Reconciling Foreign Tax Data from Form 5471 Data

• In Event: Reporting, Transparency, and Information Exchange

Abstract

Data from corporate tax returns plays an important role in informing policymakers, academics, and taxpayers on the economic effects of the tax system and the costs and benefits of various policy choices. In this paper, we provide a methodology that matches financial statement information to tax return data and find evidence consistent with information returns for US controlled foreign corporations (CFCs) double counting certain types of income. Our results suggest that some of this variance is attributable to indirect ownership of CFCs. Firms with the largest gaps between total CFC net income and pretax foreign income reported in financial statements account for most foreign intercompany dividends and transactions between foreign related-parties. We also find evidence that a commonly made adjustment to the foreign tax data to correct for double counting, subtracting related-party dividends from pretax E&P, likely introduces ‘double subtracting’ as some firms seem to adjust pretax E&P for related party dividends. Our results suggest that accurately measuring firms’ foreign activity requires information on the tiered-structure of foreign operations and the accounting conventions for indirectly owned CFCs

Authors

• Jennifer Blouin, University of Pennsylvania - Wharton

• Nathan Born, US Department of the Treasury

• Ralph Rector, Department of the Treasury