New U.S. Corporate Tax Return Data Offer Insights on Inbound Investment
On July 9 the IRS released a report reviewing and analyzing corporate tax return data for 2010 (the “Report”) This is the latest year for which the IRS has released such data. The Report is of interest because it offers insights into the reported activities of non-U.S. companies carrying on business in the United States. A non-U.S. (foreign) corporation that is engaged in a U.S. trade or business during the taxable year is required to file a Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) for that year. The following data comes from those returns.
The report contains various types of information about tax returns in the aggregate. According to the Report, most foreign corporations (approximately 30,000 out of a total of 32,000) appear to be relatively small, reporting assets of less than $10 million.
Data also are provided by industry segment. The largest number of active foreign companies filing tax returns are in the finance and insurance segment (6,300), followed by the real estate and rental and leasing industry segment (5,400). The largest industry segment, measured by aggregate gross receipts, is finance and insurance ($64 billion). The second largest segment, measured by aggregate gross receipts, is wholesale and retail trade ($60.4 billion). The business segment finance and insurance also reported the most aggregate taxable income ($4.5billion) followed by holding companies ($2 billion). Total branch tax collected in 2010 appear to the author to be quite small -- only $164 million. This number is surprising giving the size of the financial sector but it may be expalined by losses suffered by foreign banks in the last recession.
The report states that for the tax year 2010 32,414 Forms 1120-F were filed. Based on statistical sampling, the IRS concludes that only 10,896 of the reporting foreign corporations were “active.” Thus, approximately 21,500 returns (or about two-thirds of all returns filed by foreign corporations) were filed by foreign companies that were inactive in the United States. These most likely were protective returns that did not report any U.S. effectively connected income.
Protective returns are common because whether a foreign corporation is engaged in a U.S. trade or business, and thus required to file a U.S. tax return, is determined primarily under relatively old and not well-developed case law. Such returns are filed by foreign corporations out of a concern that the IRS could assert, and a court could agree, that the corporation is engaged in a U.S. trade or business and therefore subject to U.S. tax on a net basis.
Under U.S. treasury regulations, a foreign corporation that is engaged in U.S. trade or business but does not file an income tax return on timely basis loses the right to claim deductions in computing its income tax liability. Thus, a protective return preserves the right of the foreign corporation to claim deductions and be taxed on a net basis in the event the IRS is successful in asserting that the foreign corporation has income effectively connected with a U.S. trade or business.
 Internal Revenue Service, Statistics of Income – 2010, Corporation Income Tax Returns, available at http://www.irs.gov/uac/SOI-Tax-Stats-Corporation-Complete-Report. The Report does not define an “active” corporation, but it does define an “inactive” corporation to include a corporation with no income or deductions. Report, Figure G, at 13. Reg. § 1.882-4(a)(2). FDAP income includes interest, dividends, rents, royalties and certain gains.
Tax Insights Blog