COMMITTEE ON WAYS AND MEANS. JULY 21, 1992
trillion, on a historic cost basis. Of this total, U.S. businesses held $380 billion, or
28.3 percent. The next largest national source for direct investment was the United
Kingdom. British businesses had $224 billion, or 16.7 percent. Japanese businesses
were in third place, with $154 billion in direct investment, or 11.5 percent of the
overall total.
Source: Commerce Department
- 15 - -
ORAL TESTIMONY OF EVAN GALBRAITH BEFORE
THE HOUSE COMMITTEE ON WAYS & MEANS
CONCERNING H.R. 5270
JULY 21, 1992
Mr. Chairman, Members of the Committee:
Thank you for affording me the opportunity of testifying before you
today.
My name is Evan Galbraith and I am appearing on behalf of the
Organization for International Investment ("OFII"), which represents a number of
American companies that owe their existence to foreign direct investment in the
United States. These companies together employ more than one-half million
Americans within the United States in manufacturing and distributing a wide variety
of products from automobiles to X-ray machines.
I am a director of Morgan Stanley International; I am also Chairman of
the Board of LVMH Moet Hennessy Louis Vuitton Inc., Chairman of the Board of
National Review, and a director of several companies. From 1981 to 1985, it was my
privilege to serve as United States Ambassador to France. Prior to that, I was
engaged in investment banking in London and Paris with subsidiaries of American
financial institutions. I have spent most of my life dealing with national and
international financial and economic matters.
While my remarks are primarily directed at Title III of the bill, it is my
firm view that H.R. 5270 will damage the economy of the United States should it
become law. It will discourage investment in this country and make it more difficult
for American companies to do business abroad. It will weaken American companies
at home. Without their overseas earnings, Ford and General Motors would have been
in serious financial difficulty over the past few years. Coca-Cola earns more in Japan
than it does in the United States. Those Japanese earnings have been instrumental in
Coca-Cola's growth in the U.S. and elsewhere.
Why would the Congress even contemplate imposing this burden on the
American people -- this certain loss, not only of jobs, but of better, high technology,
jobs? We are told that "fairness" dictates the enactment of this destructive legislation,
but how can it possibly be fair to do ourselves economic damage? I submit that the
true test by which we must judge tax legislation is whether it is conducive to
economic growth. It is by growth that we create employment, higher living standards,
and the financial means to deal with social problems. There are no shortcuts or
substitutes; the mixture can vary, but growth boils down to the investment of capital
and the sweat of our collective brows.
Taxes are an obstacle to investment in that they divert capital away from
both investment and consumption. Investment is needed to create both factories and
employment, and consumption is needed to keep both going. To impose capital gains
tax on direct investment, impute taxable income where none exists, tax insurance
coverage, circumvent our treaty obligations, and discourage American penetration of
overseas markets is intellectually and economically indefensible. This bill is simply
another manifestation of the protectionism that lurks in the hearts of those unknowing
persons in business management and labor who, with their supporters in Congress,
seek to avoid the rigors of competition by having government intervene in the
marketplace.
This will not only damage the U.S. economy, it will undermine our
efforts under GATT and bilaterally to expand world trade. In the 1980s, U.S. exports
doubled in real terms and manufacturing increased as a percentage of our GNP. The
United States has become competitive worldwide by creating new jobs and new
markets for our goods. It is a strange paradox that one need now plead with the
Congress not to burden our growing leadership in world trade -- but plead I do in all
earnest: This bill must not pass.
This concludes my oral statement. I request that a copy of our written
comments on H.R. 5270 be included in the record of this hearing.
- 2
Organization for
Ofii
International Investment
816 Connecticut Avenue, NW, 7th Floor
Washington, D.C. 20006
Phone: (202) 659-1903
FAX: (202) 828-4550
8 April 1992
The Honorable J.J. Pickle
Chairman, House Oversight Subcommittee
242 Cannon House Office Building
Washington, DC 20515-4310
Mr. Chairman:
Hearing before the Subcommittee on Oversight of the
House Committee on the Ways and Means, 9 April 1992
In preparation for the Subcommittee's hearing, we earnestly request
that you review the annexed summary of a study, prepared by KPMG
Peat Marwick, of taxes paid by U.S. companies that are foreign
owned (FOC). This study analyzes the latest available data from
the Internal Revenue Service and clearly demonstrates that, for tax
years 1983 through 1988, FOCs averaged effective tax rates* similar
to U.S. owned companies (AOC).
FOCs have reported lower pretax rates of return than AOCs. Factors
such as faster growth in investment of FOCs in recent years, use of
historic cost accounting in measuring returns, and fluctuations in
exchange rates (particularly in 1985 and 1986) appear to account
for a substantial portion of this difference. The data available
to us do not clearly demonstrate that transfer pricing abuse is the
cause for differences in pretax rates of return.
Judging from the press release announcing the hearing, Treasury
officials will be asked to comment upon measures enacted in 1989
and 1990 to improve compliance with Internal Revenue Code Section
482. Some of these provisions, such as the increased reporting and
record keeping provisions of Section 6038A and the "earnings
stripping" provisions of Section 163(j), were targeted to apply
only to U.S. companies with (some or all) foreign ownership, while
other provisions, such as Section 482 penalties under Section 6662,
apply equally to AOCs. The hearing is, however, focusing only upon
compliance by FOCs.
As a percentage of net worth.
2
In view of the recent enactment of these compliance provisions, it
is very unlikely that the Internal Revenue Service has completed
audits on a sufficient number of returns for taxable years to which
these provisions apply to be able to draw meaningful conclusions.
We respectfully urge the Subcommittee to give these provisions time
to operate before rushing to judgement about their effectiveness or
considering enacting more laws to achieve the same result. The
Internal Revenue Service is currently auditing corporate tax
returns for tax years generally no more recent than 1985 through
1989. The increased record keeping and reporting requirements were
not enacted until 1989. In 1990, the Congress applied the new
requirements to all prior years to the maximum extent possible, but
the full impact of these provisions cannot be assessed until 1989
and later years' tax returns are audited and the results evaluated.
The Subcommittee's press release indicates that the hearing will
review the tax returns of the 36 taxpayers examined in the 1990
hearings. We hope that anecdotal information about 36 specific
taxpayers will not prejudice the Subcommittee about tax compliance
of FOCs, generally. We do not know the identity of the 36
companies whose tax returns are being examined, and we have seen
nothing indicating whether they were selected as truly
representative samples of FOCs, or whether they were selected
primarily because they were perceived to represent the greatest
compliance problems. It would be most unfair to draw conclusions
about overall tax compliance of FOCs from an unscientific sample of
36 companies which may be a biased sample. We also note that while
the Subcommittee is hearing from the agents who are auditing the
tax returns of these 36 taxpayers, these taxpayers, themselves, do
not appear to have been afforded the opportunity to present their
positions to the Subcommittee.
Members of the Organization for International Investment ("OFII")
support efforts of the Subcommittee to assure that all U.S.
taxpayers, whether foreign or domestically owned, pay their fair
shares of taxes. We implore the Subcommittee to consider all the
evidence before arriving at conclusions. Should you have any
questions about the Peat Marwick study or taxes paid by U.S.
companies with substantial foreign ownership, we hope you will
contact us.
A list of OFII member companies is annexed for your information.
James Counsel Carter Carter
Annexures (2)
REVIEW OF INTERNAL REVENUE SERVICE
STATISTICS ON FOREIGN CONTROLLED
DOMESTIC CORPORATIONS
1983 THROUGH 1988
PREPARED FOR:
ORGANIZATION FOR INTERNATIONAL INVESTMENT
PREPARED BY:
POLICY ECONOMICS GROUP
KPMG PEAT MARWICK
JULY 10, 1992
PREFACE
This report was prepared for the Organization For International Investment ("OFII") by
the Policy Economics Group of KPMG Peat Marwick. It is an update and extension of a similar
report prepared in 1990. It reviews publicly-available tax return data from the Internal Revenue
Service on foreign controlled domestic corporations for the 1983 through 1988 period.
The report has an Executive Summary and five parts: Part I is an introduction; Part II
discusses data sources and limitations; Part III compares data on foreign controlled domestic
corporations with all other domestic corporations; Part IV analyzes trends in the data and possible
reasons for foreign controlled domestic corporations having lower net income and tax liability;
and Part V provides the conclusions of our report.
Two abbreviations are used throughout the report: (a) FCDC is used as an abbreviation
for foreign controlled domestic corporations, and (b) AOC is used for "all other corporations."
All other corporations are active corporations filing income tax returns with the Internal Revenue
Service, exclusive of FCDCs and S-corporations.
Data included in this report are from published and unpublished tabulations of Internal
Revenue Service statistical data. These data provide much useful information on the general
characteristics of FCDCs and AOCs, including some detail on industry groups. While these data
provide certain insights into the relatively profitability and tax burdens of FCDCs, they do not
allow analysts to draw conclusions about specific companies.
ii
TABLE OF CONTENTS
Page
Preface
ii
Table of Contents
iii
List of Figures
iv
List of Tables
V
Executive Summary
1
I.
Introduction
8
II.
Data Sources and Limitations
16
Effect of Tax Reform Act of 1986 on IRS Statistical Information
17
III.
Comparison of FCDCS with AOCS
18
Comparison of FCDC and AOC Net Income and Tax Liability
18
Comparison of Effective Tax Rates
21
Comparison of FCDC and AOC Data by Major Industrial Sector
28
Characteristics of Selected Major Industry Groups
37
IV.
Trends in FCDC Tax Liability
44
Impact of Start-up Costs
45
High Level of Net Interest Expense
47
Intercompany Charges for Goods and Services
49
Impact of Exchange Rates
52
V.
Conclusions
56
iii
LIST OF FIGURES
Page
Figure A: FCDC net income
2
Figure B: FCDC tax liability
2
Figure C: Pretax rates of return on net worth
3
Figure D: Effective tax rate on net worth
3
Figure 1:
Effective U.S. tax rate on total assets
26
Figure 2: Effective world-wide tax rate on total assets
26
Figure 3:
Effective U.S. tax rate on total receipts
27
Figure 4: Effective world-wide tax rate on total receipts
27
Figure 5: Effective U.S. tax rate on net worth
27
Figure 6: Effective world-wide tax rate on net worth
27
Figure 7: Effective U.S. tax rate on positive net income
28
Figure 8: Effective world-wide tax rate on positive net income
28
Figure 9: Relationship between gross margin and exchange rates: FCDC manufacturing 54
Figure 10: Relationship between gross margin and exchange rates: FCDC finance
54
Figure 11: Relationship between gross margin and exchange rates: FCDC trade
54
iv
LIST OF TABLES
Page
Table 1:
Net income and U.S. tax liability reported by FCDCs
10
Table
2:
Growth in FCDC business activity and tax returns filed
11
Table
3:
Comparison of FCDC industrial sectors, 1988
12
Table
4:
Trends in FCDC asset growth
13
Table 5:
FCDC net income and tax liability by industrial sector
14
Table
6:
Comparison of returns with positive net income, amount of net income and tax
liability reported by FCDCs and AOCs
19
Table 7:
Comparison of pretax returns of FCDCs and AOCs
21
Table 8:
Effective tax rates of FCDCs and AOCs
25
Table
9:
Comparison of returns with positive net income by major industrial sector
30
Table 10: Comparison of amount of net income by major industrial sector
31
Table 11: Comparison of U.S. tax liability by major industrial sector
32
Table 12: Comparison of effective income tax rates by major industry using total assets,
total receipts, and net worth
34
Table 13: Selected information on FCDC major manufacturing groups
38
Table 14: Comparison of 1987 effective income tax rates for manufacturing major
industry groups using net worth, total assets, and total receipts
40
Table 15: Selected information on FCDC major wholesale and retail trade groups
41
Table 16: Comparison of 1987 effective income tax rates for major wholesale and retail
trade groups using net worth, total assets, and total receipts
43
Table 17: Comparison of FCDC and AOC asset growth rates by industry
45
Table 18: 1987 depreciation deductions as a percentage of total receipts
46
V
LIST OF TABLES (continued)
Page
Table 19: 1987 amortization deductions as a percentage of total receipts
47
Table 20: 1987 net interest expense as a percentage of total receipts
48
Table 21: Comparison of FCDC and AOC costs of sales as a share of total receipts by
major industry
51
Table 22: 1987 costs of sales and operations as a percent of business receipts by major
industrial sector and group
52
vi
REVIEW OF INTERNAL REVENUE SERVICE
STATISTICS ON FOREIGN-CONTROLLED
DOMESTIC CORPORATIONS
1983 THROUGH 1988
EXECUTIVE SUMMARY
This report was prepared at the request of the Organization For International Investment
("OFII") by the Policy Economics Group of KPMG Peat Marwick. It updates and extends a
similar report prepared in June 1990 by reviewing publicly-available Internal Revenue Service
data on foreign-controlled domestic corporations for the 1983 through 1988 period.
In recent years there has been much discussion over whether foreign-owned companies
have paid their "fair share" of U.S. income taxes. OFII requested that we prepare an independent
examination of the IRS statistical information. Three key findings emerge from IRS data¹:
1988 foreign-controlled domestic corporation (FCDC) pretax net income
increased to $11.2 billion from $5.6 billion in 1987, and from a 1986 loss of
$1.5 billion,
1988 FCDC U.S. income tax liability increased to $5.8 billion from $4.6
billion in 1987, and $3.0 billion in 1986,
FCDCs experienced a 1988 U.S. effective tax rate that was close to that of
all other corporations (AOCs) and FCDC effective tax rates were essentially
the same as those of AOCs over the 1983 through 1988 period.
The critical policy issue of whether FCDCs are paying their fair share of taxes can only
be fully addressed by examining the taxes paid and comparing these taxes with those of
comparable domestic corporations. Despite the significant increases in pretax income and in
taxes paid, FCDCs continue to report lower aggregate pretax rates of return. However, pretax
rates of return would generally be expected to vary from industry to industry, and FCDCs
1
Foreign-controlled domestic corporations (FCDCs) are U.S. corporations more than 50 percent directly or
indirectly owned by any foreign person. All other corporations (AOCs) are all active corporations filing returns with
IRS, less FCDCs, and less S-corporations. S-corporations are excluded because they do not generally incur
corporation income tax liability.
Data discussed in this report are from published and unpublished tabulations prepared by the SOI Division
of the Internal Revenue Service. The most recent publicly-available data are for tax year 1988. SOI Division
published data for 1988 are more limited than the detailed unpublished data provided for 1987.
Key concepts used in this report are based on tax reporting requirements. For example, "net income" is a
pretax concept calculated using income and deductions reported for tax purposes. "Tax liability" is the total
corporation federal income tax obligation for a given year's activity.
The SOI Division collects information from corporation income tax returns when first filed. Subsequent
adjustments for a given year are not captured. These adjustments can be audit adjustments that increase the firm's
tax liability, and net operating loss or tax credit carrybacks that reduce tax liability. Because these adjustments move
in opposite directions, we assume they are roughly offsetting.
represent a somewhat different mix of industries than AOCs. Aggregate data provide only a
partial picture of the FCDC rates of return. OFII, therefore, asked us to explore possible reasons
why these aggregate rates of return for foreign-owned companies are lower.
FCDC NET INCOME
As shown in Figure A, FCDC net income increased from a $1.5 billion loss in 1986 to
a $5.6 billion gain in 1987, and to $11.2 billion in 1988. The 1988 amount of net income is by
far the highest reported in any recent year. Average annual net income reported over the 1983
through 1986 period was about $2 billion. Thus by any standard, aggregate FCDC net income
in 1987 and 1988 show dramatic increases over earlier levels.
Figure A: FCDC Net Income
Figure B: FCDC Tax Liability
12
6
10
5
a
4
(Billons of Dollors)
5
4
(Billons of Dollars)
3
2
2
1
0
-2
0
1983
1984
1985
1986
1987
1988
1983
1984
1985
1986
1987
1988
FCDC TAX LIABILITY
FCDC tax liability, as shown in Figure B, exhibits a pattern similar to that of net income.
FCDC tax liability in 1987 was $4.6 billion, which is more than 50 percent above the $3.0 billion
tax liability in 1986. Tax liability further increased to $5.8 billion in 1988 -- a 26-percent
increase over 1987. The highest tax liability in any previous year was $4.5 billion in 1984.
Average tax liability reported over the 1983 through 1986 period was about $3.6 billion.
In each of the four years before 1987, FCDC income tax liability exceeded net income.
This is because income tax liability is generally incurred only by those firms with positive net
income. A more appropriate comparison is made between tax liability and net income for firms
with net income. In 1987, FCDC firms with net income reported $19.8 billion of income, while
firms with net losses reported $14.2 billion of losses. The $4.6 billion tax liability was paid
principally by the firms with positive net income. Even larger gains in positive net income
2
occurred in 1988 with $26.5 billion reported by firms with net income. Losses in 1988 increased
by a smaller amount to $15.3 billion.
COMPARISON OF FCDCs WITH AOCs
A more complex picture of FCDC net income and tax liability emerges when comparisons
are made with AOCs. While there are variations among industries, over the 1983 through 1988
period, FCDCs have lower rates of return than AOCs. FCDC net income when measured as a
percent of either assets, net worth, or receipts is below comparable measures for AOCs. Figure
C shows net income as a percent of net worth for FCDCs and AOCs, as an example of this
relationship.
Figure C: Pretax Rate of Return on Net Worth
Figure D: Effective Tax Rate on Net Worth
10.0%
4.00%
8.0%
3.50%
6.0%
3.00%
4.0%
2.50%
2.0%
2.00%
0.0%
1.50%
-2.0%
1.00%
1983
1984
1985
1986
1987
1988
1983
1984
1985
1986
1987
1988
FCDC
AOC
FCDC
AOC
A different relationship holds with tax liability. Figure D provides an effective tax rate
measure by computing income tax liability as a percent of net worth for FCDCs and AOCs.
FCDC effective tax rates over the 5-year period are, on average, the same as AOC rates. FCDC
effective tax rates vary more than AOC effective tax rates with higher rates in 1983 and 1984,
lower rates in 1986 and 1987, and a significant narrowing of the difference in 1988.
Both aggregate FCDC net income and tax liability show strong increases in 1987 and
1988. And, while effective tax rates indicate FCDCs have tax burdens similar to those of AOCs
over the 5-year period, a comparison of net incomes raises the question of why FCDCs have such
relatively low rates of return.
POSSIBLE REASONS FOR DIFFERENCES BETWEEN FCDCs AND AOCs
We explored two differences between FCDCs and AOCs that have been prominently
mentioned as issues in recent public debate. These are: (a) whether the fact that FCDC
investment has recently been growing at three times the rate of AOC growth is the principal
3
cause of lower rates of return, and (b) whether differences in gross profit margins between
FCDCs and AOCs demonstrate that intercompany transfer pricing is a major concern. The
answer to the first question appears to be "yes." The response to the second question is that IRS
tax return data do not provide enough information to permit a clear answer.
Differences Related to Growth
FCDC investment has grown rapidly in recent years. Over the 1985 through 1988 period,
AOC assets increased at an annual average rate of 7.5 percent. FCDC assets increased 22.3
percent annually -- three times the AOC rate of growth. This high growth rate has two
implications: (a) historic cost accounting overstates rates of return and effective tax rates on older
investments, and (b) new business investments often have initial losses before becoming
profitable.
Effect of historic cost accounting
Balance sheet concepts such as assets and net worth are generally recorded on tax returns
on an historic cost basis rather than a fair market value basis. Historic cost accounting tends to
understate the fair market value of older assets and net worth. For example, assume two firms
have the same net income and the same fair market value of assets. If one firm purchased its
assets earlier than the other, any comparison of the two firms' net income or tax liability with
total assets or net worth will be distorted. The firm that purchased its assets most recently will
exhibit a lower apparent rate of return and lower effective tax rate than the firm with older assets.
This is because the reported cost of assets on the tax return will be higher for the firm having
purchased its assets most recently.
Because investment by FCDCs has grown much more rapidly than investment by AOCs,
recorded asset values of FCDCs will likely be closer to current market values. The net result of
the use of historic cost accounting is that comparisons between groups of companies with older
assets and companies with newer assets may be misleading. Companies with older assets will
appear to have higher effective tax rates than companies with newer assets.
Effect of high growth rates on initial losses
The composition of income and deductions will differ when a group of rapidly-growing
firms is compared with a group of firms experiencing slower growth rates. True start-up
operations will have many expenses associated with developing new business. IRS data are not
sufficiently detailed to examine these effects in depth; however, we did investigate three
deductions -- depreciation, amortization, and interest paid -- that may be related to growth.² In
each case, relative deductions are larger for FCDCs.
2
This issue could be explored in more depth and with more accuracy using IRS files of actual corporation
tax returns; however, under current disclosure rules these files cannot be released to the public.
4
Depreciation and amortization deductions will increase where there are large
amounts of new investment, or where acquisitions of existing businesses are
made and the tax basis of the assets is increased to reflect the purchase price.
Interest deductions will increase where debt is used either to make new
investments or acquire existing businesses.
A comparison of FCDC deductions with AOC deductions for these items, when adjusted
for differences in the composition of activity by industry, shows these deductions as a percent
of total receipts are higher for FCDCs.
If, as a simple test, we adjust 1987 FCDC deductions for these items to reflect the
relationships found for AOCs, and the actual mix of FCDC industries, we find FCDC net income
increases by $11.2 billion to $16.8 billion. If we measure this adjusted net income figure as a
percent of net worth, we find FCDC net income would increase from 2.2 percent to 6.6 percent
of net worth. AOC net income is 8.8 percent of net worth.
Many other items of income and deduction will also be affected by high growth; e.g.,
business locations must be established, staff must be hired and trained, and markets must be
developed through advertising and promotional efforts. If a complete adjustment could be
performed, relative FCDC and AOC growth rates may explain a large part of the observed
differences in net income relationships.
Intercompany Transfer Pricing
The Internal Revenue Service is aggressively auditing foreign-owned and U.S.-owned
companies to investigate prices charged for goods and services sold to affiliates. IRS believes
some foreign-owned and U.S.-owned companies are manipulating these transfer prices to shift
profits overseas such that U.S. net income and tax liability are reduced.
We reviewed IRS statistical tax return data in an attempt to see whether transfer-pricing
manipulation is occurring and whether foreign-owned companies are not paying an appropriate
level of federal income taxes. Unfortunately, IRS statistical data do not include enough
information for us to be able to answer this question.³ The only way to determine whether
transfer-pricing abuses exist is on a case-by-case basis with a careful examination all the relevant
facts.
3
Our findings on the limitations of IRS statistical data are generally consistent with those reported by Harry
Grubert, Timothy Goodspeed, and Debrah Swenson in their November 1991 paper "Explaining the Low Taxable
Income of Foreign-Controlled Companies in the United States," and of Edward M. Graham and Paul R. Krugman
as discussed in Foreign Direct Investment in the United States (2nd edition), Institute for International Economics,
1991.
5
Transfer pricing issues are often addressed by comparing gross profit margins⁴ earned
by related affiliates with those earned by independent companies. These comparisons are only
appropriate if the activities and markets of the companies are comparable. If the affiliate earns
a lower return than independent companies in the same industry and conducting the same kind
of business activity, IRS regulations mandate an audit adjustment.
IRS statistical information used in this report is not suitable for resolving transfer-pricing
issues. Indeed, IRS does not use these data in transfer-pricing litigation because they are not
sufficiently detailed to demonstrate that firms are comparable.
IRS statistics do not include enough information to provide an understanding of the true
comparability of FCDCs with AOCs. While we can compare broad industry groups, we cannot
determine how similar or dissimilar companies are within these groups. This limitation may be
particularly significant for the wholesale trade industry. Many FCDC wholesalers operate as
captive factory outlets for the foreign parent's goods. In this capacity they serve simply as a
conduit for processing orders and shipping goods to retailers. AOC wholesalers, on the other
hand, tend to purchase goods from many suppliers and to provide these goods to many retailers.
Because of the nature of their business, AOCs wholesalers carry larger inventories.
Larger inventories require larger gross profit margins to provide a return on the capital invested.
Carrying additional inventories also increases business risk, which also means that AOC
wholesalers should earn higher rates of return.
While SOI data may be misleading for transfer-pricing issues, it is important to review
them because some analysts use them for tax policy analysis. The 1987 gross profit margin of
all FCDCs -- without regard to industry -- is 23.9 percent. The corresponding figure for AOCs
is 28.2 percent, when adjusted for the actual mix in FCDC industries.
If, for a given level of business receipts, FCDCs reported the same gross profit margin
as AOCs, 1987 FCDC net income would be $27.2 billion higher. The resulting FCDC return on
net worth would then be substantially above the return for AOCs. Adjusted FCDC net income
would be 12.8 percent of net worth, or about 46 percent higher than the corresponding figure for
AOCs.
The size of this disparity, coupled with our expectations of lower FCDC profitability
given their growth rates, demonstrates the questionability of interpreting these data as indicating
the existence of a transfer-pricing problem. Rather, if FCDCs were earning such a high rate of
return, it would indicate less than arms-length prices were being charged, thus shifting profits into
the U.S. Stated otherwise, if unusually high rates of return were in fact available we would
4
The gross profit margin is the excess of business receipts over the cost of sales, divided by business receipts.
For example, if a firm sells a product for $100 and its cost of sales is $80, the firm will have a gross profit margin
of 20 percent ((100 80) / 100 X 100).
6
expect to see both U.S. and foreign-owned companies rushing to enter the market to benefit from
these yields.
Gross profit margins in the manufacturing sector are essentially the same (30.6 percent
for FCDCs and 31.1 percent for AOCs); however, more significant differences appear in the
wholesale trade industry (11.3 percent for FCDCs and 17.8 percent for AOCs). These differences
may result from fundamental differences between the operational structures of FCDC and AOC
wholesalers. Of course, the similarity in gross profit margins for the manufacturing sector may
be misleadingly close given the broad range of activities conducted within the sector.
These differences in gross profit margins more likely mean the companies are not truly
comparable than necessarily indicating transfer pricing manipulation to favor foreign affiliates.
There is little apparent difference in manufacturing sector cost of sales, and the differences in the
wholesale trade sector may result from the functional organization of the business rather than
transfer pricing problems.
7
REVIEW OF INTERNAL REVENUE SERVICE
STATISTICS ON FOREIGN CONTROLLED
DOMESTIC CORPORATIONS
1983 THROUGH 1988
I. INTRODUCTION
The Policy Economics Group of KPMG Peat Marwick was asked by the Organization For
International Investment ("OFII") to review published tax return data on "foreign controlled
domestic corporations" (FCDCs).⁵ This report updates and extends a 1990 study for a
predecessor organization to OFII. The purpose of this analysis is to gain a better understanding
of historical trends in the tax liability of FCDCs as compared with other domestic corporations.
Over the past several years there has been much public discussion of the taxes paid by
FCDCs. Much this discussion was triggered by the release of Internal Revenue Service statistics
showing FCDC net losses in 1986. At that time, 1986 was the most recent year for which IRS
data were available. IRS Data now available for 1987 and 1988 show significantly different
results.⁶
Recent IRS testimony has focused on several key indicators of FCDC tax burdens. These
include net income as a percent of assets, net income as a percent of receipts, and the percent
of returns that are taxable. Others have made statements that FCDCs should be paying $30
billion in additional taxes annually.⁸
Treasury analysts have prepared and released a study using econometric techniques with
highly detailed tax return information that shows half of the differences in reported net income
by FCDCs and other domestic corporations are accounted for by factors other than transfer
pricing. This is not an official Treasury Department study; however, because of the researchers
association with the Treasury Department they have access to confidential tax return information
not otherwise available. Sometimes lost in the discussion of this study is a key point: the
5
Foreign Controlled Domestic Corporations (FCDCs) are defined by the Internal Revenue Service as U.S.
corporations more than 50 percent directly or indirectly owned by any foreign person.
6 Because all corporations are allowed to file returns up to 8 and one-half months after the end of their taxable
year, and because of the ways in which these data are processed by IRS, there are relatively long delays before data
are available to answer some of the questions raised. The most recent published information available is for 1988.
7
"Statement of Shirley D. Peterson, Commissioner of Internal Revenue Before the Subcommittee on Oversight
House Committee on Ways and Means: International Tax Administration Issues," April 9, 1992.
8 April 9, 1992 press release by Representative Duncan Hunter.
8
analysts do not say the remaining half of the difference in net income is accounted for by transfer
pricing. Rather, they said they have not been able to determine other ways of accounting for it.
The Treasury study is a good addition to our knowledge of taxes paid by foreign-owned
companies. Unfortunately, but understandably, the tax return data used by the Treasury analysts
cannot legally be released for use by other analysts. The best that can be done is to study
aggregate information that can be released. This report will review the aggregate information,
including 1988 data not available at the time the Treasury study was completed, and attempt to
provide a framework for analysis by discussing the basic statistics and concepts.
IRS data show foreign-controlled domestic corporations reported positive net income for
each year in the 1983 through 1988 period, except for 1986. In 1986, net income of FCDCs
showed a $1.5 billion loss. This deficit was followed by a strong recovery in 1987, when net
income climbed to $5.6 billion, and to $11.2 billion in 1988.
Taxes paid to the U.S. Treasury have generally followed the trend in net income. Tax
liability of FCDCs fell to its lowest level of $3.0 billion in 1986. As a result of the 1987
increase in net income, 1987 tax liability rose to $4.6 billion, and to $5.8 billion in 1988.
Table 1 shows FCDC net income and income tax liability over the 1983 through 1988
period. Net income is shown separately for FCDCs reporting positive and negative net income.
In each year before 1987 income tax liability exceeded net income. This is because income tax
liability is generally incurred only by those firms with positive net income.
9
TABLE 1
NET INCOME AND U.S. TAX LIABILITY REPORTED BY FCDCS
(Billions of dollars)
1983
1984
1985
1986
1987
1988
Net income
Net income for firms with income
12.4
15.4
14.5
12.7
19.8
26.5
Net deficit for firms with deficit
-10.6
-10.8
-11.5
-14.3
-14.2
-15.3
Combined net income less deficits
1.8
4.5
3.0
-1.5
5.6
11.2
Net U.S. tax liability
3.4
4.5
3.6
3.0
4.6
5.8
Note: detail does not add to total because of rounding.
In 1988, FCDCs accounted for approximately 1.3 percent of all active corporations filing
income tax returns with the IRS and about 7 percent of total assets. FCDC's importance in the
U.S. economy has grown rapidly over the 1983 through 1988 period and accounts for an
increasingly larger share of U.S. corporate activity. Table 2 illustrates this growth by showing
trends in basic measures of business activity. Each of the four measures shown increased
substantially over the 6-year period: assets increased by 126 percent, receipts increased by 112
percent, net worth increased by 107 percent, and tax returns filed increased by 38 percent.
10
TABLE 2
GROWTH IN FCDC BUSINESS ACTIVITY AND TAX RETURNS FILED
(Dollars in billions, returns filed in thousands)
1983
1984
1985
1986
1987
1988
Assets
530
553
656
841
959
1,199
Receipts
390
459
514
543
687
826
Net worth
138
155
178
216
256
286
Returns filed
33.6
37.4
36.7
36.8
44.9
46.3
FCDCs are concentrated in three broad industrial sectors: (a) manufacturing; (b) wholesale
and retail trade; and (c) finance, insurance, and real estate. In 1988, these three groups accounted
for more than 90 percent of FCDC assets and about 80 percent of tax returns filed. Table 3
shows the relative significance of these industrial sectors in 1988.
Each of the four measures of business activity provides a different perspective on the
relative size of these industrial sectors. The wholesale and retail trade sector is the largest in
terms of number of tax returns filed and total receipts. The finance, insurance, and real estate
sector has the largest share of assets. The manufacturing sector has the greatest net worth.
11
TABLE 3
COMPARISON OF FCDC INDUSTRIAL SECTORS, 1988
(Dollars in billions, returns filed in thousands)
Assets
Receipts
Net worth
Returns
filed
Total
1,199
826
286
46.3
Manufacturing
426
338
146
5.9
Wholesale & retail trade
163
347
31
15.9
Finance, insurance & real estate
508
81
67
15.4
All other
103
60
42
9.1
Trends in FCDC asset growth are shown in Table 4. Total FCDC assets have increased
every year since 1983. Especially rapid asset growth occurred in 1986 (+28 percent) and 1988
(+25 percent). The most significant percentage increases have occurred in the finance, insurance,
and real estate sector with a 51-percent increase in 1986 and a 37-percent increase in 1988. The
most significant increase in the manufacturing sector occurred in 1987 with a 25-percent increase.
The wholesale and retail trade sector increased by 24 percent in 1988.
12
TABLE 4
TRENDS IN FCDC ASSET GROWTH
(Millions of dollars)
1983
1984
1985
1986
1987
1988
Total
530
553
656
841
959
1,199
Manufacturing
219
216
255
295
370
426
Wholesale & retail trade
66
80
88
104
131
163
Finance, insurance & real estate
191
199
244
369
371
508
All other
54
57
68
73
89
103
Net income of FCDCs, as shown in Table 5, has increased sharply. From a deficit of -
$1.5 billion in 1986 it increased to $5.6 billion in 1987, and then doubled to reach $11.2 billion
in 1988. The 1988 increase occurred in each of the three major sectors, although the wholesale
and retail trade sector remained below 1984 and 1985 levels. The finance, insurance, and real
estate sector turned positive in 1988 -- the first time this occurred over the 6-year period.
Because of net losses in other sectors, the manufacturing sector has been the source of more than
100 percent of the net income reported over the 6-year period.
Net U.S. corporate tax liability of FCDCs, also shown in Table 5, increased in 1988 to
$5.8 billion. Significant increases occurred in manufacturing, and in the finance, insurance, and
real estate sector. Over the 6-year period, the manufacturing sector has been the source of about
half the total FCDC tax liability.
13
TABLE 5
FCDC NET INCOME AND TAX LIABILITY
BY INDUSTRIAL SECTOR
(Billions of Dollars)
1983
1984
1985
1986
1987
1988
Net Income
Total
1.8
4.5
3.0
-1.5
5.6
11.2
Manufacturing
3.8
5.3
2.9
-0.6
5.9
8.5
Wholesale & retail trade
0.9
2.4
2.4
1.3
0.9
1.7
Finance, insurance & real estate
-1.2
-1.7
-0.8
-0.4
-0.4
0.9
All other
-1.6
-1.5
-1.6
-1.8
-0.9
*
Tax Liability
Total
3.4
4.5
3.6
3.0
4.6
5.8
Manufacturing
2.0
2.4
1.4
1.0
2.1
3.0
Wholesale & retail trade
1.0
1.7
1.6
1.3
1.4
1.3
Finance, insurance & real estate
0.2
0.2
0.3
0.4
0.6
1.0
All other
0.2
0.2
0.3
0.3
0.5
0.5
*
Less than $50 million.
Aggregate FCDC net income and tax liability have shown large fluctuations over the 6-
year period. These changes will be better understood by making two comparisons:
FCDC statistics are compared with those of all other corporations during
the 1983 through 1988 period, and
14
FCDC statistics are compared with other firms in the same industrial
sector.
These comparisons are presented in Section III using the number of tax returns filed,
aggregate dollar amounts, and effective tax rates. These measures provide alternative
perspectives that are useful in understanding the data.
One important difference between this report and the information discussed in IRS studies
is our focus on reported tax liabilities. IRS comparisons focus on net income reported by FCDCs
and on pretax returns based on net income. While we analyze net income as a reasonable
measure of profitability, we also examine the tax liability of FCDCs in comparison with that of
"all other corporations" (AOCs)9, and several measures of effective tax rates. The critical policy
questions raised by these data are not limited to pretax rates of return. The issue of whether
FCDCs are paying their fair share of taxes can only be fully addressed by also examining the
taxes paid and comparing these taxes with those of comparable domestic corporations.
9 We define AOCs as all active corporations filing tax returns with the Internal Revenue Service, less FCDCs,
and less S-corporations filing on Form 1120S. S-Corporations are excluded because they do not generally incur
corporate income tax liability.
15
II. DATA SOURCES AND LIMITATIONS
Corporation tax return data used in this review are based on published and unpublished
tabulations prepared by the Statistics of Income Division (SOI), Internal Revenue Service.
Published FCDC tables for the 1983 through 1988 period are from four separate studies. 10 Data
for all corporations are from the annual SOI Corporation Source Book publication for the 1983
through 1988 period.
Corporation SOI data are developed from a stratified statistical sampling of corporation
tax returns filed each year. This procedure is designed to collect information from tax returns
of all the largest corporations and from a sample of smaller corporations.
Most of the economic activity covered in SOI data is for calendar years 1983 through
1988. However, for each of these years, tax return data include accounting periods ending from
July of the calendar year studied through June of the following year. For example, 1988 statistics
include amounts for corporations with fiscal years ending July 1988 through June 1989. Because
returns with fiscal years ending in July 1988 generally have fiscal years starting in August 1987,
the statistics for 1988 cover a span of 23 months (from August 1987 through June 1989).
Industry coding used in SOI data is determined by the predominant source of corporate
receipts. Particularly for consolidated groups with numerous activities and lines of business these
data should be interpreted with some caution. For example, a manufacturing firm -- either U.S.
owned or foreign owned -- could well have substantial revenues from wholesale trading.
These tax return data are collected from returns as originally filed. That is, these returns
do not include audit adjustments, or carrybacks of losses or credits. While these two limitations
work in opposite directions, the relative magnitude of each adjustment is unknown because no
information is collected by IRS that would allow either adjustment to be made. We therefore
make the assumption that these adjustments are roughly offsetting.
Audit adjustments can substantially increase reported tax liability. On the other hand,
carrybacks may significantly reduce tax liability. AOC returns may be affected to the same
degree as FCDC returns.
Effect of Tax Reform Act of 1986 on IRS Statistical Information
The Tax Reform Act of 1986 made a large number of changes in the Internal Revenue
Code that affected all corporations. The repeal of the investment tax credit became effective
10 These studies are: (a) James R. Hobbs, "Foreign Corporate Investment and Activity in the United States,
1983," SOI Bulletin, Summer 1987; (b) James R. Hobbs, "Foreign Corporate Investment and Activity in the United
States, 1984 and 1985," SOI Bulletin, Spring 1989; (c) James R. Hobbs, "Domestic Corporations Controlled by
Foreign Persons, 1987," SOI Bulletin, Summer 1990; (d) James R. Hobbs, "Domestic Corporations Controlled by
Foreign Persons, 1988," SOI Bulletin, Fall 1991.
16
early in 1987, while other changes first became effective in 1987. Among the other more
significant changes are the lengthening of depreciable lives, changes in accounting rules,
reduction of corporate marginal tax rates, and the adoption of the corporate alternative minimum
tax. The repeal of the investment tax credit was, by a large margin, the largest corporate revenue
raiser, while the reduction in marginal tax rates was the largest corporate revenue loser.
The 1986 Act significantly increased corporate tax burdens; however, the impact on AOCs
and FCDCs should be roughly comparable within a given industry. While we have not
performed a detailed analysis, the $1.6 billion increase in 1987 FCDC tax liability over the 1986
level and the additional increase of $1.2 billion in 1988 do not appear to be significantly related
to the 1986 Act.
Two 1986 Act items can be easily reviewed. The general business credit, which includes
the investment tax credit, claimed by FCDCs declined from $460 million to $381 million in 1987
and then increased slightly to $399 million in 1988. The repeal of the investment tax credit
reduced the credit potentially available; however, the increase in FCDC tax before credits
probably allowed more carryovers to be used. The corporate minimum tax liability of FCDCs
increased from $41 million in 1986 to $143 million in 1987, and to $310 million¹ in 1988.
The impact of other 1986 Act provisions cannot be easily measured.
The corporate alternative minimum tax is of particular interest because it was targeted at
profitable companies that avoided paying significant amounts of federal income tax. The FCDC
share of total alternative minimum tax liability was about 6 percent in 1987 and 7 percent in
1988 -- roughly the same as the FCDC share of total assets. Thus the impact of the minimum
tax on FCDCs appears to be generally comparable to its effect on AOCs.
11 A prior year minimum tax credit of $21 million was also claimed as a reduction in regular tax liability. The
alternative minimum tax is designed primarily to adjust tax payments for differences that reverse over time.
17
III. COMPARISON OF FCDCS WITH AOCS
In general, FCDCs show lower percentages of returns reporting net income, lower pretax
rates of return, and lower effective tax rates than AOCs. This section compares FCDCs with
AOCs using a variety of financial performance measures. These comparisons are first made
using aggregate data and are then broken down into more detail looking at effective tax rates,
major industrial sectors, and selected industries where FCDCs tend to be concentrated.
Comparison of FCDC and AOC Net Income and Tax Liability
While FCDCs have been the source of increasingly larger shares of U.S. economic
activity, the net income and tax liability of FCDCs does not appear to have kept pace. Income
earned and taxes paid by FCDCs over the 1983 through 1988 period can be compared with that
reported by AOCs. Such comparisons show why some tax policy analysts have been concerned
about FCDC tax liability, especially in 1986. However, 1987 performance of FCDCs as a whole
improved markedly. Table 6 compares the percentage of returns showing positive net income
and the amount of net income reported over the 6 years.
The percentage of FCDCs reporting positive net income in 1988 was 40.8 percent --
essentially equal to the 41.0 percent average over the 6-year period. In 1988, 55.6 percent of
AOC tax returns reported positive net income. This is down slightly from the 1983 through 1988
average of 57.8 percent.
Net income of FCDCs doubled to $11.2 billion in 1988. By comparison, AOC net
income increased by 23 percent. Net income of AOCs has increased in every year from 1983
through 1988, while FCDC net income dipped significantly in 1985 and 1986.
Trends in reported tax liability are similar to those of net income; however, FCDC tax
liability increase by 28 percent in 1988, while AOC tax liability dropped slightly.
18
TABLE 6
COMPARISON OF RETURNS WITH POSITIVE NET INCOME,
AMOUNT OF NET INCOME AND TAX LIABILITY
REPORTED BY FCDCS AND AOCS
(Dollar amounts in billions)
1983
1984
1985
1986
1987
1988
Percent of tax returns
reporting positive net income
FCDCs
40.6%
40.9%
43.3%
39.0%
41.2%
40.8%
AOCs
58.6% 58.8% 58.1% 58.4% 57.5% 55.6%
Net income less deficits
FCDCs
1.8
4.5
3.0
-1.5
5.6
11.2
AOCs
181.4
221.5
229.5
262.8
298.5
368.4
Net U.S. tax liability
FCDCs
3.4
4.5
3.6
3.0
4.6
5.8
AOCs
48.4
59.5
59.7
70.8
90.3
89.9
More meaningful comparisons can be made by comparing net income to relative measures
of economic activity. Four measures are shown in Table 7. Three are commonly used
relationships that require little explanation. Net income is compared with total assets, total
receipts, and net worth. The fourth comparison of net income plus interest expense as a percent
of total assets is less obvious, but perhaps the most relevant.
Different industries typically have different relative amounts of debt on their balance
sheets. These relationships are especially important when comparing financial industries with
nonfinancial industries. Based on 1988 Statistics of Income data, the banking industry (both
AOCs and FCDCs) had debt equal to 92 percent of total assets, while the manufacturing sector
had debt equal to 63 percent of total assets. Greater debt leads to greater interest deductions and
generally leads to less net income.
Relative amounts of debt, or leverage, become important when comparing rates of return
across groups with different mixes of industries. If FCDCs have a higher proportion of
companies with large amounts of debt one would expect to see greater interest expense and
correspondingly lower net incomes. Thus, when the net income of FCDCs is compared with total
assets or total receipts one would expect relatively low ratios.
19
Further, investors receive two types of returns. Lenders receive interest income in
exchange for loaning money to finance corporate assets, and shareholders receive dividends and
the benefit of accumulated retained earnings in exchange for their equity investments. Because
interest is deductible, net income reflects only the return to equity holders.
By adding the interest expense back to net income it is possible to show a more accurate
return on total assets than net income by itself will provide. Thus our fourth measure, net
income plus interest expense, divided by total assets, provides a better measure of returns on total
investment. This measure will be somewhat lower than a pure return on equity because
debtholders typically bear less risk.
Similarly, the return on net worth also provides an internally consistent rate of return.
Net income is a measure of returns to shareholders and net worth is a measure of the value of
the shareholders investment -- although, as will be described later, balance sheet concepts such
as total assets and net worth suffer from some valuation problems.
The returns on total assets and total receipts are less meaningful concepts because they
mix up returns to equity holders with measures of total economic activity, some of which benefits
lenders. Nevertheless, they provide comparative values that are useful in understanding relative
levels of economic performance.
Each pretax rate of return measure shows that FCDCs earned lower yields in 1988 than
AOCs. Of the four, the comparison using the net income plus interest expense is the most
similar. The greatest difference occurs with the pretax return on assets.
Return on assets. FCDC returns on assets have been, and continue to be, lower
than AOC returns on assets, although yields for both groups increased in 1988.
FCDC returns on assets rose to 0.9 percent in 1988, up from a low of -0.2 percent
in 1986. Returns on assets for AOCs were higher, reaching 2.5 percent in 1988.
The average return on assets over the 6-year period was 0.5 percent for FCDCs
and 2.1 percent for AOCs.
Return on receipts. The FCDC pretax return on receipts was 1.4 in 1988 -- much
lower than AOC return of 4.5 percent.
Return on net worth. Pretax returns on net worth also have been consistently
lower for FCDCs. In 1988, the return on net worth for FCDCs rose to 3.9
percent. The AOC return on net worth was 9.8 percent.
Return on net income plus interest expense. The FCDCs return on assets, after
adjusting net income to include the return to debt holders by adding back interest
expense, was 4.8 percent in 1988. The comparable AOC return was 6.6 percent.
These relationships, while still showing a significant difference are less
pronounced than the other three measures.
20
TABLE 7
COMPARISON OF PRETAX RETURNS OF FCDCS AND AOCS
1983
1984
1985
1986
1987
1988
Average
Net income as a percent of total assets
FCDCs
0.3%
0.8%
0.5%
-0.2%
0.6%
0.9%
0.5%
AOCs
1.9%
2.1%
1.9%
2.0%
2.1%
2.5%
2.1%
Net income as a percent of total receipts
FCDC
0.5%
1.0%
0.6%
-0.3%
0.8%
1.4%
0.7%
AOC
2.8%
3.2%
3.1%
3.4%
3.8%
4.5%
3.5%
Net income as a percent of net worth
FCDCs
1.3%
2.9%
1.7%
-0.7%
2.2%
3.9%
1.9%
AOCs
7.3%
8.2%
7.4%
7.7%
8.4%
9.8%
8.1%
Net income plus interest expense as
a percent of total assetsᵃ
FCDC
n.a.
5.4%
4.7%
3.2%
4.3%
4.8%
4.5%
AOCs
n.a.
7.0%
6.4%
6.1%
6.0%
6.6%
6.4%
a Sufficient data are not available from IRS to compute this relationship in 1983. The average is therefore limited
to the 1984 through 1988 period.
Comparison of Effective Tax Rates
In some respects effective tax rates are more relevant than pretax returns. That is,
regardless of the amount of reported net income, the most basic question is whether FCDCs paid
their "fair share" of income taxes. Internal Revenue Service data can be used to develop
effective tax rate comparisons based of total assets, net worth, and total receipts. 12
12 A fourth effective tax rate comparison could be developed using a concept similar to pretax net income plus
interest. The denominator would be total assets and the numerator would be the sum of FCDC tax liability on net
income plus the lenders' tax liability on interest paid by FCDCs to lenders. We have not prepared this comparison
because it would require assumptions on the tax position of lenders that are more speculative (e.g., whether lenders
are related parties).
21
Effective tax rate analyses usually attempt to measure the tax burden imposed on the
pretax economic income of the taxpayer. No clear agreement exists on the definition of
economic income, and, even if analysts did agreed, no tax return data exist to support such a
calculation.
We use total assets, net worth, and total receipts as proxies for potential economic income
because IRS data on net income has changed over time due to modifications in tax law and
because tax return concepts do not reflect economic income. Assets and net worth provide
indirect measures of the income corporations will earn given a "normal" rate of return. Total
receipts is used as an additional measure of the level of economic activity, although it may bear
a lesser relationship to the actual earnings potential of a corporation. These measures are divided
into current year tax liability to compute an effective tax rate.
Each measure has certain limitations. As with the pretax profitability measures, we
believe the comparison with net worth is most reflective of the earnings potential of the
corporation.
Limitations of effective tax rates using total assets. Assets can be thought of as
the potential to earn net income. If cash is invested in an interest-bearing account
it will earn a market yield. Similarly, assets invested in inventories, and plant and
equipment should generate a market rate of return. The difficulty with this
comparison is that net income is measured after subtracting interest expense, while
total assets are financed by both debt and equity. Effective tax rates based on
total assets are useful when the debt-equity ratios are similar.
Total assets exclude intangible assets developed by the corporation. Self-
developed intangible assets, such as manufacturing know-how and customer lists,
increase the earnings potential of the corporation yet they are not reported on the
balance sheet. However, the earnings attributable to intangibles are reflected in
net income. This inconsistency may lead to an overstatement of returns on assets
and effective tax rates. AOC earnings and effective rates are more likely to be
overstated than those of FCDCs because intangibles are typically owned by the
parent corporation. AOC net income of will generally include the return on
intangibles, while FCDC net income will not generally include such a return. 13
Limitations of effective tax rates using total assets and net worth. Total assets and
net worth edited from corporation income tax returns are typically based on
financial accounting concepts. These amounts generally reflect historic cost
accounting rather than current market value. Some asset categories will be valued
at close to market, e.g., inventories, while others may be substantially understated,
13 Some FCDCs acquired by foreign corporations already owned such intangibles before they were acquired,
while other FCDCs invest in and develop their own intangibles separately from their foreign parents. These
corporations should be expected to show rates of return and effective tax rates more similar to those of AOCs.
22
e.g., land. Depreciable, depletable, and amortizable assets will tend to be valued
somewhere between these extremes depending upon the relative rates of inflation
and write-off.
As long as companies and industries being compared have approximately the same
investment patterns, the use of historic cost accounting will not result in a
substantial bias. When investment patterns are different, balance sheet-based
comparisons may not be meaningful.
The following simple example illustrates this problem. Assume two agricultural
companies each have land with a fair market value $100. Also assume the
companies generate all their net income using this land, plus labor and materials,
which are expensed. If both companies earn a 20 percent pretax rate of return,
or $20, on the fair market value of the land, and the federal corporate tax rate is
34 percent, both companies will pay taxes of $6.80. This results in an asset-based
effective tax rate of 6.8 percent. Now assume one company purchased its land in
the current year for $100, and the other purchased the land five years ago for $60.
The first company still has an effective tax rate of 6.8 percent, while the second
has an effective tax rate of 11.3 percent (6.80 / 60). Similar, but more complex,
problems occur in measuring rates of return and effective tax rates with other
kinds of assets.
The net result of the use of historic cost accounting is that comparisons between
groups of companies with older assets and companies with newer assets may be
misleading. Companies with older assets will appear to have higher effective tax
rates than companies with newer assets.
While the impact of historic cost accounting cannot be measured directly, the
rapid growth in FCDC investment relative to the slower growth in AOC
investment may result in AOC effective tax rates being overstated. This is
because FCDC assets are likely to be newer and, therefore, will more closely
reflect market values. On the other hand, to the extent FCDC investment occurs
through acquisitions of existing companies in purchase-of-stock transactions where
existing asset bases are retained, this problem may be less significant.
Growth-related limitations. Two growth-related limitations are start-up costs and
the extent to which firms have increasing or decreasing investment levels. To the
extent FCDCs are making new investments, start-up costs may be relatively more
important resulting in lower net income and reported taxes than amounts reported
by AOCs. More slowly growing firms may show unusually high net income and
effective tax rates. An old firm that is slowly liquidating its assets by not
investing, or investing more slowly than the depreciation of its existing assets,
should experience high net income and taxes paid because some of its return is
a return of capital being treated as net income.
23
When all firms are taken together, these growth-related distortions may wash out.
However, if a specific group of firms is investing rapidly, while another group
tends to have slower asset growth, the effective tax rate on the former group may
appear to be lower than the later.
Limitations of effective tax rate using total receipts. Total receipts do not directly
suffer from the historic cost limitation of assets and net worth. On the other hand,
a comparison of earnings rates and tax liability with total receipts may be distorted
if the companies being compared are from different industries. Some industries,
such as wholesale and retail trade, often have high levels of receipts relative to net
income and tax liability. A comparison of all AOCs with all FCDCs using total
receipts will be misleading to the extent these groups have different industry
mixes.
Receipts-based comparisons also do recognize different means of financing. Two
firms in the same industry with equal receipts may have very different amounts
of net income and tax liability because they are leveraged to differing degrees.
More highly leveraged firms will pay out larger shares of deductible interest
resulting in lower net income and tax liability. The firms may also perform
different functions. If one firm is solely a supplier of goods to customers, while
the other actively markets goods and holds substantial inventories, one would
expect different returns and effective tax rates.
Limitations of effective rates using current U.S. tax liability. Total assets, net
worth, total receipts, and net income each include to varying degrees the results
of investments in foreign operations. To the extent effective tax rates are
computed using U.S. income tax liability after credits, the total tax burden and
relative tax burdens may be understated.
If a foreign corporation owned by a U.S. parent repatriates (or is deemed to
repatriate) income, this income will be included in total receipts, net income, and
U.S. tax before the foreign tax credit. Net U.S. tax after credits can appropriately
be compared with income earned in the U.S.; however, effective tax rates based
on "world-wide" net income, as reported on the tax return, may be misleading.
To the extent AOCs have more foreign-source income and investment than
FCDCs, effective tax rates on AOCs will be understated. This measure can be
partially corrected by using the foreign tax credit as a proxy for foreign taxes paid
and computing a world-wide effective tax rate. We, therefore, use two separate
measures of income tax liability to compute effective tax rates: (a) net U.S.
income tax after credits, and (b) net U.S. income tax with the foreign tax credit
added back to taxes paid.
24
Because the foreign tax credit is not allowed to exceed the U.S. tax on the same
income, the credit may underestimate foreign taxes actually paid. This means
world-wide effective tax rates calculated with these data may be understated.
Comparison of Effective Tax Rates
Table 8 shows U.S. and world-wide effective tax rates for FCDCs and AOCs. Average
effective tax rates of FCDCs are slightly below those of AOCs over the 6-year period. Effective
rates of FCDCs tend to be higher than AOC rates in earlier years and lower than AOC rates in
later years. Effective tax rates using net U.S. taxes paid tend to be more similar than those based
on world-wide taxes. Under each of the three measures, FCDC effective rates have risen from
the low 1986 levels.
TABLE 8
EFFECTIVE TAX RATES OF FCDCS AND AOCS
1983
1984
1985
1986
1987
1988
Average
Effective U.S. tax rate on total assets
FCDCs
0.6
0.8
0.5
0.4
0.5
0.5
0.6
AOCs
0.5
0.6
0.5
0.5
0.6
0.6
0.6
Effective U.S. tax rate on total receipts
FCDCs
0.9
1.0
0.7
0.6
0.7
0.7
0.7
AOCs
0.8
0.8
0.8
0.9
1.1
1.1
0.9
Effective U.S. tax rate on net worth
FCDCs
2.5
2.9
2.0
1.4
1.8
2.0
2.1
AOCs
2.0
2.2
1.9
2.1
2.5
2.4
2.2
Effective world-wide tax rate on total assets
FCDCs
0.8
1.0
0.7
0.4
0.5
0.5
0.6
AOCs
0.7
0.8
0.7
0.7
0.8
0.8
0.7
Effective world-wide tax rate on total receipts
FCDCs
1.0
1.1
0.8
0.6
0.8
0.8
0.9
AOCs
1.1
1.1
1.1
1.2
1.4
1.4
1.2
Effective world-wide tax rate on net worth
FCDCs
3.0
3.4
2.4
1.6
2.0
2.3
2.5
AOCs
2.7
3.0
2.7
2.7
3.1
3.1
2.9
25
Effective tax rate on total assets. The average effective U.S. tax rate on total assets over
the period is the same for FCDCs and AOCs. In 1988, the FCDC effective U.S. tax rate
of 0.5 was slightly below the AOC rate of 0.6. The average FCDC world-wide tax rate
on total assets was slightly below the AOC rate; however, the 1988 FCDC rate of 0.5 was
noticeably lower than the 0.8 AOC rate. As shown in Figures 1 and 2, FCDC effective
tax rates on assets have been more volatile than the AOC rates. FCDC rates declined
sharply in 1985 and 1986, followed by a significant increase in 1987, and a flattening in
1988.
Figure 1:
Figure 2:
Effective U.S. Tax Rate on Total Assets
Effective World-wide Tax Rate on Total Assets
0.85%
1.00%
0.80%
0.90%
0.75%
0.70%
0.80%
0.65%
0.50%
0.70%
0.55%
0.60%
0.50%
0.45%
0.50%
0.40%
0.35%
0.40%
1983
1984
1985
1986
1987
1958
1983
1984
1985
1986
1987
1988
FCDCa
AOCs
FCDCs
AOCs
Effective tax rate on total receipts. On average over the 1983 through 1988 period,
FCDCs effective tax rates on receipts were below AOC rates. The 0.7 average effective
U.S. tax rate on total receipts paid by FCDCs was lower than the 0.9 percent AOC rate.
The spread in average world-wide effective rates is slightly greater with 0.9 for FCDCs
and 1.2 for AOCs. Figures 3 and 4 show that both U.S. and world-wide effective tax
rates on total receipts diverged significantly beginning in 1985.
26
Figure 3:
Figure 4:
Effective U.S. Tax Rate on Total Receipts
Effective World-wide Tax Rate on Total Receipts
1.20%
1.50%
1.10%
1.40%
1.30%
1.00%
1.20%
0.90%
1.10%
0.80%
1.00%
0.90%
0.70%
0.80%
0.50%
0.70%
0.50%
0.60%
1983
1984
1985
1986
1987
1988
1983
1984
1985
1986
1987
1958
FCDCs
AOCs
FCDCs
AOCs
Effective tax rate on net worth. The average effective U.S. tax rate on net worth is very
similar for both FCDCs (2.1 percent) and AOCs (2.2 percent) over the 6-year period. The
2.5 percent average FCDC world-wide effective rate is somewhat lower than the 2.9
percent AOC rate. As shown in Figures 5 and 6, the gap in effective tax rates narrowed
significantly in 1988, with the U.S. effective rate narrowing appreciably.
Figure 5:
Figure 6:
Effective U.S. Tax Rate on Net Worth
Effective World-wide Tax Rate on Net Worth
3.00%
3.50%
2.80%
3.40%
3.20%
2.50%
3.00%
2.40%
2.80%
2.20%
2.60%
2.00%
2.40%
2.20%
1.80%
2.00%
1.50%
1.80%
1.40%
1.60%
1983
1984
1985
1986
1987
1988
1983
1984
1985
1986
1987
1988
FCDCs
AOCa
FCDCs
AOCs
A fourth measure shows the effective tax rate on positive net income. This tax base is
useful in that it shows the effective tax rate paid by those firms paying tax. On the other hand,
it is potentially misleading because it does not include loss firms, which are of perhaps the most
concern to analysts. Differences between AOC and FCDC effective tax rates on positive net
27
income reflect the benefit of net operating loss carryovers, the dividends received deduction,
reduced marginal rates for small corporations, and the availability of tax credits. Firms with
losses are excluded from this calculation because they do not generally incur tax liability and
their inclusion could produce unrealistic effective tax rates depending upon the extent of firms
with pretax losses.
As shown in Figures 7 and 8, FCDCs paid higher effective tax rates on positive net
income than did AOCs, whether measured on a year-by-year basis or on a five-year average
basis. The rates paid by FCDCs and AOCs have been converging since 1984. Over the 1983
through 1988 period the average effective U.S. tax rate on positive net income was 25.0 percent
for FCDCs and 19.3 percent for AOCs. The average world-wide effective tax rate for this period
was 29.3 percent for FCDCs and 25.5 percent for AOCs. The 1988 effective U.S. tax rates were
22.0 for FCDCs and 19.3 for AOCs, while the corresponding world-wide rates were 24.9 for
FCDCs and 25.5 for AOCs.
Figure 7:
Figure 8:
Effective U.S. rate on Positive Net Income
Effective World-wide Tax Rate on Pos. Net Income
30.00%
35.00%
34.00%
28.00%
33.00%
26.00%
32.00%
31.00%
24.00%
30.00%
29.00%
22.00%
28.00%
20.00%
27.00%
26.00%
18.00%
25.00%
16.00%
24.00%
1983
1984
1985
1986
1987
1988
1983
1984
1985
1986
1987
1988
FCDCs
AOCs
FCDCs
AOCs
Comparison of FCDC and AOC Data by Major Industrial Sector
Each of the major industrial sectors has different characteristics. Three types of
information are presented for each sector: (a) percent of returns with net income, (b) net income,
and (c) income tax liability.
Percent of Returns with Net Income
Over the 1983 through 1988 period the proportion of AOCs reporting net income on tax
returns has remained relatively constant, ranging between 56 and 59 percent. The percentage of
FCDCs reporting net income has also been stable, but consistently lower, varying between 39 and
28
43 percent (see Table 6). As shown in Table 9, the proportions are more volatile when
disaggregated into major industrial sectors -- particularly for FCDCs.
Manufacturing. While the percentage of AOCs reporting positive net income
ranged between 60 and 62 percent over the period, the comparable percentage for
FCDCs exhibited wide year-to-year swings. From 50.7 percent in 1983, it moved
up to 57.2 percent in the following year; then two sharp declines in 1985 and
1986 brought the percentage down to 34.6 percent in 1986. A strong recovery
occurred in 1987, with the percentage of FCDCs reporting positive net income
rising to 49.8 percent, more than recovering the 1986 loss. The percentage then
fell again to 38.5 percent in 1988.
Wholesale & retail trade. The percentage of AOCs reporting positive net income
ranged narrowly between 58 and 61 percent over the 1983 to 1988 period. The
percentage of FCDCs with net income increased from 1983 to 1985 to reach 45.3
percent. In 1986 the percentage dropped somewhat to 44.9 percent, but that loss
was fully recovered in 1987, when the percentage rose back up to 45.3 percent.
In 1988, the percentage jumped to its highest point of 50.4 percent.
Finance, insurance & real estate. Between 1983 and 1986, the proportion of
AOCs with positive net income remained between 57 and 58 percent. In 1987
that proportion dropped slightly to 55.8 percent, and then fell to 54.9 percent in
1988. The percentage of FCDC firms with net income rose from 30.3 percent in
1983 to 34.5 percent in 1985. The 1986 decline was mostly recovered in 1987,
when the percentage moved back up to 33.7 percent. In 1988 the percentage was
largely unchange at 33.1 percent.
29
TABLE 9
COMPARISON OF RETURNS WITH POSITIVE NET INCOME
BY MAJOR INDUSTRIAL SECTOR
1983
1984
1985
1986
1987
1988
Average
Manufacturing
FCDC
50.5% 57.2% 49.1% 34.6% 49.8% 38.5% 46.8%
AOC
60.3% 61.8% 59.9% 60.2% 61.4% 60.6% 60.7%
Wholesale & retail trade
FCDC
40.5% 41.4% 45.3% 44.9% 45.3% 50.4% 44.6%
AOC
61.0% 60.9% 58.5% 59.6% 58.7% 59.7% 59.7%
Finance, insurance & real estate
FCDC
30.3% 33.5% 34.5% 28.9% 33.7% 33.1%
32.3%
AOC
58.5% 57.0% 58.2% 58.5% 55.8% 54.9%
57.2%
All other
FCDC
45.5% 41.8% 49.4% 42.8% 40.2% 38.4%
43.0%
AOC
56.8% 57.6% 57.5% 57.3% 56.8% 52.6%
56.4%
Net Income
FCDC net income reached its highest level during the 1983 through 1988 period in 1988
when it rose to $11.2 billion. While FCDC net income was volatile over the period, AOC net
income increased each year. Net income of AOCs reached $368.4 billion in 1988. Net income
by major industry is shown in Table 10.
Manufacturing. Both FCDC and AOC manufacturing firms showed significant
declines in net income in 1985 and 1986. FCDC firms showed an aggregate net
loss of -$0.6 billion in 1986; however, in the following two years they improved
greatly reaching $5.9 billion in 1987 and $8.5 billion in 1988. Like FCDCs,
AOCs recovered strongly with net income rising to $131.2 billion in 1987 and
$185.7 billion in 1988.
Wholesale & retail trade. FCDC net income rose to $1.7 billion in 1988. This
is the highest level since 1985. AOC net income also increased in 1988, reaching
$30.8 billion. Net incomes of both FCDCs and AOCs in 1988 remained below
their earlier peaks.
30
Finance, insurance & real estate. Net income for FCDCs turned positive ($0.9
billion) in 1988 for the first time during the 6-year period. Net income of AOCs
increased slightly to $88.7 billion in 1988, but remained well below the 1986 peak
of $100.1 billion.
TABLE 10
COMPARISON OF AMOUNT OF NET INCOME
BY MAJOR INDUSTRIAL SECTOR
(Billions of Dollars)
1983
1984
1985
1986
1987
1988
Manufacturing
FCDC
3.8
5.3
2.9
-0.6
5.9
8.5
AOC
89.4
112.8
107.1
98.8
131.2
185.7
Wholesale & retail trade
FCDC
0.9
2.4
2.4
1.3
0.9
1.7
AOC
32.5
37.2
28.1
31.1
29.9
30.8
Finance, insurance & real estate
FCDC
-1.2
-1.7
-0.8
-0.4
-0.4
0.9
AOC
32.5
34.0
61.4
100.1
86.1
88.7
All others
FCDC
-1.6
-1.5
-1.6
-1.8
-0.9
*
AOC
27.0
37.5
32.9
32.8
51.2
63.2
*
Less than $50 million.
Tax Liability
U.S. tax liability of FCDCs rose more than 50 percent in 1987 to reach $4.6 billion, and
by an additional 26 percent in 1988 to reach $5.8 billion. This increase followed consecutive
declines in 1985 and 1986. Table 11 shows FCDC and AOC U.S. tax liability by major
industrial sector.
Manufacturing. As with net income, tax liability for both FCDC and AOC
manufacturing firms declined in 1985 and 1986, and then recovered strongly.
Manufacturing FCDCs reported tax liability of $3.0 billion in 1988 -- up from
31
$2.1 billion in 1987 and $1.0 billion in 1986. AOC tax liability increased to
$38.9 billion in 1988 from $31.9 billion in 1987, and $24.7 billion in 1986.
Wholesale & retail trade. FCDC tax liability remained virtually flat over the 1986
through 1988 period -- between $1.3 billion and $1.4 billion. AOC tax liability
increased to $13.9 billion in 1986, and then declined to $12.6 billion in 1987, and
$11.4 billion in 1988.
Finance, insurance & real estate. Tax liability for both FCDC and AOC firms
continued to increase rapidly during the entire 6-year period. FCDC tax liability
reached $1.0 billion in 1988 -- up from $0.6 billion in 1987 and $0.4 billion in
1986. AOC tax liability increased to $16.9 billion in 1988. AOC liability was
$15.7 billion in 1987 and $14.2 billion in 1986.
TABLE 11
COMPARISON OF U.S. TAX LIABILITY
BY MAJOR INDUSTRIAL SECTOR
(Billions of Dollars)
1983
1984
1985
1986
1987
1988
Manufacturing
FCDC
2.0
2.4
1.4
1.0
2.1
3.0
AOC
22.9
28.1
24.0
24.7
31.9
38.9
Wholesale & retail trade
FCDC
1.0
1.7
1.6
1.3
1.4
1.3
AOC
9.6
10.7
11.8
13.9
12.6
11.4
Finance, insurance & real estate
FCDC
0.2
0.2
0.3
0.4
0.6
1.0
AOC
5.5
6.5
9.9
14.2
15.7
16.9
All others
FCDC
0.2
0.2
0.3
0.3
0.5
0.5
AOC
10.4
14.2
14.0
17.9
30.1
22.8
32
Comparison of Effective Tax Rates by Major Industry Group
Table 12 compares effective tax rates by major industrial sector over the 1983 through
1988 period. While the rates vary significantly from year-to-year, several observations can be
made:
FCDC effective tax rates in the manufacturing sector, regardless of the
measure chosen, are consistently and significantly lower than AOC
effective rates.
Average FCDC effective tax rates in the wholesale and retail trade sector
are generally equal to or above AOC rates. While both FCDC and AOC
effective rates have declined, FCDC rates tend to have fallen further.
Effective tax rates of FCDCs and AOCs in the finance, insurance and real
estate sector are generally similar. In 1988, FCDC effective rates are
generally above those of AOCs.
33
TABLE 12
COMPARISON OF EFFECTIVE INCOME TAX RATES BY MAJOR INDUSTRY
USING TOTAL ASSETS, TOTAL RECEIPTS, AND NET WORTH
1983
1984
1985
1986
1987
1988
Average
Effective U.S. tax rate on total assets
Manufacturing
FCDC
0.9
1.1
0.5
0.3
0.6
0.7
0.7
AOC
1.2
1.3
1.0
1.0
1.2
1.4
1.2
Wholesale & retail trade
FCDC
1.5
2.1
1.8
1.2
1.0
0.8
1.4
AOC
1.4
1.4
1.4
1.5
1.4
1.2
1.4
Finance, insurance & real estate
FCDC
0.1
0.1
0.1
0.1
0.2
0.2
0.1
AOC
0.1
0.1
0.1
0.2
0.2
0.2
0.2
All other
FCDC
0.3
0.4
0.5
0.4
0.5
0.5
0.4
AOC
0.7
0.8
0.7
0.9
1.5
1.0
0.9
Effective world-wide tax rate on total assets
Manufacturing
FCDC
1.2
1.4
0.7
0.4
0.7
0.8
0.9
AOC
1.9
2.1
1.8
1.6
1.8
2.1
1.9
Wholesale & retail trade
FCDC
1.6
2.2
1.8
1.3
1.1
0.8
1.5
AOC
1.4
1.4
1.4
1.6.
1.5
1.3
1.4
Finance, insurance & real estate
FCDC
0.1
0.1
0.2
0.1
0.2
0.2
0.2
AOC
0.1
0.1
0.2
0.2
0.2
0.2
0.2
All other
FCDC
0.3
0.4
0.5
0.4
0.5
0.5
0.4
AOC
0.7
0.8
0.7
0.9
1.5
1.0
0.9
34
TABLE 12 (continued)
COMPARISON OF EFFECTIVE INCOME TAX RATES BY MAJOR INDUSTRY
USING TOTAL ASSETS, TOTAL RECEIPTS, AND NET WORTH
1983 1984 1985 1986 1987 1988 Average
Effective U.S. tax rate on net worth
Manufacturing
FCDC
2.8
2.9
1.5
0.9
1.5
2.1
1.9
AOC
2.6
3.0
2.4
2.5
3.2
3.7
2.9
Wholesale & retail trade
FCDC
5.6
8.0
7.3
5.5
4.7
4.3
5.9
AOC
4.1
4.2
4.7
5.3
5.1
4.6
4.7
Finance, insurance & real estate
FCDC
0.7
0.7
0.8
0.8
1.3
1.5
1.0
AOC
0.7
0.8
0.9
1.0
1.0
1.0
0.9
All other
FCDC
0.9
1.1
1.2
1.1
1.3
1.1
1.1
AOC
1.8
2.2
1.9
2.5
4.1
3.0
2.6
Effective world-wide tax rate on net worth
Manufacturing
FCDC
3.6
3.5
2.0
1.1
1.8
2.3
2.4
AOC
4.4
4.8
4.4
4.2
4.8
5.7
4.7
Wholesale & retail trade
FCDC
5.7
8.3
7.4
5.7
4.8
4.4
6.0
AOC
4.2
4.3
4.9
5.5
5.4
5.0
4.9
Finance, insurance & real estate
FCDC
0.9
0.8
1.0
0.9
1.4
1.6
1.1
AOC
0.9
0.9
1.0
1.1
1.1
1.1
1.0
All other
FCDC
1.2
1.8
1.5
1.8
1.6
1.8
1.6
AOC
2.0
2.5
2.1
2.6
4.2
3.2
2.8
35
TABLE 12 (continued)
COMPARISON OF EFFECTIVE INCOME TAX RATES BY MAJOR INDUSTRY
USING TOTAL ASSETS, TOTAL RECEIPTS, AND NET WORTHᵃ
1983
1984
1985
1986
1987
1988
Average
Effective U.S. tax rate on total receipts
Manufacturing
FCDC
1.3
1.3
0.7
0.5
0.8
0.9
0.9
AOC
1.0
1.1
0.9
1.0
1.2
1.4
1.1
Wholesale & retail trade
FCDC
0.6
0.8
0.7
0.6
0.5
0.4
0.6
AOC
0.5
0.6
0.6
0.7
0.6
0.6
0.6
Finance, insurance & real estate
FCDC
0.6
0.5
0.7
0.7
1.0
1.2
0.8
AOC
0.6
0.7
0.9
1.1
1.1
1.1
0.9
All other
FCDC
0.5
0.6
0.7
0.7
0.8
0.8
0.7
AOC
0.7
0.9
0.8
1.0
1.7
1.3
1.7
Effective world-wide tax rate on total receipts
Manufacturing
FCDC
1.6
1.6
0.9
0.6
1.0
1.0
1.1
AOC
1.7
1.8
1.7
1.7
1.8
2.2
1.8
Wholesale & retail trade
FCDC
0.6
0.9
0.7
0.6
0.5
0.4
0.6
AOC
0.7
0.6
0.6
0.7
0.7
0.6
0.6
Finance, insurance & real estate
FCDC
0.7
0.6
0.9
0.8
1.1
1.3
0.9
AOC
0.8
0.8
1.0
1.3
1.2
1.2
1.1
All other
FCDC
0.7
1.0
0.9
1.1
1.0
1.3
1.0
AOC
0.8
1.0
0.9
1.1
1.8
1.3
1.1
ᵃEffective world-wide tax rate assumes foreign tax credits claimed equal foreign taxes paid. To the extent firms have
excess credits the world-wide effective tax rate may be understated.
36
Characteristics of Selected Major Industry Groups
There are a number of major industry groups where FCDCs are particularly important.
Four manufacturing groups and two trade groups are particularly important. While the following
discussion of IRS statistics on these six groups provides a better understanding of underlying
trends, it is important to recognize that sampling variability may reduce the reliability of these
data.
Major Groups in the FCDC Manufacturing Sector
Four FCDC manufacturing groups are particularly significant: petroleum and coal;
chemicals; food products; and electrical and electronic equipment. The petroleum group had the
greatest assets in 1988, and the chemical group had the greatest net worth. Table 13 provides
statistics on the number of returns filed, total assets, net worth, total receipts, net income, and
tax liability for each group over the 1984 through 1988 period.
Petroleum. Following the 1985-1986 collapse in oil prices, the number of FCDCs
filing returns fell from 366 firms in 1986 to only 35 firms in 1988. Most of this
decline was in relatively small firms as assets and net worth did not show the
same percentage decline. Total assets and net worth declined in 1988; however,
total receipts and net income increased significantly.
Chemicals. The FCDC chemical industry grew strongly throughout the 6-year
period. Tax liability grew significantly from $0.2 billion in 1986 to $0.5 billion
in 1987, and $0.7 billion in 1988. The chemical industry had 38 percent of the
net income earned in the manufacturing sector in 1988.
Food Products. The FCDC food and kindred products industry showed significant
declines during 1988 in the number of returns, assets, net worth, and net income.
In contrast, total receipts and tax liability increased. The 1988 results were,
however, significantly above results for years before 1987 indicating that 1987
may have been an unusually good year.
Electrical Equipment. FCDCs show continuing increases in assets, net worth, and
receipts over the period. The substantial decline in the number of returns in 1987
may be the result of sampling variability, although some parts of the electronics
industry had a particularly difficult period in the mid-1980s.
37
TABLE 13
SELECTED INFORMATION ON FCDC
MAJOR MANUFACTURING GROUPS
(Dollar amounts in Billions)
1984
1985
1986
1987
1988
Petroleum
Number of returns
106
225
366
95
35
Total assets
89.0
91.0
92.4
102.0
98.3
Net worth
32.6
33.5
36.3
40.4
31.6
Total receipts
53.3
51.6
40.8
53.5
61.7
Net income
4.2
2.4
-2.2
0.2
1.2
U.S. tax liability
1.3
0.4
*
0.3
0.4
Chemicals
Number of returns
205
169
207
274
312
Total assets
26.1
32.6
51.0
73.5
84.3
Net worth
11.2
12.4
18.3
28.2
33.3
Total receipts
27.8
31.0
40.6
55.1
62.0
Net income
0.6
0.4
0.6
2.8
3.2
U.S. tax liability
0.3
0.3
0.2
0.5
0.7
Food products
Number of returns
167
135
205
349
244
Total assets
21.2
28.4
27.6
49.6
40.1
Net worth
9.1
9.3
9.7
23.8
13.7
Total receipts
13.7
19.3
17.6
25.1
31.1
Net income
*
0.2
0.3
1.0
0.8
U.S. tax liability
0.1
*
*
0.2
0.3
Electrical equipment
Number of returns
693
787
971
356
751
Total assets
10.1
11.2
22.0
26.4
32.7
Net worth
3.6
4.0
8.5
10.9
11.9
Total receipts
14.1
15.2
24.4
28.2
36.8
Net income
0.3
*
0.2
0.1
0.2
U.S. tax liability
0.2
0.1
0.1
0.2
0.2
* Less than $50 million.
38
Comparison of FCDC and AOC Effective Tax Rates
Insufficient data are available for 1988 to allow us to compute AOC effective tax rates
for the four major manufacturing groups. 14 Data are, however, available for 1987. Table 14
shows 1987 FCDC and AOC effective tax rates on total assets, total receipts, and net worth for
FCDCs and AOCs.
FCDC effective tax rates are consistently below -- or at best equal to -- AOC rates. In
two instances the effective tax rates are equal. The petroleum industry's effective U.S. tax rate
on total receipts is 0.6 percent for both FCDCs and AOCs. FCDC and AOC food products
industry effective world-wide tax rates on total receipts are equal at 1.4 percent.
14 AOC data require the availability of information on S-corporations. S-corporation data are typically only
published by industrial sector. We were able to obtain an unpublished, detailed industry tabulation on S-corporations
for 1987.
39
TABLE 14
COMPARISON OF 1987 EFFECTIVE INCOME TAX RATES
FOR MANUFACTURING MAJOR INDUSTRY GROUPS
USING NET WORTH, TOTAL ASSETS, AND TOTAL RECEIPTS
All Other
Petroleum Chemicals
Food
Electrical Manufacturing
Effective U.S. tax rate on total assets
FCDC
0.3
0.7
0.4
0.6
0.7
AOC
0.4
1.9
1.7
0.8
1.3
Effective U.S. tax rate on total receipts
FCDC
0.6
1.0
0.8
0.6
0.8
AOC
0.6
2.0
1.1
1.0
1.2
Effective U.S. tax rate on net worth
FCDC
0.8
1.9
0.9
1.6
2.0
AOC
0.9
4.1
4.4
2.3
3.9
Effective world-wide tax rate on total assets
FCDC
0.3
1.1
0.7
0.7
0.8
AOC
1.7
3.0
2.2
1.0
1.8
Effective world-wide tax rate on total receipts
FCDC
0.6
1.5
1.4
0.7
0.9
AOC
2.4
3.2
1.4
1.3
1.6
Effective world-wide tax rate on net worth
FCDC
0.8
2.9
1.4
1.8
2.2
AOC
3.9
6.3
5.7
2.9
5.1
The effective world-wide tax rate computation assumes that reported foreign tax credits claimed are equal to foreign
taxes paid. To the extent firms are in an excess credit position the world-wide effective tax rate may be understated.
Major Groups in the FCDC Wholesale and Retail Trade Sector
Data on FCDC wholesale trade and retail trade groups can be shown separately. Table
15 provides the number of returns filed, total assets, net worth, total receipts, net income, and
tax liability for each group.
40
Wholesale trade. The size of the FCDC wholesale trade group -- as measured by
returns, assets, net worth and total receipts -- has grown in each year except 1986.
Industry net income and tax liability dropped in 1986, and by 1988 neither had
recovered to pre-1986 levels.
Retail trade. Total assets, net worth, and total receipts all increased significantly
and continuously throughout the 1984 through 1988 period. The number of
returns fluctuated significantly, which may be partially related to sampling
variability. Net income and tax liability have also fluctuated. While the trend in
net income is difficult to determine, tax liability seems generally to have increased
in 1987 and 1988 when compared with earlier years.
TABLE 15
SELECTED INFORMATION ON FCDC
MAJOR WHOLESALE AND RETAIL TRADE GROUPS
(Dollar amounts in Billions)
1984
1985
1986
1987
1988
Wholesale
Number of returns
11,364
11,592
10,630.
12,250
13,257
Total assets
70.2
75.7
82.8
103.5
122.6
Net worth
18.2
18.8
17.6
22.6
25.1
Total receipts
181.7
196.8
190.9
252.2
282.6
Net income
2.5
2.4
1.3
0.7
1.8
U.S. tax liability
1.6
1.5
1.1
1.0
1.1
Retail
Number of returns
2,826
1,988
2,711
4,214
2,643
Total assets
10.0
12.5
21.1
27.0
40.0
Net worth
2.8
3.2
5.7
6.5
5.7
Total receipts
20.3
30.6
37.1
53.0
64.1
Net income
-0.1
*
*
0.2
-0.1
U.S. tax liability
0.1
0.1
0.1
0.4
0.2
ᵃRetail group data have been derived by subtracting wholesale figures from the total for the wholesale and retail
industry. This assumes the small "unallocable" trade group should be counted as retail activity.
* Between -$50 million and $50 million.
41
Comparison of Effective Tax Rates with AOCs
Effective tax rates for 1987 measured on the three different bases -- total assets, net
worth, and total receipts -- are shown in Table 16 for the wholesale trade and retail trade groups.
These comparisons show that effective tax rates were consistently lower for FCDC wholesalers
than for the AOC wholesalers. By contrast, FCDC retailers tended to pay the same or higher
effective tax rates as AOC retailers in 1987.
42
TABLE 16
COMPARISON OF 1987 EFFECTIVE INCOME TAX RATES
FOR MAJOR WHOLESALE AND RETAIL TRADE GROUPS
USING NET WORTH, TOTAL ASSETS, AND TOTAL RECEIPTS
Wholesale Trade
Retail Tradeᵇ
Effective U.S. tax rate on total assets
FCDC
1.0
1.4
AOC
1.4
1.5
Effective U.S. tax rate on total receipts
FCDC
0.4
0.7
AOC
0.6
0.7
Effective U.S. tax rate on net worth
FCDC
4.4
5.9
AOC
5.6
5.1
Effective world-wide tax rate on total assets
FCDC
1.0
1.4
AOC
1.4
1.5
Effective world-wide tax rate on total receipts
FCDC
0.4
0.7
AOC
0.6
0.7
Effective world-wide tax rate on net worth
FCDC
4.4
5.9
AOC
5.7
5.3
"The effective world-wide tax rate computation assumes that reported foreign tax credits claimed are equal to foreign
taxes paid. To the extent firms are in an excess credit position the world-wide effective tax rate may be understated.
ᵇThe effective rates for the retail trade group are calculated using the same data calculated for Table 15.
43
IV. TRENDS IN FCDC TAX LIABILITY
IRS data may be used to analyze trends in FCDC tax liability by focusing on the level
of taxes paid and on effective tax rates. FCDCs tax liability declined in 1985 and 1986, and
increased significantly in 1987 and 1988 (see Table 6). By comparison, AOC tax liability
increased throughout the period, although the gain in 1986 was negligible. Our review of
effective tax rates shows that FCDC rates are closer to AOC effective rates when averaged over
the 6-year period. However, FCDC rates were generally higher in the earlier part of the period,
dipped to a low point in 1986, and moved back up in 1987 and 1988. This section discusses
these trends in more detail.
Our 1990 report discussed possible reasons for declines in net income, tax liability, and
effective tax rates in 1986. These reasons included: (a) start-up costs resulting from the
substantial growth in foreign investment in the U.S., (b) high levels of debt used to acquire
existing businesses, and (c) high intercompany charges for goods and services. The report also
suggested that shifting exchange rates might provide some explanation for lower 1986 results.
These effects will be discussed in more detail; however, access to company-by company tax
return data, as used in the Treasury report, is necessary for a more complete understanding.
Much of the data discussed in this section is from tax returns filed for 1987. As
previously discussed, a more detailed industry comparison between AOCs and FCDCs requires
the elimination of S-corporation data that are only publicly available for 1987 returns.
FCDC tax burdens may be particularly affected by rapid growth. As shown in Table 17,
total FCDC assets have increased much more rapidly than AOC assets over the 1986 through
1988 period. FCDC growth rates exceed AOC growth rates in each year in almost all industries.
The FCDC finance, insurance, and real estate sector grew the most rapidly at an average annual
rate of almost 30 percent.
44
TABLE 17
COMPARISON OF FCDC AND AOC ASSET GROWTH RATES BY INDUSTRY
1986-88
1986
1987
1988
Average
All industries
FCDC
28.2
14.1
25.0
22.4
AOC
9.8
6.4
6.3
7.5
Manufacturing
FCDC
15.5
25.4
15.3
18.7
AOC
10.3
2.2
7.4
6.6
Wholesale & retail trade
FCDC
17.9
25.6
24.5
22.7
AOC
4.1
0.4
4.7
3.1
Finance, insurance & real estate
FCDC
51.1
0.4
37.0
29.5
AOC
12.1
9.7
6.1
9.3
All other industries
FCDC
7.4
21.3
16.2
15.0
AOC
3.5
2.1
6.4
4.0
Impact of Start-up Costs
Rapid asset growth will likely result in higher start-up costs. These costs can be
manifested in several ways. Rapid growth in direct investment could result in high depreciation
deductions relative to sales. Growth through acquisitions of existing firms could lead to large
amortization deductions where intangible assets are acquired. High levels of debt may be
incurred for use in either direct investment or growth through acquisition. Because each industry
will have somewhat different mixes of assets and expenses, these attributes are best explored at
a more detailed level.
FCDC deductions for depreciation, amortization, and interest are very large relative to net
income. In 1987, total FCDC net income was $5.6 billion. Depreciation deductions were $19.6
billion, amortization deductions were $1.9 billion, and interest deductions were $35.6 billion.
Relatively small changes in these deductions would have a large impact on net income.
45
Large depreciation deductions generally do not appear to have caused FCDCs' low ratios
of net income to total receipts. Table 18 shows FCDC depreciation deductions as a percentage
of total receipts are 18.5 percent below the deductions of AOCs. The most noticeable difference
is that FCDC finance, insurance, and real estate firms have depreciation deductions more than
200 percent greater than AOC firms. This may be the result of a different industry mix between
FCDCs and AOCs within this industrial sector.
TABLE 18
1987 DEPRECIATION DEDUCTIONS
AS A PERCENTAGE OF TOTAL RECEIPTS
FCDC
Percent
FCDC
AOC
-AOC Difference
All Industries
2.85%
3.50%
-0.65%
-18.5%
Manufacturing
4.08
3.94
0.14
3.6
Petroleum
6.54
4.17
2.37
57.0
Chemicals
4.00
3.74
0.26
7.1
Food products
2.42
2.71
-0.30
-11.0
Electrical equipment
3.61
5.03
-1.42
-28.2
Other manufacturing
3.37
3.99
-0.62
-15.5
Wholesale & retail trade
1.13
1.51
-0.38
-25.4
Wholesale trade
0.99
1.11
-0.12
-11.0
Retail tradeᵃ
1.78
1.84
-0.06
-3.3
Finance, insurance
& real estate
4.06
0.02
4.04
208.8
All other industries
5.16
6.38
-1.22
-19.2
Retail figures are derived by subtracting wholesale trade from wholesale and retail trade combined.
The differences between FCDC and AOC amortization deductions are greater in
percentage terms; however, because these deductions are a small fraction of total receipts they
are unlikely to have a large impact on net income. FCDC deductions are 58.5 percent higher
than AOC deductions. The largest differences are in the chemicals; other manufacturing; retail
trade; and finance, insurance, and real estate categories.
46
TABLE 19
1987 AMORTIZATION DEDUCTIONS
AS A PERCENTAGE OF TOTAL RECEIPTS
FCDC
Percent
FCDC
AOC
-AOC Difference
All Industries
0.28%
0.18%
0.10%
58.5%
Manufacturing
0.39
0.18
0.21
116.3
Petroleum
0.20
0.20
-0.00
-1.5
Chemicals
0.51
0.18
0.33
177.7
Food
0.39
0.22
0.17
79.6
Electrical equipment
0.24
0.18
0.07
36.4
Other manufacturing
0.47
0.17
0.30
175.6
Wholesale & retail trade
0.08
0.08
-0.00
-0.8
Wholesale trade
0.06
0.05
0.01
9.5
Retail trade
0.17
0.10
0.16
160.0
Finance, insurance
& real estate
0.57
0.00
0.57
273.7
All other industries
0.59
0.27
0.32
122.3
High Level of Net Interest Expense
Table 20 shows net interest expense (total interest expense less total interest income) as
a percentage of total receipts for 1987. FCDCs have positive net interest expense, while AOCs
have negative net interest expense. Overall, 1987 FCDC net interest payments are 2.4 percentage
points higher than AOC payments. The greatest different is in the finance, insurance, and real
estate sector where AOC net interest expense as a percent of total receipts is close to zero, but
FCDC net interest is a negative 6.21 percent. Negative net interest expense for all AOCs is
largely the result of financial institutions earning net interest income from making loans to
customers.
High interest payments resulting from debt issued to finance acquisitions may substantially
reduce FCDC net income. Because interest expense on debt used to finance acquisitions cannot
be separated from debt used for other purposes, it is not possible to determine the cause of high
FCDC net interest expense.
47
It is possible that some of this interest expense may be related to earnings stripping
activity. To the extent some corporations did distribute income to foreign parents or affiliates
as deductible interest expense rather than as taxable dividends this practice was essentially
disallowed in the Omnibus Budget Reconciliation Act of 1989. It is, however, unlikely that
earnings stripping activity accounted for a large share of total FCDC interest expense.
Because FCDC net interest expense as a share of total receipts is 2.4 percentage points
higher than AOC net interest expense, it may have a large impact on FCDC net income. If, for
example, FCDC interest deductions were reduced by 2.4 percent of total receipts to make them
comparable to AOC interest deductions, FCDC net income would increase by $16.5 billion.
TABLE 20
1987 NET INTEREST EXPENSE
AS A PERCENTAGE OF TOTAL RECEIPTS
FCDC
Percent
FCDC
AOC
-AOC Difference
All Industries
1.07%
-1.33%
2.40%
-180.4%
Manufacturing
2.58
1.60
0.97
60.6
Petroleum
3.05
1.76
1.29
73.6
Chemicals
2.97
1.41
1.56
111.2
Food
3.30
1.56
1.74
111.6
Electrical equipment
1.11
2.47
-1.36
-55.0
Other manufacturing
2.34
1.49
0.85
57.5
Wholesale & retail trade
0.96
0.78
0.18
23.6
Wholesale trade
0.83
0.57
0.26
46.0
Retail trade
1.58
0.95
0.63
66.3
Finance, insurance
& real estate
-6.21
-14.29
8.08
-56.5
All other industries
2.49
2.75
-0.26
-9.5
The combined effect of differences between FCDCs and AOCs for these three categories
of deductions could potentially increase FCDC net income by $12.7 billion (-$4.5 billion from
depreciation, +$0.7 billion from amortization, and +$16.5 billion from interest). While we are
not able to specifically relate these expenses to the higher rate of asset growth of FCDCs, this
48
effect may offer one explanation for the relatively low amounts of net income reported by
FCDCs.
If lower levels of FCDC net income are attributable to start-up expenses and we allow
for the higher FCDC growth rate by adjusting these expenses, we find FCDC relative net income
is similar to AOC net income. That is, by increasing FCDC net income from $5.6 billion to
$18.3 billion -- by this $12.7 billion adjustment, FCDC net income in 1987 would be 1.9 percent
of total assets, which is quite close to the 2.1 percent figure for AOCs.
Intercompany Charges for Goods and Services
A third possible reason for the lower net income and tax liability of FCDCs is that FCDCs
may have paid higher prices for goods bought from foreign parents and affiliates, thereby
reducing FCDC profitability and tax liability. A detailed analysis of this question is beyond the
scope of available IRS data. However, if such higher prices were paid, they should appear in the
"Cost of Sales and Operations" deduction, and FCDC gross profit margins¹⁵ should be smaller
than AOC profit margins.
As shown in Table 21, FCDC costs of sales were generally higher than AOC costs of
sales, as a fraction of total receipts. At the industrial sector level, however, this pattern varies.
Manufacturing. From 1983 to 1985, costs of sales as a share of receipts were
lower for FCDCs than for AOCs, but the differences were small. In 1986, this
relationship reversed, but again, the difference was small. In 1987, FCDC and
AOC costs of sales shares were virtually identical, and in 1988 FCDCs were again
larger. Over the entire period there was virtually no difference between FCDCs
and AOCs.
Wholesale and retail trade. FCDC costs of sales as a share of receipts is
consistently about 10 percentage points higher than AOC costs of sales.
Finance, insurance, and real estate. The FCDC ratio is consistently above the
AOC ratio over the period; however, the difference is gradually narrowing. The
gap was .145 in 1983, but only .066 in 1988. FCDC and AOC firms within this
industry tend to differ widely. For example, a large share of foreign-owned banks
are organized as branches which are not included in these data. This different
industry mix could significantly affect the cost of sales / total receipts ratio.
Table 22 provides additional industry detail for the manufacturing and trade sectors. The
relationships for the total and the major industrial sectors are slightly different from those in
15 Gross profit is the excess of business receipts over the cost of sales and operations. The gross profit margin
is simply gross profit per dollar of receipts.
49
Table 21 because the Table 22 amounts use cost of sales divided by business receipts rather than
by total receipts.
Of the major FCDC manufacturing groups in 1987, only the chemical
industry had a cost of sales / business receipts ratio below the
corresponding AOC ratio. With the exception of the electrical equipment
industry the differences for each industry were relatively small.
The difference between FCDC and AOC cost of sales / business receipts
ratios for retail trade is small. Wholesale trade, however, shows somewhat
larger differences with the FCDC ratio 6.5 percentage points above the
AOC ratio.
These comparisons do not demonstrate that FCDCs pay excessive prices for their
intercompany purchases -- especially in the wholesale trade sector -- but they do leave the
question of transfer pricing open for further investigation. IRS statistical data, however, cannot
resolve this issue. Intercompany pricing issues can only be fairly addressed through a careful
examination of specific company data. Direct comparisons of foreign-owned firms with other
companies that are truly comparable are needed to resolve transfer-pricing controversies.
There may be a number of reasons why FCDCs have higher ratios of costs of sales to
receipts. For example, FCDCs in the wholesale trade group may typically be little more than
U.S. sales offices for their parents, with relatively few employees, assets, and other expenses.
AOC wholesalers, on the other hand, are more likely to be independent businesses.
This distinction is, in part, the result of the way in which industries are identified. The
industry code is assigned to the activity that generates the largest amount of receipts within the
consolidated group. Wholesale trade AOC tax returns are filed by companies where wholesale
trade is the dominant activity of the consolidated group, while FCDC wholesalers may be wholly-
owned subsidiaries of foreign manufacturing parents. Because FCDCs are not consolidated with
the foreign parent's tax return, only the wholesaling activity is identified on the U.S. tax return.
In contrast, wholesaling activities included in the consolidated tax return of U.S. manufacturers
are included in the manufacturing sector data. To the extent substantive differences in the nature
of the business activity are responsible for different relationships between the cost of sales and
receipts, FCDC wholesalers could have adequate operating profit even if their gross profit
margins are low.
50
TABLE 21
COMPARISON OF FCDC AND AOC COSTS OF SALES
AS A SHARE OF TOTAL RECEIPTS
BY MAJOR INDUSTRY
1983
1984
1985
1986
1987
1988
Average
Total
FCDC
.696
.699
.696
.683
.701
.693
.695
AOC
.597
.587
.571
.556
.563
.553
.571
Manufacturing
FCDC
.627
.620
.627
.644
.649
.657
.637
AOC
.659
.650
.635
.618
.645
.624
.639
Wholesale & retail trade
FCDC
.860
.850
.848
.830
.839
.832
.843
AOC
.761
.753
.745
.735
.735
.731
.743
Finance, insurance & real estate
FCDC
.331
.381
.283
.337
.366
.350
.341
AOC
.186
.200
.198
.231
.291
.284
.232
All other
FCDC
.590
.607
.611
.570
.563
.547
.581
AOC
.532
.525
.514
.489
.475
.480
.503
51
TABLE 22
1987 COSTS OF SALES AND OPERATIONS
AS A PERCENT OF BUSINESS RECEIPTS
BY MAJOR INDUSTRAIL SECTOR AND GROUP
FCDC
AOC
All Industries
76.1
65.3
Manufacturing
69.4
68.9
Petroleum
74.5
73.7
Chemicals
57.2
60.8
Food
71.3
70.0
Electrical equipment
70.8
64.4
All other manufacturing
72.3
69.6
Wholesale & retail trade
85.8
75.8
Wholesale trade
88.7
82.2
Retail trade
71.7
70.7
Finance, insurance & real estate
63.0
58.0
All other industries
61.3
50.8
Impact of Exchange Rates
The volatility of exchange rates appears to affect the cost of sales comparison between
FCDCs and AOCs. When FCDCs purchase goods with foreign currencies, their cost of sales will
rise when the dollar falls in value, and will decrease when the dollar rises in value. A firm's net
income or loss will depend upon the extent and the speed with which cost increases can be
passed on to the ultimate customer.
In 1986 the value of the dollar fell dramatically relative to other major currencies. The
average annual value of the dollar relative to the Yen, fell by 29 percent; it fell by 26 percent
relative to the German Mark; and by 12 percent relative to the U.K. Pound. On a trade-weighted
basis the value of the dollar fell by 22 percent in 1986. 16 A further significant decline occurred
in 1987, when the trade-weighted value of the dollar fell nearly 14 percent.
16 Economic Report of the President, 1992, p. 420.
52
The magnitude of these reductions in the value of the dollar likely prevented some firms
from fully passing their higher costs through to customers. As a result, cost of sales as a fraction
of total receipts may have increased, and gross profit per dollar of receipts may have declined,
driving down FCDC net income and tax liability. While exchange rates do fluctuate over time,
the change that occurred in 1986 was particularly large. 17
In reviewing available IRS data, there appears to be a relationship between the trade-
weighted value of the dollar and FCDCs' performance, although the relationship does vary both
by year and by industry.¹⁸
The relationship between exchange rates and profitability is measured by comparing gross
profit margins with the trade-weighted value of the dollar. The gross profit margin equals the
excess of total receipts over the cost of sales, divided by total receipts. This measure excludes
the effects of interest, depreciation, and all the other costs of operating the business. To the
extent FCDCs purchase a substantial part of what they sell from foreign sources, the gross profit
margin should reflect the impact of exchange rates on profitability.
Exchange rates are measured using the trade-weighted value of the dollar. The value of
the dollar is measured against major foreign currencies and then weighted by the volume of trade
between the U.S. and these countries. The Board of Governors of the Federal Reserve System
prepares these data and converts them into an index with a base year of 1973.
Figure 9 shows a comparison of the gross profit margin for the FCDC manufacturing
sector with the exchange rate index over the 1983 through 1988 period. The relationship appears
to be quite strong with annual changes in the gross profit margin closely tracking the change in
the value of the dollar. This result may explain a significant share of the decline in net income
and tax liability reported by the FCDC manufacturing sector in 1986.
The relationship between profitability and exchange rates is not as strong in the FCDC
finance, insurance, and real estate sector. As shown in Figure 10, over the 6-year period, the
relationship diverged in 1984 and 1988. Nevertheless, it is clear that gross profit margins
generally tend to track exchange rates over the period. This relationship may have contributed
the low net income reported in 1986 and 1987, although it does not explain the increase in net
income reported in 1988.
17 The following series shows the annual percentage change in the average trade-weighted value of the dollar
over the 1983 through 1991 period:
1983
1984
1985
1986
1987
1988
1989
1990
1991
Percent change
7.5
10.3
3.5
-21.5
-13.6
-4.3
6.4
-9.6
0.8
18 The strongest relationship appears when a 2-year moving average of the trade-weighted exchange rate is
calculated, and then lagged one year.
53
Figure 9:
Figure 10:
Relationship between Gross Margin
Relationship between Gross Margin
and Exchange Rates: FCDC Manufacturing
and Exchange Rates: FCDC Finance
38.5%
150
72.0%
150
38.0%
71.0%
-140
70.0%
140
37.5%
37.0%
130
Exchange Rate Index (1973=100)
69.0%
130
Gross Profit Morgin
36.5%
35.0%
Gross Profit Margin
65.0%
67.0%
120
-120
66.0%
65.0%
35.5%
110
110
64.0%
Exchange Rate Index (1973=100)
35.0%
100
53.0%
100
34.5%
62.0%
34.0%
90
61.0%
90
1983
1984
1985
1986
1987
1988
1983
1964
1985
1986
1987
1988
Gross margin
Exchange rate
Gross margin
Exchange rate
Profitability in the FCDC wholesale and
retail trade sector shows a weaker relationship
Figure 11:
with exchange rates. There is a general similarity
Relationship between Gross Margin and
between the trend in gross profit margins and
Exchange Rates: Trade
exchange rates, but it is neither as clear or as
consistent as in other sectors. This is somewhat
17.5%
150
17.0%
surprising because wholesale and retail trade is
-140
16.5%
the FCDC sector most likely to be affected by
130
changes in the exchange rate with many of these
Gross Profil Margin
18.0%
15.5%
120
firms importing goods for resale. Of the three
15.0%
sectors, trade has the highest proportion of
-110
Exchange Rate Index (1973=100)
14.5%
imports to costs of sales, making costs of sales
100
14.0%
more sensitive to exchange rate movements.
13.5%
90
1983
1984
1985
1986
1987
1988
Gross margin
Exchange rate
Exch. rate logged
As shown in Figure 11, the relationship is
somewhat stronger if a 1-year lag is used. It
appears to take a year, on average, for exchange
rate shifts to have the anticipated effects on the trade sector's cost of sales. Such a lag is
appropriate to the extent the trade sector tends to use longer-term contracts that lock in prices
when arranging purchases from foreign suppliers.
This means the severe depreciation of the dollar in 1986 did not adversely affect
wholesale and retail trade gross profit margins until 1987. Even though there may be a general
relationship between exchange rates and gross profit margins in the trade sector, this relationship
does not explain why the FCDC wholesale and retail trade sector had lower net income and paid
less tax in 1986.
54
Overall, it is clear that exchange rates do affect FCDC gross profit margins -- although
to differing degrees in different industries. Other costs of operating the business also impact the
net income of FCDCs, but exchange rates provide a partial explanation for significant year-to-
year fluctuations in profitability and tax liability.
55
V. CONCLUSIONS
The most recent Internal Revenue Service data on taxes paid by FCDCs raise a number
of complex issues that cannot be fully resolved by these data. Certain measures show FCDCs
to be paying a reasonable amount of federal income tax, while other measures indicate that some
FCDCs may be paying less than their "fair share" of taxes. FCDC effective tax rates tend to be
roughly comparable to AOC effective rates when averaged over the last 6 years, yet most
measures based of pretax profitability show surprisingly low rates of return.
Some concepts have the potential to be misleading. For example, comparing FCDC and
AOC pretax rates of return without recognizing differences in the mix of industries and-in the
means of financing investments are not likely to be accurate and may be misinformative. To
recognize these limitations we have explored alternative concepts, such as measures of the pretax
return to both lenders and equityholders, that show more similar pretax returns. We have also
focused on comparisons within industries.
Even when using measures that are conceptually more accurate, we still find that pretax
returns are somewhat lower for FCDCs than AOCs. Average effective tax rates over the period
studied, depending on the tax base chosen, range from being essentially the same as AOC
effective rates, to somewhat below AOC rates. In exploring the reasons for these results we have
identified a number of possible explanations, including those related to the rapid growth in FCDC
investment in the U.S., intercompany transfer pricing, and the impact of foreign exchange rates.
IRS statistical data are very useful in gaining an understanding of relative tax burdens;
however, they cannot fully answer the more fundamental policy questions. These issues require
a more complete understanding the structural differences between FCDCs and AOCs. These
structural differences lessen the comparability of the data and complicate the analysis. For
example, FCDC wholesale trade subsidiaries often perform materially different functions from
AOC wholesale trade companies. Because income tax returns do not include any detailed
description of the functions or activities a company performs, IRS statistical data cannot be
assumed to provide information on the comparability of different companies, even within the
same industry.
In conclusion, we find analyses of pretax returns and effective tax rates are useful in
developing a perspective on relative profitability and tax burdens; however, these data should be
only one element of the policy analysis. A more complete picture of these issues requires more
accurate measures of the true comparability of the firms being analyzed.
56
MYTHS ABOUT THE TAXES PAID BY
FOREIGN-OWNED COMPANIES
Myth #1: Foreign-owned companies are not paying their fair
share of taxes.
FACT: According to IRS Statistics of Income (SOI), foreign-owned companies
paid federal income taxes at essentially the same rates as domestically-owned
companies.
The most recent IRS data for the period 1983-1988 reveal that the average
effective tax rate as a percentage of net worth for foreign owned companies was
2.1 percent. The average, effective tax rate for domestically-owned companies for
the same period was 2.2 percent. These percentages are calculated by dividing the
total federal income taxes paid by each group by the net worth of all the
companies in the group (including those companies which did not pay any taxes
because they had no income for the year). The year by year effective tax rates on
net worth are as follows:
YEAR-BY-YEAR COMPARISONS FOR
EFFECTIVE TAX RATES BASED UPON NET
WORTH
Foreign-owned
All Other
Year
Companies
U.S. Companies
1988
2.0 percent
2.4 percent
1987
1.8 percent
2.5 percent
1986
1.4 percent
2.1 percent
1985
2.0 percent
1.9 percent
1984
2.9 percent
2.2 percent
1983
2.5 percent
2.0 percent
Comparing effective tax rates using total assets instead of net worth over the same
time period reveals that the foreign-owned and domestically owned companies paid
identical effective tax rates of 0.6 percent. Calculating an effective tax rate based
upon total receipts (i.e., total taxes paid divided by total receipts), foreign-owned
corporations paid a slightly lower average rate of 0.7 percent, while other U.S.
corporations paid an average effective tax rate of 0.9 percent. Comparing effective
tax rates based upon assets or total receipts is less accurate because such
comparisons do not take into consideration the differences in the level of debt of
the companies. Tax rates based upon net worth are considered a more accurate
comparison.
Myth #2: In 1986, foreign-owned companies doing business in
the U.S. were entitled to a tax refund (i.e., a "negative tax
liability") of $1 billion.
FACT: Foreign-owned companies had net losses of $1.5 billion in 1986 but
paid, nevertheless, $3 billion in federal income taxes. Even though many foreign-
owned companies lost money in 1986, there were enough foreign-owned
companies with income to pay $3 billion in taxes. The most recent available IRS
Statistics of Income (SOI) data show that foreign-owned companies have paid the
following aggregate amounts of federal income tax for each of the years listed.
AGGREGATE FEDERAL INCOME TAX LIABILITY
OF FOREIGN-OWNED COMPANIES
1988 - $5.8 billion
1987 - $4.6 billion
1986 - $3.0 billion
1985 - $3.6 billion
1984 - $4.5 billion
1983 - $1.8 billion
The 1986 net loss figure has been misstated consistently in the press and in some
political speeches as a "negative tax liability" or refund of moneys from the U.S.
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government. As can be seen from the following table of SOI data listing the total
income of foreign-owned companies, 1986 was the only year in recent IRS
statistics in which the foreign-owned companies as a group incurred a net loss.
AGGREGATE NET INCOME
OF FOREIGN-OWNED COMPANIES
1988 - $11.2 billion
1987 - $5.6 billion
1986 - ($1.5 billion)
1985 - $3.0 billion
1984 - $4.5 billion
1983 - $1.8 billion
Myth #3: Foreign-owned companies are avoiding paying taxes
by using a "scheme" called "transfer pricing" to reduce their
income in the U.S.
FACT: Transfer pricing is not a tax avoidance "scheme" or device. The term
"transfer pricing" refers to the price for a product, service, or intangible that a
corporation charges to an affiliated corporation. All multinational companies,
domestic and foreign, must establish transfer prices for international
transactions.
Income tax rates of major industrial nations are similar or, in many cases, higher
than U.S. income tax rates. Income of a multinational enterprise that is not
reported in one nation must be reported in another. Transfer pricing determines
the portion of income arising from an international transaction that is taxed by
each nation involved in the transaction. Unless one of the concerned jurisdictions
is a "tax haven," i.e., one with markedly lower tax rates, there is little advantage to
shifting income artificially from one jurisdiction to another. It should be noted, for
example, that both Japan and Germany have higher corporate income tax rates than
the U.S.
Since members of a multinational group are located in different nations, the tax
authorities of each nation concerned are extremely anxious to ensure that the
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transfer price is "arm's length" -- that is, the same price at which the seller would
have sold the same product to an unrelated buyer.
If, for example, a U.S.-owned company manufactures computers in the U.S. and
sells them to its foreign subsidiary to market abroad, both the parent and its
subsidiary may recognize some portion of the total profit from the final sale to
consumers. The portion that is reportable in each country is determined by the
"transfer price" between parent and subsidiary. If that price is high, the subsidiary
has less profit, but the parent has more. If the price is low, the parent has less
profit but the subsidiary has more. The total income from the computer sales will
be taxed, but the split between U.S. and the foreign country may depend on the
transfer price. All tax authorities have the power to challenge transfer prices and
regularly do so, frequently disagreeing with one another as to the correct income
split. These disagreements must be resolved among the taxing authorities
themselves in proceedings referred to as "competent authority".
Myth #4: Additional laws are needed to enforce transfer pricing
regulations and prevent abuse.
Fact: In 1989 and 1990, Congress passed legislation to foster compliance with
transfer pricing rules. New reporting and record-keeping legislation was enacted,
providing much additional information from foreign-owned companies and
imposing penalties on companies that fail to comply. Enforcement tools given to
the IRS include a designated summons procedure (for those companies that refuse
to provide requested information in the hope that the statute of limitations will
expire) and expedited availability of outside experts.
In April 1992 testimony before a House Ways & Means Subcommittee, IRS
Commissioner Shirley Peterson stated that the legislation [passed in 1989 and
1990] is responsive to the problems identified in 1990 and is increasing
compliance..." At the same hearing, Alan J. Wilensky, Deputy Assistant Secretary
(Tax Policy) of the U.S. Treasury Department, urg[ed] that these new measures
be given adequate time to work before introduction of major new initiatives "
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Myth #5: Foreign-owned companies manipulate transfer prices
to report lower U.S. taxable income than domestically-owned
companies.
FACT: While foreign-owned companies have generally earned lower rates of
return on their assets, sales, and net worth than domestically-owned companies,
the disparity does not result from transfer pricing abuse.
Both the IRS Commissioner and the Deputy Assistant Secretary of the Treasury
recently explained the difference in levels of profitability for foreign-owned firms
in testimony before the Oversight Subcommittee of the House Committee on Ways
and Means on April 9, 1992. According to their testimony, "as much as 50
percent of the differential" in profitability between foreign-owned and
domestically-owned companies is explained by nontax factors such as start up
costs or currency fluctuations. Over the period 1985-1988, foreign investment in
the U.S. increased three times faster than domestic investment. This high growth
rate, coupled with historic cost accounting methods used throughout the U.S.,
distorted comparisons between the two groups. Older investments show a higher
rate of return than new ones which are valued at closer to current market value. In
addition, start-up losses of the new investments decreased the actual rates of return.
The IRS Commissioner went on to state that there is "no certainty that the
remainder (of the difference in rates of return) is due to transfer pricing abuse or
that the comparison of measures of profitability is valid in this aggregate form."
Myth #6: There is $30 billion in taxes going uncollected
annually from foreign-owned companies who are inflating their
transfer prices and reporting too little profit in the U.S.
FACT: This is a total fabrication that has no foundation in fact and is not
supported by the U.S. Treasury.
The IRS Commissioner specifically discussed this $30 billion myth in her
testimony on April 9, 1992 and stated unequivocally that such an estimate could
not be substantiated. She further stated that if the unexplained differential in the
profitability of foreign-owned companies, described above, were due wholly to
transfer pricing abuse (and she specifically states that there is no certainty that this
is the case) the "tax gap" would be "about $3 billion," not $30 billion. The
Commissioner went on to state that although transfer pricing problems do exist,
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they are not presently quantifiable and the problems exist equally for foreign-
owned and U.S.-based multinational companies.
Myth #7: Foreign-owned companies which sell large amounts of
popular products, such as automobiles and electronics, should
pay more taxes.
FACT: All U.S. corporations pay taxes based upon their net taxable income,
i.e., their profits. A company that has large sales and many assets is not
automatically profitable. An example is the "Big Three" U.S. automobile
companies which apparently have not reported taxable profits for years. It is
entirely wrong to assume that any company, foreign or domestic, should pay
income taxes based upon a percentage of its sales or assets irrespective of profits.
This concept is that of a "wealth tax" practiced in only a few countries, notably
India, which have a small gross national product in comparison to government
expenditures. It is not a formula that will promote prosperity. The $30 billion
myth discussed above is the result of assumptions that foreign-owned companies
should be reporting income based upon a certain percentage of their assets or
receipts. In testimony before a House Ways & Means Subcommittee, IRS
Commissioner Peterson noted that 59 percent of U.S.-owned companies report no
taxable income.
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