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Selected Terms and Concepts
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Active versus inactive Controlled Foreign Corporations.—In general, a foreign corporation was considered “active” if earnings and profits, income taxes, receipts, expenses, distributions of E&P, or certain transactions between the foreign corporation and its subsidiaries or majority shareholder were reported on Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. The filing of Form 5471 was required even if a CFC was dormant or inactive for Tax Year 2008. Only data from active CFCs are included in the statistics in this article, unless otherwise noted.
Average tax rate.—For purposes of this article, the average tax rate is defined as income tax divided by E&P (less deficit) before income taxes.
Controlled Foreign Corporation.—Section 957 of the Internal Revenue Code defines a foreign corporation as being “controlled” if more than 50 percent of the total combined voting power of all classes of stock of such corporation entitled to vote, or more than 50 percent of the value of all its outstanding stock, is owned (directly, indirectly, or constructively) by U.S. shareholders on any day during the foreign corporation’s tax year. A U.S. shareholder for purposes of determining control is defined as a “U.S. person” owning 10 percent or more of the foreign corporation’s voting stock. For purposes of these statistics, a foreign corporation was “controlled” only if a single U.S. corporation satisfied the ownership requirements for an uninterrupted period of at least 30 days. These are the only foreign corporations for which complete Form 5471 filings are required. U.S corporations may also control a CFC through a partnership where the U.S. corporation is the controlling partner. To the extent possible, these CFCs have also been included in these statistics.
Country of incorporation.—The country of incorporation is the country under whose laws the CFC is legally created. The CFC’s country of incorporation is not necessarily the principal place of business. For Tax Year 2008, 1,627 CFCs (1.9 percent) reported a principal place of business that differed from the reported country of incorporation. Tables 2 and 3 provide data by country of incorporation; data by principal place of business are not included in these statistics.
Current earnings and profits.—“Current earnings and profits” represent the difference between total earnings and profits of the foreign corporation at the end of the current year (before reduction by dividends paid during the year) and the accumulated earnings and profits of the corporation at the beginning of the year. Although current earnings and profits typically are an after-tax measure of profits, they are shown in these statistics both before and after taxes. “Earnings and profits” is a tax concept referring to the economic capacity of a corporation to make a distribution to shareholders that is not a return on capital. The term “earnings and profits” is not specifically defined in the Internal Revenue Code. In those instances where current earnings and profits were not reported for the foreign corporation, net income per books was used in place of missing earnings and profits.
Distributions out of earnings and profits.—A distribution comes first from current earnings and profits and then from accumulated earnings and profits.
Income taxes.—CFCs reported income, war profits, and excess profits taxes paid or accrued to any foreign country or U.S. Possession as income tax for their annual accounting period.
OPEC countries.—The member countries of the Organization of Petroleum Exporting Countries for Tax Year 2008 were: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.
Previously taxed earnings and profits.—This includes any earnings and profit amounts that were subject to U.S. tax in the current year or in a prior year, but not distributed. Previously taxed earnings and profits include amounts related to Subpart F income (see definition below), earnings related to investments in certain U.S property, previously excluded Subpart F income withdrawn from qualified investments, previously excluded export trade income withdrawn from investment in export trade assets, factoring income, and earnings invested in excess passive assets.
Subpart F income.—Internal Revenue Code sections 951 and 952 stipulate specific cases in which earnings and profits are deemed to have been paid by a CFC to a U.S. shareholder. Such income is subject to U.S. tax whether or not it is repatriated to U.S. shareholders in the form of an actual dividend. Internal Revenue Code section 951 requires that U.S. shareholders include in their gross incomes certain undistributed profits of foreign corporations controlled by U.S. shareholders. Subpart F income from a CFC includes certain insurance income of U.S. risks, “foreign base company” income, international boycott participation income, bribes and other illegal payments to foreign government officials, and income from any country which the United States does not recognize or with which it has severed relations, or which repeatedly provides support for acts of international terrorism.
Total receipts.—Total receipts equal business receipts (gross receipts from sales and operations) plus income from investment activity. In the statistics reported prior to 1990, “business receipts” were used to describe the larger of “gross receipts from sales and operations” and “total income”. The latter is a tax return concept used to describe the sum of business receipts less cost of sales and operations (i.e., gross profit), plus income (less loss) from investments.
U.S. person.—A U.S. person can be a U.S. citizen or resident individual, a domestic partnership, a domestic corporation, or an estate or trust (other than a foreign estate or trust whose income from sources outside the United States is not includable in the beneficiaries’ gross income).
Data Sources and Limitations
The statistics presented in this article are based on information collected from corporate income tax returns (Form(s) 1120) with accounting periods ending July 2008 through June 2009 and their attached Form(s) 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. A U.S. corporation is required by Internal Revenue Service regulations to submit a Form 5471 for any Controlled Foreign Corporation (CFC) with an accounting period ending with or within the U.S. parent’s accounting period. Thus, the accounting periods for Tax Year 2008 CFCs may have ended as early as July 2007 and as late as June 2009. However, most CFC activity occurred in Calendar Year 2008. These statistics report data for active foreign corporations controlled by U.S. corporations.
Coefficient of variation (CV) tables are not provided because these data are not subject to significant sampling error. For example, CFCs sampled at a 100-percent rate accounted for 96.6 percent of the sampled returns and nearly 88.2 percent of the estimated population. Furthermore, CFCs sampled at a 100-percent rate accounted for 99.9 percent of the total ending assets for all CFCs. However, these data may be subject to nonsampling error.
Several limitations apply when making comparisons to prior-year statistics. First, the data in this article are based upon a sample of U.S. corporations. For Tax Year 2008, this sample generally includes all CFCs controlled by U.S. corporations with $50 million or more in total assets or $5.0 million or more in “proceeds” and all CFCs filed by U.S. corporations with less than $50 million in the SOI corporate sample. The sample for the Tax Year 2008 CFC statistics is far more inclusive than studies conducted before Tax Year 2004, which included only the 7,500 largest CFCs controlled by U.S. corporations with $500 million or more in total assets.
Second, statistics previously published by Statistics of Income for tax years before 1986 were for all CFCs controlled by U.S. corporations with total assets of $250 million or more, and were not limited to the 7,500 largest active CFCs controlled by U.S. corporations with total assets of $500 million or more. Therefore, the statistics for these years include smaller and also inactive CFCs. For this reason, comparisons between statistics on the largest CFCs and statistics for years before 1986 should be made with caution.
Finally, fluctuations in exchange rates can have significant effects on the reported statistics. Financial statistics that are translated using current (as opposed to historical) rates of exchange can be distorted by large exchange rate fluctuations. For example, the weakening of the U.S. dollar against many currencies from Tax Year 2002 to Tax Year 2004 certainly contributed to the large increases in some of the statistics over that period. The U.S. dollar generally fluctuated far less against most major currencies between Tax Year 2006 and Tax Year 2008 than it had between Tax Year 2002 and Tax Year 2004.
Caution should also be used when comparing data by industrial groupings. Beginning with Tax Year 1998, CFCs were classified under the North American Industry Classification System (NAICS), which differs from the Standard Industrial Classification (SIC) system used before Tax Year 1998. While most industries were not affected by the implementation of NAICS, the groupings of some economic activities were changed. The most significant change was the movement of the management of companies and enterprises sector from finance, insurance, and real estate under the SIC system to the services sector under NAICS. Furthermore, CFCs were classified by industry based on their principal business activity as reported on Form 5471. However, assets, receipts, and profits may have also been related to secondary business activities. It is not possible to measure the extent of these secondary business activities due to these activities not being detailed on Form 5471.
The data reported on Form 5471 generally represent the financial information of each foreign corporation and not the amounts attributable to the U.S. shareholder filing the Form 5471. Data reported on Form 5471, Schedule I are the exception to this general rule. The Subpart F income and dividends received reported on Schedule I represent the amount of foreign dividends taxable to the U.S. shareholder filing the Form 5471.
U.S. shareholders do not prepare consolidated Form 5471 filings as they typically do for Forms 1120 that are filed for domestic corporations. U.S. shareholders file a separate Form 5471 for each foreign corporation for which this form is required. As a result, the Form 5471 data presented in this article contain inherent double counting to the extent that intercompany transactions occur.
The foreign disregarded entity data cited in this article are reported on Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities. The FDE data in this article pertain only to active FDEs that are owned by controlled foreign corporations. Data attributable to inactive FDEs and FDEs that are owned by foreign partnerships or U.S. entities are excluded from the statistics in this article. The sampling procedures used for Forms 8858 mirror those described above for Forms 5471.
As mentioned above, the tax owners of FDEs are treated as owning all FDE assets and liabilities. Consequently, CFCs that are tax owners of FDEs include the earnings and profits of their FDEs in their current E&P. To the extent that FDEs are incorporated in different countries than their tax owners, the geographic statistics for CFCs presented in this article may misrepresent, to some degree, the true geographic source of these earnings and profits. For Tax Year 2008, 65.6 percent of FDEs owned by CFCs were incorporated in a different country than their tax owner. These FDEs accounted for 48.2 percent of the assets and 50.0 percent of the E&P (less deficit) after income taxes reported by FDEs with tax owners that are CFCs. Figure F presents selected geographic data for FDEs incorporated in countries different than their tax owners. For Tax Year 2008, $115.2 billion of E&P (less deficit) after income taxes reported by CFCs were earned by FDEs outside of the CFCs’ country of incorporation. Table 4 shows CFC data attributable to FDEs by FDE country within CFC country.
The industrial data presented in this article also may be somewhat distorted because FDEs may have different industry codes than the CFCs that own them. Table 5 shows CFC data attributable to FDEs by FDE industrial sector within CFC industrial sector. For Tax Year 2008, 46.2 percent of FDEs operated in a different industrial sector than their CFC owners. These FDEs accounted for 38.4 percent of the assets and 39.0 percent of the E&P (less deficit) after income taxes reported by all CFC-owned foreign disregarded entities. For Tax Year 2008, 37.2 percent of the E&P (less deficit) after income taxes for CFCs in the distribution and transportation of goods sector were attributable to FDEs operating in a different industrial sector. Similarly, 19.4 percent and 15.7 percent of the E&P (less deficit) after income taxes reported by CFCs in the goods production and services sectors were attributable to FDEs classified in a different industrial sector.
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