The Treasury Department’s Office of Tax Policy has released three technical papers (abstracts of the papers are below the fold):

• Debt and the Profitability of Foreign-Controlled Domestic Corporations in the United States (OTA Working Paper #1), by Harry Grubert
• Income shifting from Transfer Pricing: Further Evidence from Tax Return Data (OTA Working Paper #2), by Michael McDonald
• Treasury’s Panel Model for Tax Analysis (OTA Working Paper #3), by James R. Nunns, Deena Ackerman, James Cilke, Julie-Anne Cronin, Janet Holtzblatt, Gillian Hunter, Emily Lin & Janet McCubbin

Debt and the Profitability of Foreign-Controlled Domestic Corporations in the United States (OTA Working Paper #1), by Harry Grubert:

U.S. corporations controlled by foreigners continue to report lower net income in relation to total receipts than comparable domestically-controlled corporations. But the 2004 tax return data show that, in manufacturing and the entire nonfinancial sector, the discrepancy disappears when using a measure of operating income that focuses on the corporations’ activities in the United States. To determine operating income, dividends, interest and royalties are subtracted from net income and interest paid, depreciation, amortization, and depletion are added back to net income. Domestically-controlled corporations receive much greater dividend and royalty income, mainly from their subsidiaries abroad.

In the nonfinancial sector, foreign-controlled U.S. corporations do not on average pay a larger percentage of their cash flow in interest than their domestically-controlled counterparts. They are also less likely to have very high levels of interest expense, using 50 percent of cash flow as the threshold.

Foreign-controlled U.S. corporations in finance, insurance, and real estate exhibit a wide range of profitability compared to similar domestically-controlled corporations. For example, foreign-controlled corporations in real estate are on average much more profitable than domestically-controlled real estate corporations. On the other hand, foreign-controlled property and casualty insurance corporations and securities dealers and investment banks report modest income compared to domestically-controlled corporations.

In finance, foreign-controlled commercial banks and securities dealers and investment banks pay more interest than domestically-controlled corporations as a percentage of cash flow. They are also much more likely to have very high levels of interest expense relative to cash flow. For example, the probability that a domestically-controlled securities dealer and investment bank pays more than 90 percent of cash flow in interest is less than 5 percent but greater than 40 percent for comparable foreign-controlled U.S. corporations.

Income shifting from Transfer Pricing: Further Evidence from Tax Return Data (OTA Working Paper #2), by Michael McDonald:

The paper updates, modifies, and extends research by Grubert (2003) to investigate income shifting from intercompany transfer pricing. The analysis is based on theoretical and regression models developed in Grubert (2003). The models are modified slightly to capture the effects of “real” intercompany tangible, intangible, and services transactions (as opposed to interest ‘income stripping’ through intercompany or interbranch debt), and extended to incorporate data relating to cost sharing arrangements. Although some caution is required in interpreting the transfer pricing implications from the regression results, the empirical analysis generally supports concerns about potential non-arm’s length income shifting under current transfer pricing rules.

Treasury’s Panel Model for Tax Analysis (OTA Working Paper #3), by James R. Nunns, Deena Ackerman, James Cilke, Julie-Anne Cronin, Janet Holtzblatt, Gillian Hunter, Emily Lin & Janet McCubbin:

Over time an individual’s demographic or economic status may change in ways that significantly change how they are affected by current or proposed federal tax laws. In addition, some provisions of the tax law have effects over multiple years, and the effects of some tax provisions change over time due to phase-ins, phase-outs, and other factors. Current economic analyses of the effect of federal tax laws are generally based on data from “cross-section” samples, so analyses capture the demographic and economic circumstances of individuals and the provisions of federal tax law only at a single point in time. Treasury’s Office of Tax Analysis has developed a new model based on data from a “panel” sample that included the same individuals for 10 years. This model captures the changing demographic and economic circumstances of individuals and the effects of changes in tax law over the entire 10-year budget window. Analyses based on the model will provide policy makers and the general public a deeper understanding of the effects of current and proposed tax policies.