Every year, U.S.-based multinational corporations transfer hundreds of billions of dollars of goods and services between their affiliates in the United States and their foreign subsidiaries. Such transactions may be a part of normal business operations for corporations with foreign subsidiaries. However, it is generally recognized that given the variation in corporate tax rates across countries, an incentive exists for corporations with foreign subsidiaries to reduce their overall tax burden by maximizing the income they report in countries with low income tax rates, and minimizing the income they report in or repatriate to countries with high income tax rates. Various studies have suggested that U.S.-based multinational corporations appear to engage in transactions such as these that shift income from their affiliates in high-tax countries to subsidiaries in low-tax countries to take advantage of the differences in tax rates in foreign countries. In 2002, GAO reported that 4 of the 100 largest publicly traded federal contractors are incorporated in a "tax haven" country that either does not tax corporate income or taxes the income at a low rate. As a follow-up to the report, Congress asked us to determine which, if any, of the 100 largest publicly traded federal contractors we identified in our 2002 report have subsidiaries that are incorporated in a tax haven country. Congress further asked us to determine, to the extent possible, which of these subsidiaries are Foreign Sales Corporations, a type of corporation that can exempt a portion of its foreign sales income from U.S. tax.

Fifty-nine of the 100 largest publicly traded federal contractors from fiscal year 2001 report having a subsidiary in a tax haven country. Fifty-eight of these 59 corporations also report having additional foreign subsidiaries in countries other than tax havens. Likewise, 26 of the 59 corporations that report having a subsidiary in a tax haven country report that at least one of these subsidiaries is a Foreign Sales Corporation. Four of these 26 contractors also report having additional Foreign Sales Corporations in countries other than tax havens. However, as the SEC only requires corporations to report their significant subsidiaries, there may be additional corporations among the 100 largest publicly traded federal contractors that have a subsidiary in a tax haven country. Likewise, some corporations that report having a subsidiary in a tax haven country could have additional subsidiaries in tax haven countries that they have not reported. The simple existence of a subsidiary in a tax haven country does not signify that a corporation has established that subsidiary primarily for the purpose of reducing its overall tax burden.

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