Foreign-controlled domestic corporations, 2000 - Illustration

Statistics of Income Bulletin, Summer, 2003 by James R. Hobbs

For Tax Year 2000, the 60,609 domestic corporations each "controlled" by a foreign "person" generated $2.6 trillion of total receipts and reported $6.1 trillion of total assets on income tax returns filed with the Internal Revenue Service (IRS). These corporations were relatively few in numbers, just 1.2 percent of the U.S. total. However, they accounted for 12.7 percent and 12.9 percent of the receipts and assets, respectively, reported on all U.S. corporation income tax returns. They also accounted for 12.8 percent of the "taxable income" and 13.8 percent of the total U.S. income tax after credits reported on these returns.

The profits (i.e., "net income (less deficit)" shown in the statistics) reported by foreign-controlled domestic corporations (FCDC's) for tax purposes under the Internal Revenue Code were $66.3 billion for 2000. This was an increase of over 10 percent from the $60.2 billion reported for the prior year [1]. Placed in context, the net income (less deficit) reported on all corporation income tax returns declined very slightly from $929.0 billion for 1999 to $927.5 billion for 2000 [2]. As a result, FCDC's accounted for 7.2 percent of the profits reported by all corporations for Tax Year 2000, up significantly from the 6.5 percent for the prior year.

Of all the FCDC's, 26,519 reported positive profits (i.e., net income) for 2000, totaling $118.6 billion, an increase from the $100.0 billion reported for 1999. The profitable companies for 2000 also reported $97.5 billion of taxable income after statutory special deductions (i.e., "income subject to tax" shown in the statistics), another significant increase over the previous year. Total statutory special deductions remained essentially unchanged between the 2 years, at just over $22 billion for both years. The U.S. tax liability (i.e., "total income tax after credits") of FCDC's was $28.1 billion, 17.3 percent greater than that of the prior year.

For 2000, the 3,287 "largest" companies (i.e., those with at least $250 million of assets, or with at least $50 million of receipts, or with both) accounted for most of the key financial items of all FCDC's: 95.1 percent of total assets, 93.3 percent of total receipts, 91.9 percent of taxable income, and 90.9 percent of total income tax after credits. After an overview of all FCDC's, this article focuses on the largest foreign-controlled domestic companies and compares them to the largest domestic corporations not controlled by foreign persons.

Tables showing selected balance sheet, income statement, and tax items for FCDC's are included at the end of this article. Table 1 shows historical FCDC data for selected tax years between 1971 and 2000. Table 2 includes information for all FCDC's, classified by major industries that conform to the recently adopted North American Industry Classification System (NAICS). Tax Year 2000 is only the third year for which data are presented using NAICS. In years prior to 1998, the Enterprise Standard Industrial Classification system was used. Table 3 also presents data for all FCDC's, classified by countries of the foreign owners, as well as age of the corporations. Table 4 presents information on the "largest" FCDC's, classified by industrial sectors. For comparison purposes, this table also contains data for the largest domestic corporations not controlled or owned by foreign persons. For reasons explained later in this article, Table 4 excludes data from Forms 1120-REIT (real estate investment trusts), 1120-RIC (regulated investment companies), and 1120S (S corporations).

Direct Foreign Investment in the United States

Direct foreign investment in the United States can take several forms, including corporations, partnerships, and even joint ventures. Under these forms of direct investment, the foreign investor may have sufficient equity in the enterprise to control and participate in managing its operations [3]. With regard to corporations, a foreign investor can either gain control of an existing U.S. company, create a new company incorporated in the United States, or operate in the United States through a branch of a foreign corporation. There are numerous factors involved in the decision of a foreign investor to operate in the United States through either a domestic or foreign corporation [4, 5].

This article focuses on domestic corporations that are controlled by foreign persons. For the foreign-controlled domestic corporations covered in this article, "control" is generally defined as ownership by any foreign person or entity (including an individual, corporation, partnership, estate, or trust), directly or indirectly, of 50 percent or more of a U.S. corporation's voting stock (or the value of all of the corporation's stock) at any time during the accounting period. (This is discussed in greater depth in the Data Sources and Limitations section. Also, a description of foreign persons and an explanation of the rules of constructive ownership are given in the Explanation of Selected Terms section.)