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Controlled foreign corporations, 2004.

For Tax Year 2004, foreign corporations controlled by U.S. multinational corporations held $9.2 trillion in assets and reported receipts of $3.8 trillion. These controlled foreign corporations (CFCs) paid $69.3 billion in income taxes on $362.2 billion of earnings and profits (E&P) before income taxes.

Approximately 79.0 percent, or 58,992, of CFCs for Tax Year 2004 were concentrated in three major industrial sectors: (1) goods production; (2) distribution and transportation of goods; and (3) services. These three industrial sectors accounted for 84.7 percent of total receipts ($3.2 trillion), 72.6 percent of E&P (less deficit) before income taxes ($263.1 billion), and 67.1 percent of income taxes ($46.5 billion). Foreign corporations in the finance, insurance, real estate, and rental and leasing sector held 42.5 percent of total CFC assets ($3.9 trillion), while generating only 9.4 percent of total CFC receipts ($356.0 billion) and 16.0 percent of total CFC E&P (less deficit) before income taxes ($57.9 billion).

For Tax Year 2004, 74,676 CFCs were incorporated in 185 different countries. (1) Over 45 percent, or 33,719, of these CFCs were incorporated in Europe. Slightly more than 91 percent of these European CFCs were located in European Union countries. Latin America and Asia domiciled 14.3 percent and 19.2 percent of all CFCs, respectively.

Controlled Foreign Corporations

Direct foreign investment by U.S. persons may take several forms, including foreign branches, partnerships, and separate corporations. This article deals with the use of the corporation as a vehicle for direct foreign investment. For U.S. income tax purposes, a foreign corporation is "controlled" if U.S. shareholders own more than 50 percent of its outstanding voting stock, or more than 50 percent of the value of all its outstanding stock (directly, indirectly, or constructively) on any day during the foreign corporation's tax year. A "noncontrolled" foreign corporation is any foreign corporation that fails to meet either of the above requirements for control. For purposes of determining control, a U.S. shareholder is defined as a U.S. person who owns 10 percent or more of the foreign corporation's total combined voting stock. (2) However, for Statistics of Income purposes, a foreign corporation is controlled only if one U.S. corporation satisfies either of the above 50-percent ownership requirements for an uninterrupted period of at least 30 days during the foreign corporation's tax year. (3) For Tax Year 2004, there were 10,939 U.S. corporations that held such control over at least one foreign corporation.

In general, the income of a CFC is not taxable to the U.S. shareholders until repatriated in the form of a dividend. Prior to 1962, U.S. taxpayers could defer U.S. tax on such income indefinitely by accumulating this income in a CFC. To address the potential for tax avoidance, Congress enacted the Subpart F provisions of the Internal Revenue Code in 1962. (4) These provisions require certain items of income to be treated as dividends deemed paid to the U.S. shareholders and, therefore, subject to U.S. taxation. Currently, a U.S. shareholder of a CFC may be required to include in gross income the shareholder's ratable share of the CFC's: (1) Subpart F income (see Subpart F income in the Explanation of Selected Terms section of this article); (2) earnings invested in U.S. property; (3) previously excluded Subpart F income withdrawn from "qualified investments" in less developed countries and in "foreign base company" shipping operations; (4) previously excluded export trade income withdrawn from investment in export trade assets; and (5) factoring income (income derived from the acquisition of a trade or service receivable).

CFCs by Industrial Sector

For Tax Year 2004, goods producers accounted for 20.2 percent of end-of-year assets and 43.0 percent of total receipts (see Figure A). These CFCs earned 34.6 percent of E&P (less deficit) before income taxes for all corporate-owned CFCs. Goods producers paid $22.3 billion of foreign taxes, representing 32.2 percent of all taxes paid by CFCs. Chemical, computer and electronic products, petroleum and coal products, and transportation equipment manufacturers collectively reported 61.4 percent of end-of-year assets, 61.0 percent of total receipts, and 58.0 percent of E&P (less deficits) before income taxes for all goods producers. Chemical manufacturers alone generated 32.7 percent of E&P (less deficit) before income taxes and 23.9 percent of foreign income taxes reported by all goods producers.

For Tax Year 2004, CFCs engaged in finance, insurance, real estate, and rental and leasing held 42.5 percent of all assets while generating only 9.4 percent of total receipts and 16.0 percent of E&P (less deficit) before income taxes reported by all CFCs. More than $3.3 trillion, or 85.3 percent, of the assets reported for this industrial sector were attributable to finance corporations. These finance corporations amassed 65.8 percent of receipts and 70.0 percent of E&P (less deficit) before income taxes for this industrial sector. Insurance subsidiaries reported nearly $0.5 trillion in assets and nearly $0.1 trillion in receipts, representing 12.0 percent and 27.7 percent of total assets and total receipts for this sector, respectively.

There were more CFCs in the services sector than any other industrial sector. More than 31 percent of all CFCs were classified as service corporations. Service providers reported nearly $2.2 trillion in assets and more than $0.6 trillion in receipts. However, excluding management and holding companies, CFCs classified in the services sector reported only $0.4 trillion in assets and $0.3 trillion in receipts.

Geographic Distribution of CFCs

Figure B shows the geographic distribution of CFCs by major region of incorporation. For Tax Year 2004, Europe remained the dominant region for CFC activity. Europe alone accounted for 62.2 percent of end-of-year assets, 54.3 percent of total receipts, and 49.8 percent of E&P (less deficit) before income taxes for all CFCs. European CFCs paid 46.9 percent of the $69.3 billion of foreign income taxes reported by all CFCs for Tax Year 2004. Within Europe, most CFC activity was concentrated in European Union (EU) countries. More than 91 percent of European CFCs were incorporated in EU countries. These CFCs reported 92.8 percent of ending assets, 90.6 percent of total receipts, and 86.7 percent of E&P (less deficit) before income taxes for all European CFCs. More than 47 percent of European CFCs not incorporated in EU countries were incorporated in Switzerland. These Swiss CFCs accounted for 79.6 percent of ending assets, 81.7 percent of receipts, and 72.4 percent of E&P (less deficit) before income taxes for non-EU European CFCs.

Other Western Hemisphere countries (which includes Canada) and Asia also were significant regions of CFC activity. CFCs conducting business in the Other Western Hemisphere countries held 19.5 percent of all CFC end-of-year assets and reported 18.4 percent of all CFC receipts. These CFCs reported 24.0 percent of E&P (less deficit) before income taxes and paid 22.7 percent of foreign income taxes paid by all CFCs. Within the Other Western Hemisphere region, Canada was home to most CFC activity. Canadian CFCs generated 60.2 percent of total receipts, 46.7 percent of E&P (less deficit) before income taxes, and 55.5 percent of foreign income taxes for CFCs in this region. With 6,559 CFCs, Canada had more CFCs than any other country except the United Kingdom (8,227). CFCs in Asia reported 9.5 percent of ending assets, 15.1 percent of total receipts, and 13.6 percent of E&P (less deficit) before income taxes for all CFCs. More CFC economic activity occurred in Japan than any other Asian country. Japanese CFCs accounted for 44.9 percent of ending assets, 34.7 percent of total receipts, and 30.7 percent of E&P (less deficit) before income taxes reported by all Asian CFCs. For Tax Year 2004, there were almost as many CFCs incorporated in China (2,264) as Japan (2,265). In fact, for Tax Year 2004, only 8 countries had more CFCs than China. (5)

The two geographic groupings with the smallest CFC representation were Africa and U.S. Possessions (including Puerto Rico). Only 2.7 percent of all CFCs were incorporated in these two regions. Collectively, these two regions accounted for less than 1.0 percent of end-of-year assets, 1.4 percent of total receipts, and 1.7 percent of E&P (less deficit) before income taxes for all CFCs. Within Africa, most CFC activity was concentrated in four countries. South Africa, Liberia, Mauritius, and Egypt collectively accounted for 76.7 percent of ending assets, 75.4 percent of total receipts, and 94.2 percent of E&P (less deficit) before income taxes for all African CFCs. South Africa alone had 41.2 percent of African CFCs. South African CFCs reported 35.2 percent of ending assets, 54.4 percent of total receipts, and 58.9 percent of E&P (less deficit) before income taxes reported by all African CFCs. Most CFC activity in the U.S. possessions is attributable to Puerto Rico. Puerto Rican CFCs held 89.3 percent of ending assets and generated 90.2 percent of total receipts reported by all CFCs operating in the U.S. possessions. For Tax Year 2004, the average tax rate for CFCs incorporated in Puerto Rico and U.S. Possessions was 8.7 percent, compared to the average tax rate of 19.2 percent for all other CFCs (see Average Tax Rate in the Explanation of Selected Terms section of this article). CFCs incorporated in African countries had the highest average tax rate of any region at 29.7 percent.

Profitability

For purposes of this article, two measures are used to assess pretax profitability for CFCs: rate of return on assets and profit margin. Rate of return on assets is defined as current E&P (less deficit) before income taxes divided by end-of-year assets. Profit margin is defined as current E&P (less deficit) before income taxes divided by total receipts.

For Tax Year 2004, profitability measures varied among the six different major industrial sectors. CFCs engaged in raw materials and energy production reported both the highest rate of return on assets (10.2 percent ) and the highest profit margin (26.1 percent). The high profitability of this sector is attributable to CFCs in the mining subsector. The return on assets and profit margin for mining CFCs were 11.9 percent and 33.6 percent, respectively. CFCs in the utilities subsector reported a 6.5-percent return on assets and a 13.3-percent profit margin, while CFCs engaged in agriculture, forestry, and fishing reported only a 3.8-percent return on assets and an 8.5-percent profit margin.

CFCs engaged in the distribution and transportation of goods sector reported the second highest return on assets percentage (8.5 percent). These CFCs, however, also reported the lowest profit margin of any sector (5.4 percent). Conversely, CFCs in the finance, insurance, real estate, and rental and leasing sector reported the second highest profit margin (16.3 percent), while reporting the lowest return on assets (1.5 percent).

Distributions of earnings and Profits

For Tax Year 2004, CFCs distributed $135.2 billion of E&P to U.S. and foreign shareholders. Nearly 68 percent of distributions of E&P were from not previously taxed E&P ($91.4 billion), while the remainder was distributed from previously taxed E&P ($43.8 billion). More than 34 percent of CFC distributions ($46.6 billion) represented taxable dividends to the U.S. parent corporation.

The majority of distributions of E&P are attributed to CFCs doing business in the goods production and services sectors. These two industrial sectors distributed $75.1 billion of E&P or 55.6 percent of total distributions. Of this total, $49.0 billion were from not previously taxed E&P, with the remaining $26.1 billion coming from previously taxed E&P. Almost 21.4 percent of distributions by goods producers were attributable to chemical manufacturers, while an additional 12.3 percent were attributable to petroleum and coal products manufacturers. CFCs classified as management companies reported 81.6 percent of distributions to shareholders reported by all services CFCs.

European-based CFCs accounted for 49.2 percent ($66.5 billion) of all distributions of E&P. Nearly 62.0 percent of these distributions were from not previously taxed E&P ($41.2 billion), with the remainder distributed from previously taxed E&P ($25.3 billion). CFCs incorporated in European Union countries made 88.1 percent of all shareholder distributions by European CFCs. CFCs in the Other Western Hemisphere region distributed $37.7 billion of E&P in Tax Year 2004, or 27.9 percent of all distributions. Canadian CFCs accounted for 61.6 percent of these distributions; CFCs in Bermuda and the Cayman Islands accounted for 22.5 percent and 11.1 percent, respectively.

Figure C displays taxable payout ratios by industrial sector. The taxable payout ratio is defined as taxable dividends paid to a U.S. person by a CFC with positive current E&P net of current-year Subpart F income divided by positive current E&P net of current-year Subpart F income (see U.S. person, Current earnings and profits, and Subpart F Income in the Explanation of Selected Terms section of this article). For Tax Year 2004, CFCs reported a taxable payout ratio of 8.8 percent. This ratio is lower than the taxable payout ratio reported for the previous three CFC studies (10.3 percent for Tax Year 2002, 11.9 percent for Tax Year 2000, and 16.0 for Tax Year 1998).

The taxable payout ratio varied considerably among the industrial sectors. CFCs in the raw materials and energy production sector reported the largest taxable payout ratio (22.0 percent). CFCs in the information sector also reported a substantial taxable payout ratio (21.4 percent). No other industrial sector had a double-digit taxable payout ratio.

Largest 7,500 Controlled Foreign Corporations

For Tax Year 2004, the largest 7,500 CFCs held $8.5 trillion in assets and reported receipts of $3.0 trillion. (6) These amounts increased from Tax Year 2002 by 45.7 percent and 30.7 percent, respectively. These 7,500 CFCs reported foreign taxes of $54.4 billion on pretax earnings and profits of $313.1 billion, increases from Tax Year 2002 of 40.9 percent and 56.0 percent, respectively. These foreign corporations distributed $113.0 billion of E&P to all shareholders during Tax Year 2004. (7) Of these distributions, $37.3 billion represented taxable remittances to U.S. parent corporations. U.S. parent corporations were required to include an additional $40.4 billion in taxable income attributable to these largest 7,500 CFCs under the subpart F income rules.

As Figure D shows, 80.5 percent of the largest 7,500 CFCs conducted business in three industrial sectors: services (28.0 percent), goods production (27.8 percent), and finance, insurance, real estate, and rental and leasing (24.7 percent). These sectors accounted for 87.8 percent of ending assets, 70.4 percent of total receipts, and 74.7 percent of E&P (less deficit) before income taxes for the largest 7,500 CFCs. Among the largest 7,500 CFCs, service corporations experienced the most significant economic growth from Tax Year 2002 to Tax Year 2004. Ending assets and receipts for these service corporations increased by 67.0 percent and 88.7 percent, respectively. For Tax Year 2004, service corporations earned 75.4 percent more in E&P (less deficit) before income taxes and paid 107.5 percent more in foreign income taxes than for Tax Year 2002. For the largest 7,500 CFCs, raw materials and energy production was the only sector to experience a decrease in ending assets (1.0 percent) and total receipts (2.5 percent). However, CFCs in this sector reported increases in E&P (less deficit) before income taxes and foreign income taxes of 77.3 percent and 63.8 percent, respectively. For Tax Year 2002, the information sector was the only sector with an aggregate deficit in E&P before income taxes ($4.1 billion). For Tax Year 2004, this sector reported $6.5 billion of E&P (less deficit) before income taxes.

For Tax Year 2004, 54.2 percent of the largest 7,500 CFCs were incorporated in Europe (see Figure E). European CFCs accounted for 63.3 percent of total assets and 56.4 percent of total receipts of the largest 7,500 CFCs. These CFCs earned 51.1 percent of E&P (less deficit) before income taxes and paid 48.0 percent of foreign taxes for the largest 7,500 CFCs. Approximately, 92.9 percent of these European CFCs were incorporated in European Union countries. (8) Other Western Hemisphere and Asia were two other regions of significant activity, accounting for 19.0 percent and 11.6 percent of the largest 7,500 CFCs for Tax Year 2004.

The largest 7,500 CFCs accounted for 92.2 percent of ending assets, 78.5 percent of total receipts, and 86.5 percent of E&P (less deficit) before income taxes of all CFCs controlled by U.S. parent corporations. The largest 7,500 CFCs paid 78.5 percent of foreign income taxes attributable to all CFCs. These largest CFCs remitted 80.0 percent of foreign taxable dividends paid to controlling U.S. shareholders and generated 84.5 percent of total subpart F income reported by these U.S. shareholders. Figure F shows the industrial and geographic composition for all CFCs and the largest 7,500 CFCs for Tax Year 2004. As Figure F shows, the largest 7,500 CFCs accurately reflect the industrial and geographic composition of the population of all CFCs at the industrial sector and major geographic region levels. (9)

Data Sources and limitations

The statistics presented in this article are based on information collected from corporate tax returns (Form(s) 1120) with accounting periods ending July 2004 through June 2005 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 2004 CFCs may have ended as early as July 2003 and as late as June 2005. However, most CFC activity occurred in Calendar Year 2004. These statistics report data for active foreign corporations controlled by U.S. corporations (see Active versus inactive Controlled Foreign Corporations in the Explanation of Selected Terms section of this article).

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 more than 95.0 percent of the number of CFCs and more than 99.9 percent of the total ending assets for all CFCs. (10) 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 on a sample of U.S. corporations. For Tax Year 2004, this sample includes all CFCs controlled by U.S. corporations with $10 million or more in total assets or $2.5 million or more in "proceeds" and all CFCs filed by U.S. corporations with less than $10 million in the SOI corporate sample. (11) The sample for the Tax Year 2004 CFC statistics is far more inclusive than recent studies, 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, not just 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.

Third, the composition of the 7,500 largest CFCs is not consistent across tax years. For example, only 84.3 percent of the 7,500 largest CFCs for Tax Year 2004 were also included in the 7,500 largest CFCs for Tax Year 2002. Many of the 7,500 largest CFCs for Tax Year 2002 that were not included among the 7,500 largest CFCs for Tax Year 2004 were still controlled by U.S. corporations, but the size of their total assets for Tax Year 2004 excluded them from this group. In addition, some of the 7,500 largest CFCs for Tax Year 2002 were not included in Tax Year 2002 because they were no longer "controlled" or the U.S. parent corporation's total assets had fallen below $500 million.

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. 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 presented in this article.

Caution should also be used when comparing data by industrial groupings. For Tax Years 1998, 2000, 2002, and 2004, 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.

Explanation of Selected Terms

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 2004. 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 (see definition below) 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 2004, 1,728 CFCs (2.3 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 are 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 periods.

OPEC countries--The member countries of the Organization of Petroleum Exporting Countries for Tax Year 2004 were: Algeria, 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 assets--For purposes of determining the 7,500 largest CFCs for these statistics, total assets are defined as the larger of the foreign corporation's beginning-of-year and end-of-year total assets. However, the statistics cited in this article generally refer to ending assets unless otherwise noted.

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).

(1) Based on unpublished data.

(2) The current definition of a Controlled Foreign Corporation is provided in Internal Revenue Code section 957. Ownership attribution rules are provided in section 958.

(3) The statistics in this article pertain only to foreign corporations for which one U.S. corporation satisfies the requirements for control. Generally, complete Form 5471 filings are required only for foreign corporations controlled by a single U.S. shareholder (i.e., those shareholders meeting the definition of a "Category of Filer 4" taxpayer per the Form 5471 instructions). Partial filing requirements exist for noncontrolled foreign corporations and for controlled foreign corporations which are not controlled by a single U.S. shareholder. For more details, refer to the instructions for Form 5471.

(4) The prevention of tax avoidance was a primary tax policy objective that led to the enactment of the Subpart F provisions of the Internal Revenue Code. Other policy considerations also contributed to the enactment of Subpart F. For more detailed information on the history of Subpart F, see "The Deferral of Income Earned Through U.S. Controlled Foreign Corporations: A Policy Study," Office of Tax Policy, Department of the Treasury, December 2000.

(5) The countries with the most CFCs are: United Kingdom (8,227), Canada (6,559), Mexico (4,618), Germany (4,121), France (3,857), Netherlands (3,151), Australia (2,807), Japan (2,265), China (2,264), and Hong Kong (1,800).

(6) The SOI Controlled Foreign Corporation Study has changed from a defined population to a sample. In prior studies, data generally were published only for the largest 7,500 foreign corporations controlled by large U.S. multinationals. Beginning with Tax Year 2004, SOI is publishing population estimates for controlled foreign corporations. For transitional purposes, this article includes limited data for the 7,500 largest controlled foreign corporations. Tax Year 2004 is the last year for which statistics will be reported for the largest 7,500 controlled foreign corporations.

(7) Based on unpublished data.

(8) Based on unpublished data.

(9) While the largest 7,500 CFCs accurately depict the industrial and geographic composition of all CFCs, the new study design allows SOI to publish more detailed data at the industry and country levels, as well as provide population estimates for CFC data. In prior CFC studies, SOI did not publish statistics for many industries and countries due to the disclosure problems associated with having data for only 7,500 CFCs.

(10) Based on unpublished data.

(11) See Statistics of Income, Corporation Income Tax Returns, 2004 for a more complete description of the SOI Corporate sample. The SOI Corporate sample is the basis for the SOI Controlled Foreign Corporation sample. In other words, the Controlled Foreign Corporation sample includes every Form 5471 filed by each corporation in the SOI Corporate sample.

Lee Mahony and Randy Miller are economists with the Special Studies Returns Analysis Section. This article was prepared under the direction of Chris Carson, Chief.
Figure A

U.S. Corporations and Their Controlled Foreign Corporations: Number,
End-of-Year Assets, and Receipts, by Industrial Sector of Controlled
Foreign Corporation, Tax Year 2004

Number of foreign corporations

Information 25.9%
Distribution and
transportation of goods 21.7%
Goods production 5.0%
Finance, insurance, real
estate, and rental and leasing 11.7%
Services 31.4%
Nature of business
not allocable 0.6%
Raw materials and energy
Production 3.7%

End-of-year assets [1]

Information 20.2%
Distribution and
transportation of goods 6.7%
Goods production 3.1%
Finance, insurance, real
estate, and rental and leasing 42.5%
Services 23.8%
Raw materials and energy
Production 3.5%

Total receipts [1]

Information 43.0%
Distribution and
transportation of goods 25.5%
Goods production 2.5%
Finance, insurance, real
estate, and rental and leasing 9.4%
Services 16.2%
Raw materials and energy
Production 3.4%

[1] Includes "Nature of business not allocable," not shown separately.
NOTE: Detail may not add to 100 percent because of rounding.

Note: Table made from pie chart.

Figure B

U.S. Corporations and Their Controlled Foreign Corporations: Number,
End-of-Year Assets, Receipts, and Earnings, by Geographic Region of
Incorporation of Controlled Foreign Corporation, Tax Year 2004

Number of foreign corporations

Major geographic region

Africa 13.8%
Europe 45.2%
Other Western Hemisphere 2.0%
Asia 19.2%
Oceania 4.8%
Puerto Rico and U.S. Possessions 0.7%
Latin America 14.3%

End-of-year assets

Africa 19.5%
Europe 62.2%
Other Western Hemisphere 0.4%
Asia 9.5%
Oceania 3.3%
Puerto Rico and U.S. Possessions 0.3%
Latin America 4.9%

Total receipts

Africa 18.4%
Europe 54.3%
Other Western Hemisphere 0.8%
Asia 15.1%
Oceania 3.1%
Puerto Rico and U.S. Possessions 0.5%
Latin America 7.6%

Earnings and profits [1]

Africa 24.0%
Europe 49.8%
Other Western Hemisphere 0.8%
Asia 13.6%
Oceania 4.0%
Puerto Rico and U.S. Possessions 0.9%
Latin America 6.8%

[1] Less deficits and before income taxes.

NOTE: Includes "Other country or country unknown," not shown
separately. Detail may not add to 100 percent because of rounding.

Note: Table made from pie chart.

Figure C

U.S. Corporations and Their Controlled Foreign Corporations:
Number of Foreign Corporations with Positive Current Earnings and
Profits Net of Current-Year Subpart F Income and Taxable Payout
Ratios, by Industrial Sector of Controlled Foreign Corporation,
Tax Year 2004

[Money amounts are in thousands of dollars]

 Number of
 foreign Positive
 corporations current
 with positive earnings
 current and profits
 earnings and net of
Industrial sector of profits net current-year Taxable
Controlled Foreign of current-year Subpart F payout ratio
Corporation Subpart F income income [1] (percentage)

 (1) (2) (3)

All industries 41,931 294,649,031 8.8

Raw materials and 1,124 24,283,854 22.0
 energy production
Goods production 12,037 105,657,597 8.3
Distribution and 10,156 36,582,974 5.9
 transportation of
 goods
Information 1,810 9,526,661 21.4
Finance, insurance, 4,363 45,291,578 3.8
 real estate, and
 rental and leasing
Services 12,252 73,222,646 8.3
Nature of business 189 83,721 0.3
 not allocable

[1] Amounts are multiplied by the total percentage of voting stock
owned by the Form 5471 filer at the end of its annual accounting
period.

Figure D

U.S. Corporations with Total Assets of $500 Million or More and
Their 7,500 Largest Controlled Foreign Corporations: Number, Assets,
Receipts, Net Income, Earnings, Taxes, Dividends, and Subpart F
Income, by Industrial Sector of Controlled Foreign Corporation,
Tax Year 2004

[Money amounts are in thousands of dollars]

 Controlled Foreign Corporations

 Total assets
 Number
Industrial sector of U.S. Number of
of Controlled corporation foreign
Foreign Corporation returns [1] corporations Beginning-of-year

 (1) (2) (3)

All industries 1,135 7,500 6,979,508,476
Raw materials and 97 356 283,417,594
 energy production
Goods production 507 2,086 1,379,151,897
Distribution and 308 869 415,877,413
 transportation
 of goods
Information 67 236 153,684,612
Finance, insurance, 385 1,856 3,112,659,865
 real estate,
 and rental and
 leasing
Services 634 2,097 1,634,717,095

 Controlled Foreign Corporations

 Total assets Net income
Industrial sector (less deficit)
of Controlled Total before income
Foreign Corporation End-of-year receipts taxes

 (4) (5) (6)

All industries 8,500,682,185 2,980,832,112 353,654,732
Raw materials and 300,251,790 110,282,162 32,619,651
 energy production
Goods production 1,621,423,345 1,318,882,571 141,417,872
Distribution and 476,443,399 706,004,976 42,903,579
 transportation
 of goods
Information 263,476,630 66,425,947 6,226,141
Finance, insurance, 3,834,116,468 318,224,097 57,066,692
 real estate,
 and rental and
 leasing
Services 2,004,970,553 461,012,359 73,420,797

 Controlled Foreign Corporations

 Current
 earnings
 and profits
Industrial sector (less deficit)
of Controlled Net income before income Income
Foreign Corporation (less deficit) taxes taxes

 (7) (8) (9)

All industries 313,734,337 313,129,621 54,388,141
Raw materials and 22,124,651 33,293,068 9,405,697
 energy production
Goods production 122,828,136 106,539,184 16,828,485
Distribution and 35,527,066 39,382,536 7,713,349
 transportation
 of goods
Information 4,735,246 6,540,116 1,591,412
Finance, insurance, 47,343,462 53,142,117 9,231,256
 real estate,
 and rental and
 leasing
Services 81,175,776 74,232,601 9,617,942

 Controlled Foreign Corporations

 Current
 earnings
 and profits
Industrial sector (less deficit) Dividends paid Total
of Controlled after income to controlling Subpart
Foreign Corporation taxes U.S. corporation F income

 (10) (11) (12)

All industries 258,741,480 37,332,477 40,394,360
Raw materials and 23,887,372 8,106,735 758,816
 energy production
Goods production 89,710,698 14,313,788 10,325,669
Distribution and 31,669,187 2,411,509 6,955,389
 transportation
 of goods
Information 4,948,704 3,607,935 421,504
Finance, insurance, 43,910,861 2,371,365 12,411,667
 real estate,
 and rental and
 leasing
Services 64,614,659 6,521,146 9,521,314

[1] Number of returns is not additive because some U.S. corporations
had Controlled Foreign Corporations in more than one industrial
sector. The industrial activity of the parent corporation filing
the return often differs from that of the Controlled Foreign
Corporations.

Figure E

U.S. Corporations with Total Assets of $500 Million or More and Their
7,500 Largest Controlled Foreign Corporations: Number, Assets,
Receipts, Net Income, Earnings, Taxes, Dividends, and Subpart F
Income, by Geographic Region of Incorporation of Controlled Foreign
Corporation, Tax Year 2004

[Money amounts are in thousands of dollars]

 Controlled Foreign Corporations

 Number Total assets
Industrial sector of U.S. Number
of Controlled corporation of foreign
Foreign Corporation returns [1] corporations Beginning-of-year

 (1) (2) (3)

All geographic 1,135 7,500 6,979,508,476
 regions
Latin America 223 660 308,822,943
Other Western 571 1,422 1,439,513,081
 Hemisphere
Europe 792 4,064 4,379,055,538
Africa 44 74 20,676,547
Asia 264 869 605,903,525
Oceania 134 373 205,775,010
Puerto Rico and 27 38 19,761,832
 U.S. Possessions

 Controlled Foreign Corporations

Geographic region Total assets Net income
of incorporation of (less deficit)
Controlled Foreign Total before income
Corporation End-of-year receipts taxes

 (4) (5) (6)

All geographic 8,500,682,185 2,980,832,112 353,654,732
 regions
Latin America 363,726,266 189,285,962 21,414,543
Other Western 1,688,102,041 588,225,064 79,964,308
 Hemisphere
Europe 5,383,455,930 1,681,081,503 201,779,814
Africa 23,674,901 15,716,356 1,616,450
Asia 753,039,347 415,463,889 37,263,580
Oceania 270,595,620 80,461,566 9,928,700
Puerto Rico and 18,088,079 10,597,773 1,687,336
 U.S. Possessions

 Controlled Foreign Corporations

 Current
 earnings
Geographic region and profits
of incorporation of (less deficit)
Controlled Foreign Net income before income Income
Corporation (less deficit) taxes taxes

 (7) (8) (9)

All geographic 313,734,337 313,129,621 54,388,141
 regions
Latin America 17,015,430 18,345,968 4,180,562
Other Western 66,210,516 81,680,392 13,660,286
 Hemisphere
Europe 191,191,862 160,011,693 26,108,144
Africa 1,122,703 1,705,438 490,438
Asia 28,630,476 38,207,225 7,861,460
Oceania 8,102,410 11,305,240 1,948,484
Puerto Rico and 1,460,940 1,873,665 138,767
 U.S. Possessions

 Controlled Foreign Corporations

 Current
 earnings
Geographic region and profits
of incorporation of (less deficit) Dividends paid Total
Controlled Foreign after income to controlling Subpart
Corporation taxes U.S. corporation F income

 (10) (11) (12)

All geographic 258,741,480 37,332,477 40,394,360
 regions
Latin America 14,165,407 1,922,479 648,480
Other Western 68,020,106 15,356,921 11,871,449
 Hemisphere
Europe 133,903,549 15,268,934 23,128,482
Africa 1,215,000 302,105 119,839
Asia 30,345,765 3,293,628 3,714,994
Oceania 9,356,755 991,592 783,954
Puerto Rico and 1,734,898 196,818 127,162
 U.S. Possessions

[1] Number of returns is not additive because some U.S.
corporations had Controlled Foreign Corporations in more than one
geographical region.

Figure F

Percentage of the Number, Assets, Receipts, Earnings, and Taxes of
All Controlled Foreign Corporations and the 7,500 Largest Controlled
Foreign Corporations, by Industrial Sector and Geographic Region of
Incorporation of Controlled Foreign Corporation, Tax Year 2004

Industrial sector Number of CFCs End-of-year assets
of Controlled Foreign
Corporation All CFCs 7,500 All CFCs 7,500

 (1) (2) (3) (4)

All industries [1] 100.0 100.0 100.0 100.0
Raw materials and energy 3.7 4.7 3.5 3.5
 production
Goods production 25.9 27.8 20.2 19.1
Distribution and 21.7 11.6 6.7 5.6
 transportation of goods
Information 5.0 3.1 3.1 3.1
Finance, insurance, real
 estate, and rental
and leasing 11.7 24.7 42.5 45.1
Services 31.4 28.0 23.8 23.6

 Current E&P
 (less deficit)
Industrial sector Total receipts before income taxes
of Controlled Foreign
Corporation All CFCs 7,500 All CFCs 7,500

 (5) (6) (7) (8)

All industries [1] 100.0 100.0 100.0 100.0
Raw materials and energy 3.4 3.7 9.2 10.6
 production
Goods production 43.0 44.2 34.6 34.0
Distribution and 25.5 23.7 14.5 12.6
 transportation of goods
Information 2.5 2.2 2.2 2.1
Finance, insurance, real
 estate, and rental
and leasing 9.4 10.7 16.0 17.0
Services 16.2 15.5 23.6 23.7

Industrial sector Income taxes
of Controlled Foreign
Corporation All CFCs 7,500

 (9) (10)

All industries [1] 100.0 100.0
Raw materials and energy 14.5 17.3
 production
Goods production 32.2 30.9
Distribution and 16.8 14.2
 transportation of goods
Information 3.2 2.9
Finance, insurance, real
 estate, and rental
and leasing 15.1 17.0
Services 18.1 17.7

Geographic area Number of CFCs End-of-year assets
of incorporation of Controlled
Foreign Corporation All CFCs 7,500 All CFCs 7,500

 (1) (2) (3) (4)

All geographic regions [2] 100.0 100.0 100.0 100.0
Latin America 14.3 8.8 4.9 4.3
Other Western Hemisphere 13.8 19.0 19.5 19.9
Europe 45.2 54.2 62.2 63.3
Africa 2.0 1.0 0.4 0.3
Asia 19.2 11.6 9.5 8.9
Oceania 4.8 5.0 3.3 3.2
Puerto Rico and U.S. Possessions 0.7 0.5 0.3 0.2

 Current E&P
 (less deficit)
Geographic area Total receipts before income taxes
of incorporation of Controlled
Foreign Corporation All CFCs 7,500 All CFCs 7,500

 (5) (6) (7) (8)

All geographic regions [2] 100.0 100.0 100.0 100.0
Latin America 7.6 6.4 6.8 5.9
Other Western Hemisphere 18.4 19.7 24.0 26.1
Europe 54.3 56.4 49.8 51.1
Africa 0.8 0.5 0.8 0.5
Asia 15.1 13.9 13.6 12.2
Oceania 3.1 2.7 4.0 3.6
Puerto Rico and U.S. Possessions 0.5 0.4 0.9 0.6

Geographic area Income taxes
of incorporation of Controlled
Foreign Corporation All CFCs 7,500

 (9) (10)

All geographic regions [2] 100.0 100.0
Latin America 9.2 7.7
Other Western Hemisphere 22.7 25.1
Europe 46.9 48.0
Africa 1.3 0.9
Asia 15.7 14.5
Oceania 4.0 3.6
Puerto Rico and U.S. Possessions 0.4 0.3

[1] Includes "Nature of business not allocable," not shown separately.

[2] Includes "Other country or country unknown," not shown separately.

NOTE: Detail may not add to 100 percent because of rounding.
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Author:Mahony, Lee; Miller, Randy
Publication:Statistics of Income. SOI Bulletin
Date:Jun 22, 2008
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