## 4. Differences between GOS and N-CTB in the United States, 2010

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### Purpose and framework
- The RA-GAP top-down framework defines the tax gap as the difference between potential revenue from underlying economic activities and actual revenue; the gap is decomposed into compliance gap and policy gap.
- The RA-GAP methodology for CIT focuses on measuring the compliance gap for CIT by estimating potential CIT under current tax legislation using macroeconomic (national accounts) data and comparing with declared tax returns.
- Top-down estimates assume a static model given current levels of economic activity and do not consider behavioral responses to administrative or policy changes.

### Key conceptual distinctions and aggregation sequence
- Gross Operating Surplus (GOS) from national accounts is used as the starting point; GOS is close to aggregate EBITDA of resident corporations and reflects value added not allocated to employees or taxes on production and imports.
- Three sequential adjustment categories are required to move from GOS to aggregate tax base (TB):
  - [D1] Differences between GOS in national accounts and aggregate Financial Accounting Profit (FAP) of CIT taxpayers.
  - [D2] Differences between aggregate FAP and aggregate Current-year Net Tax Base (C-NTB).
  - [D3] Differences between aggregate C-NTB and aggregate Tax Base (TB) after considering current-year losses and carry-over losses.
- Three tax-base concepts are defined explicitly:
  - Current-year net tax base (C-NTB): aggregated result reflecting both profit-making corporations and loss-making corporations in a current year.
  - Current-year tax base (C-TB): aggregated result of profit-making corporations in a current year (before deducting carried-over losses).
  - Tax base (TB): aggregate result of profit-making corporations in a current year minus deductions for carried-over losses (the base for calculating aggregate CIT liability in a year).

### Measurement indicators
- Primary compliance indicators:
  - CIT base gap = potential C-TB − declared C-TB. Can be expressed as a ratio to potential C-TB or as a percent of GDP.
  - CIT gap = potential CIT liabilities − declared CIT liabilities. Can be expressed as a ratio to potential CIT liability or as a percent of GDP.
- Sector CIT gaps:
  - Both CIT base gap and CIT gap can be estimated for individual economic activities if GOS and adjustments can be classified by activity; useful for targeting compliance strategies.

### Scope and sectoral coverage guidance
- Under SNA institutional sectors, analysis typically focuses on:
  - S11 (non-financial corporations) and S12 (financial corporations) as primary sources of GOS for corporate taxation.
- Practical recommendation:
  - It is often reasonable to limit analysis to S11 because estimating potential FAP and taxable incomes for financial corporations (S12) is more complex due to FISIM, insurance technical reserves, asset-price effects, deferred tax assets/liabilities, and bad-debt write-offs.
- Exclusions and special cases:
  - Entities in S13 (general government), S14 (households), and S15 (NPISH) are generally excluded unless their economic magnitude and noncompliance potential are non-negligible.
  - Entities classified in S11/S12 but legally exempt from CIT (e.g., central bank, entities in free economic zones) should be removed from GOS using entity-level data.

### Detailed D1 adjustments: GOS → FAP (items to add or subtract)
- Positive adjustments (add to GOS to estimate FAP) — data sources and issues to consider:
  - Interest (receipt): use allocation of primary income accounts; receipts should exclude FISIM component (pure interest relative to reference rate).
  - Distributed income of corporations (dividends, withdrawals): include dividends and withdrawals from quasi-corporations; exclude reinvested earnings on FDI except realized profits/losses of foreign branches.
  - Other investment income (receipt): exclude investment income attributed to insurance policy holders that are premium supplements.
  - Rent (receipt): include rent from owners of natural resources not included in output/GOS.
  - Current transfers (receipt): include net social contributions and other receipts (non-life insurance claims, donations) where relevant.
  - Capital transfers (receipt): check sources of large, irregular transfers (investment grants, debt cancellation).
  - Inventory Valuation Adjustment (IVA): add back holding gains excluded from GOS; holding gains can be substantial under inflationary circumstances.
  - Capital gains: do not use revaluation accounts or flow-of-funds data that include unrealized gains; rely on survey/financial statements for realized capital gains.
  - Profits of foreign branches: include via survey/financial statements or tax return proxies when necessary.
  - Other adjustments: include items recognized as accounting incomes (reversal of allowances/reserves, cost of trading/issuing securities).
- Negative adjustments (subtract from GOS to estimate FAP) — data sources and issues to consider:
  - Interest (payment): subtract interest payments net of FISIM component.
  - Other investment income (payment): subtract payments attributed to insurance policy holders.
  - Rent (payment): subtract rent payable to owners of natural resources where applicable.
  - Current transfers (payment): subtract social benefits (other than in-kind), non-life insurance net premiums, fines, penalties, donations; current taxes on income/wealth should only be subtracted if deductible in calculating CIT base.
  - Capital transfers (payment): investigate large transfers and decide subtraction.
  - Depreciation: subtract accounting depreciation (historical-cost basis) — note that Consumption of Fixed Capital (CFC) in national accounts is based on repurchase cost and cannot replace accounting depreciation.
  - Capital losses: do not use revaluation accounts or flow-of-funds data that include unrealized losses; rely on survey/financial statements for realized capital losses.
  - Other adjustments: subtract accounting expenses not recognized as intermediate consumption (current R&D/software expenditure, provisions, stock options).

### D2 adjustments: FAP → C-NTB (tax vs accounting differences)
- Description:
  - Mandatory tax-law differences reduce or increase taxable income relative to FAP. Examples reducing taxable income include dividend exclusions, foreign-source income excluded due to foreign tax, and special allowances/exemptions (accelerated depreciation). Examples increasing taxable income include disallowed expenses (entertainment, donations) and temporary differences from special allowances.
  - Aggregated adjustments produce potential C-NTB, which remains a net value reflecting both profitable and loss-making corporations.
- Typical positive adjustments (items to add to FAP to reach C-NTB):
  - Limitations on deductible donation amounts.
  - Limitations on deductible interest.
  - Limitations on deducting entertainment expenses.
  - Limitations on deducting fines and penalties.
  - Limitations on deductions of allowances and reserves.
  - Positive differences between accounting depreciation and tax depreciation.
- Typical negative adjustments (items to subtract from FAP to reach C-NTB):
  - Receipt of dividends (where dividends are excluded from taxable income).
  - Bad debt expenses (if deductible for tax but not accounted the same way).
  - Negative differences between accounting depreciation and tax depreciation.
  - Deductions for equity returns.
  - Specific tax deductions (such as R&D expense allowances).
  - Foreign-source incomes not subject to domestic taxation.
  - Income already subject to other deductible taxes (withholding tax or special levies).

### D3 adjustments: C-NTB → C-TB → TB (losses and carry-overs)
- Concept:
  - C-NTB reflects net value including losses; C-TB should reflect aggregated profit-making corporations in a current year before carried-over loss deductions.
  - TB (tax base used to calculate liability) = C-NTB + current-year positive adjustments for losses (D3.1) − deductions for carried-over losses (D3.2).
- Rationale:
  - These adjustments are necessary because taxation commonly treats profit-making and loss-making corporations asymmetrically (no direct reimbursement for current-year losses; carry-over rules apply).

### Calculating potential CIT liability from potential TB
- Apply statutory CIT rate(s) to potential TB; when multiple rates exist, separate the aggregate base into components subject to different rates (e.g., reduced rates for small corporations) using available distributional data.
- Reflect CIT tax credits and additional tax liabilities (minimum/alternative taxes) that are not proportional to the tax base to derive potential CIT liability before and after credits/additions.
- If reliable third-party data exist for potentially deductible credits/additions, include them; otherwise use declared values and note that the CIT gap will resemble the CIT base gap.

### Data quality caveats and operational considerations
- Top-down approach requires that national accounts are compiled independently of tax declarations; if national accounts heavily use tax return data to compile corporate GOS, the top-down comparison is meaningless.
- National accounts should adequately capture the non-observed economy; errors or biases in national accounts due to misreporting or non-responses will affect gap estimates.
- Data limitations (missing adjustments or unreliable third-party data) tend to bias estimated potential CIT base/liabilities toward underestimating CIT gaps, because declared values may be used as proxies for adjustments that should be estimated independently.
- Audit-derived bottom-up estimates (random or operational audits) can complement top-down analysis but face non-detection bias and selection bias; random audits are costly.

### BOX 1 — Treatments for Foreign Source Incomes (selected guidance)
- Distinguishing taxable and non-taxable foreign source income:
  - Tax treatment depends on each country’s domestic CIT legislation, CIT legislation in the foreign jurisdiction, and tax treaties.
  - National accounts and Balance of Payments (BOP) statistics show aggregate flows of incomes and financial transactions between resident and non-resident entities but do not necessarily provide complete data for estimating the domestic CIT base.
  - The OECD model tax treaty stipulates that income from foreign immovable properties is only taxable in the (foreign) countries in which they arise, while other property income (interest and dividends) is taxable in the countries where recipients reside.
  - There are many varieties of tax treaties, making it difficult to classify potentially “taxable” income and “non-taxable” income from aggregated national accounts and BOP numbers.
- Guidance on data sources and adjustments:
  - Unless concerns about foreign source income is one the main motivations for the CIT gap estimation, it is generally necessary to use tax return data to quantify “non-taxable” foreign source income to be excluded from the potential tax base estimation when transforming potential FAP to potential C-NTB.
  - If using tax return data, check that the magnitude of the foreign income is sufficiently smaller than the aggregate receipts of foreign source incomes in BOP data.
  - If foreign source income is one of the main motivations for the CIT gap estimation, adjustments will need to be based on independent data sources, for example academic studies of offshore incomes or leaked data from offshore advisors or banks.
- Examples of treatments (as presented):
  - Receipt of interest from foreign entities — Classification: Receipt of property income (interest) — Treatment in OECD model treaty: Taxable, while foreign country can also tax with a certain limit.
  - Receipt of dividends from foreign entities — Classification: Receipt of property income (dividends) — Treatment in OECD model treaty: Taxable, while foreign country can also tax with a certain limit.
  - Receipt of rent for immovable properties located in foreign countries — Classification: Receipt of property income (Withdrawals from income of quasi-corporations)1 — Treatment in OECD model treaty: Non-taxable.
  - Receipt of royalties for owned patents and similar property from foreign entities — Classification: Exports of services — Treatment: Taxable.
  - Profits from international shipping and air transport services — Classification: Exports of services (if customers are non-residents) or final or intermediate consumption (if customers are residents) — Treatment: Taxable.
  - Business profits of foreign branches — Classification: Not included in GOS — Treatment in OECD model treaty: Non-taxable, if permanent establishment exists in the foreign country.
- Procedures for adjustments from C-NTB to TB:
  - Key data required: Aggregate losses in the current year; Aggregate deductible carried-over losses in the current year.
  - Preferred data sources: Use corporate survey data showing aggregate losses by corporations if available; in most countries, reliable data on aggregate losses are not available other than from financial statements or tax returns.
  - Cautions when using tax return data on losses: Declared losses in tax returns may include anomalies; audits for loss-making corporations are often limited; exclude anomalies by checking internal inconsistencies over time.

### BOX 2 — Magnitude of Differences between GOS and C-TB in the United States (selected findings)
- Overview:
  - The Bureau of Economic Analysis (BEA) estimates GOS by using tax return data for CIT submitted to IRS, making adjustments for conceptual differences between the CIT tax base and gross operating surplus, and accounting for an estimated CIT gap using a bottom-up approach.
  - The BEA exercise illustrates quantitative links between GOS and C-TB and highlights which adjustment items drive differences between national accounts GOS and the CIT tax base.
- Aggregate amounts and IRS misreporting (2010):
  - Aggregate net corporate profit declared by taxpayers in 2010: 1,254.2 billion USD
  - Amount of misreporting (under-declarations) estimated by IRS (bottom-up approach using audit results): 401.5 billion USD
- BEA adjustments to construct GOS from TB (as presented):
  - GROSS OPERATING SURPLUS (CORPORATE BUSINESS)2,842 7
  - RATIO TO GOS
  - PLUS:(+) 2,715 5
    - (+) receipt of interest(+) 1,773.562.4%
    - (+) foreign source income(+)   3 3 6 .111. 8%
    - (+) dividends from domestic corporations(+)   176 .16.2%
    - (+) net capital gains from sales of property(+) 152.35.4%
    - (+) non-deductible interest payment(+) 129.74.6%
    - (+) costs of trading or issuing corporate securities(+) 62.32.2%
    - (+) inventory valuation adjustment(+) 41.01.4%
    - (+) business entertainment(+)   17. 80.6%
    - (+) other items(+) 26.70.9%
  - MINUS:(-) 3,902 4
    - (–) payment of interest(–) 1,883.4–66.3%
    - (–) depreciation(–) 1,20 9.2–42.5%
    - (–) bad debt expense(–) 316.3–11.1%
    - (–) net current transfer payment(–) 99.8–3.5%
    - (–) intangible amortization(–) 96.6– 3.4%
    - (–) income out of scope for CIT(–) 84.9–3.0%
    - (–) expenditures for intellectual property(–) 55.3–1.9%
    - (–) state and local taxes on corporate income( – )   47.7–1.7%
    - (–) expenditures for mining exploration( – )   25 .1–0.9%
    - (–) excess of employer expenses for DB plans(–) 20.7– 0.7%
    - (–) rent and royalties for natural resource(–) 19.2– 0.7%
    - (–) depletion of domestic minerals( – )   17.7–0.6%
    - (–) other items(–) 26.5–0.9%
  - POTENTIAL NET TI-C1,655 7
  - ADJUSTMENT FOR MISREPORTING ON INCOME TAX RETURNS
    - (–) 401 5
  - TOTAL RECEIPTS LESS TOTAL DEDUCTIONS, IRS1,254 2
- Key quantitative findings from the BEA adjustments (as presented):
  - The largest positive adjustment is receipt of interest: 1,773.562.4% (as presented).
  - The next largest positive adjustment is foreign source income:   3 3 6 .111. 8% (as presented).
  - The largest negative adjustments are payment of interest (1,883.4–66.3%) and depreciation (1,20 9.2–42.5%) (as presented).
  - Other non-negligible positive adjustments include dividends from domestic corporations (176 .16.2%) and net capital gains from sales of property (152.35.4%).
  - Other non-negligible negative adjustments include bad debt expense (316.3–11.1%) and net current transfer payment (99.8–3.5%).
- Implications:
  - Careful treatment of payment/receipt of interest is key to appropriately estimating the tax base from GOS, given that interest-related adjustments are the largest contributors to differences.
  - Differences between consumption of fixed capital in national accounts and depreciation in accounting reports are large, making depreciation a major adjustment item.
  - Other items—receipt of dividends, foreign source income, bad debt expenses, and income outside the scope of CIT—are smaller individually but still non-negligible and should be considered.
  - Although relative importance of adjustments may differ across countries, every adjustment item should be considered when estimating potential tax base from GOS.
- Methodological notes:
  - After constructing a potential TB, multiplying by relevant CIT statutory rates and adjusting for tax credits and additional liabilities yields potential CIT liabilities; if multiple CIT rates apply, separate parts of the base must be used.
  - Declared CIT base and liability must be matched with estimated potential CIT base and liability in terms of scope and timing; use of calendar-year aggregation is recommended to align with national accounts recording conventions.
  - When tax periods deviate from a calendar year, reallocations or classification into early (E) and late (L) groups can be used to approximate calendar-year collections.
  - Measuring actual CIT declarations requires attention to initial versus modified declarations, timing of payments (including advance payments, interest, penalties, reimbursements), and unpaid arrears; unpaid arrears should be separately recorded as a CIT collection gap.

*Source: Technical Notes and Manuals 18/02 | 2018 — Chapter 4 (Differences between GOS and N-CTB in the United States, 2010)*

### References                                                                                                              

### References

### Boxes
- 1. Treatments for foreign source incomes and foreign entities . . . . . . . . . . . . . . . . . . . . 19
- 2. Magnitude of differences between GOS and C-TB in the United States . . . . . . . . . . . . . . 21

### Figures
- 1. Theoretical Relationship between GDP and CIT Base . . . . . . . . . . . . . . . . . . . . . . . . 9
- 2. Concept of CIT Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

### Tables
- 1. Procedures for Positive Adjustments to GOS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
- 2. Procedures for Negative Adjustments to GOS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
- 3. Examples of Treatments for Foreign Source Income. . . . . . . . . . . . . . . . . . . . . . . . 19

*tnm1802 - References*

### 4. Differences between GOS and N-CTB in the United States, 2010 . . . . . . . . . . . . . . . . 22

### 4. Differences between GOS and N-CTB in the United States, 2010

### Purpose and framework
- The RA-GAP top-down framework defines the tax gap as the difference between potential revenue from underlying economic activities and actual revenue; the gap is decomposed into compliance gap and policy gap.
- The RA-GAP methodology for CIT focuses on measuring the compliance gap for CIT by estimating potential CIT under current tax legislation using macroeconomic (national accounts) data and comparing with declared tax returns.
- Top-down estimates assume a static model given current levels of economic activity and do not consider behavioral responses to administrative or policy changes.

### Key conceptual distinctions and aggregation sequence
- Gross Operating Surplus (GOS) from national accounts is used as the starting point; GOS is close to aggregate EBITDA of resident corporations and reflects value added not allocated to employees or taxes on production and imports.
- Three sequential adjustment categories are required to move from GOS to aggregate tax base (TB):
  - [D1] Differences between GOS in national accounts and aggregate Financial Accounting Profit (FAP) of CIT taxpayers.
  - [D2] Differences between aggregate FAP and aggregate Current-year Net Tax Base (C-NTB).
  - [D3] Differences between aggregate C-NTB and aggregate Tax Base (TB) after considering current-year losses and carry-over losses.
- Three tax-base concepts are defined explicitly:
  - Current-year net tax base (C-NTB): aggregated result reflecting both profit-making corporations and loss-making corporations in a current year.
  - Current-year tax base (C-TB): aggregated result of profit-making corporations in a current year (before deducting carried-over losses).
  - Tax base (TB): aggregate result of profit-making corporations in a current year minus deductions for carried-over losses (the base for calculating aggregate CIT liability in a year).

### Measurement indicators
- Primary compliance indicators:
  - CIT base gap = potential C-TB − declared C-TB. Can be expressed as a ratio to potential C-TB or as a percent of GDP.
  - CIT gap = potential CIT liabilities − declared CIT liabilities. Can be expressed as a ratio to potential CIT liability or as a percent of GDP.
- Sector CIT gaps: Both CIT base gap and CIT gap can be estimated for individual economic activities if GOS and adjustments can be classified by activity; useful for targeting compliance strategies.

### Scope and sectoral coverage guidance
- Under SNA institutional sectors, analysis typically focuses on:
  - S11 (non-financial corporations) and S12 (financial corporations) as primary sources of GOS for corporate taxation.
- Practical recommendation:
  - It is often reasonable to limit analysis to S11 because estimating potential FAP and taxable incomes for financial corporations (S12) is more complex due to FISIM, insurance technical reserves, asset-price effects, deferred tax assets/liabilities, and bad-debt write-offs.
- Exclusions and special cases:
  - Entities in S13 (general government), S14 (households), and S15 (NPISH) are generally excluded unless their economic magnitude and noncompliance potential are non-negligible.
  - Entities classified in S11/S12 but legally exempt from CIT (e.g., central bank, entities in free economic zones) should be removed from GOS using entity-level data.

### Detailed D1 adjustments: GOS → FAP (items to add or subtract)
- Positive adjustments (add to GOS to estimate FAP) — data sources and issues to consider:
  - Interest (receipt): use allocation of primary income accounts; receipts should exclude FISIM component (pure interest relative to reference rate).
  - Distributed income of corporations (dividends, withdrawals): include dividends and withdrawals from quasi-corporations; exclude reinvested earnings on FDI except realized profits/losses of foreign branches.
  - Other investment income (receipt): exclude investment income attributed to insurance policy holders that are premium supplements.
  - Rent (receipt): include rent from owners of natural resources not included in output/GOS.
  - Current transfers (receipt): include net social contributions and other receipts (non-life insurance claims, donations) where relevant.
  - Capital transfers (receipt): check sources of large, irregular transfers (investment grants, debt cancellation).
  - Inventory Valuation Adjustment (IVA): add back holding gains excluded from GOS; holding gains can be substantial under inflationary circumstances.
  - Capital gains: do not use revaluation accounts or flow-of-funds data that include unrealized gains; rely on survey/financial statements for realized capital gains.
  - Profits of foreign branches: include via survey/financial statements or tax return proxies when necessary.
  - Other adjustments: include items recognized as accounting incomes (reversal of allowances/reserves, cost of trading/issuing securities).
- Negative adjustments (subtract from GOS to estimate FAP) — data sources and issues to consider:
  - Interest (payment): subtract interest payments net of FISIM component.
  - Other investment income (payment): subtract payments attributed to insurance policy holders.
  - Rent (payment): subtract rent payable to owners of natural resources where applicable.
  - Current transfers (payment): subtract social benefits (other than in-kind), non-life insurance net premiums, fines, penalties, donations; current taxes on income/wealth should only be subtracted if deductible in calculating CIT base.
  - Capital transfers (payment): investigate large transfers and decide subtraction.
  - Depreciation: subtract accounting depreciation (historical-cost basis) — note that Consumption of Fixed Capital (CFC) in national accounts is based on repurchase cost and cannot replace accounting depreciation.
  - Capital losses: do not use revaluation accounts or flow-of-funds data that include unrealized losses; rely on survey/financial statements for realized capital losses.
  - Other adjustments: subtract accounting expenses not recognized as intermediate consumption (current R&D/software expenditure, provisions, stock options).

### D2 adjustments: FAP → C-NTB (tax vs accounting differences)
- Description:
  - Mandatory tax-law differences reduce or increase taxable income relative to FAP. Examples reducing taxable income include dividend exclusions, foreign-source income excluded due to foreign tax, and special allowances/exemptions (accelerated depreciation). Examples increasing taxable income include disallowed expenses (entertainment, donations) and temporary differences from special allowances.
  - Aggregated adjustments produce potential C-NTB, which remains a net value reflecting both profitable and loss-making corporations.
- Typical positive adjustments (items to add to FAP to reach C-NTB):
  - Limitations on deductible donation amounts.
  - Limitations on deductible interest.
  - Limitations on deducting entertainment expenses.
  - Limitations on deducting fines and penalties.
  - Limitations on deductions of allowances and reserves.
  - Positive differences between accounting depreciation and tax depreciation.
- Typical negative adjustments (items to subtract from FAP to reach C-NTB):
  - Receipt of dividends (where dividends are excluded from taxable income).
  - Bad debt expenses (if deductible for tax but not accounted the same way).
  - Negative differences between accounting depreciation and tax depreciation.
  - Deductions for equity returns.
  - Specific tax deductions (such as R&D expense allowances).
  - Foreign-source incomes not subject to domestic taxation.
  - Income already subject to other deductible taxes (withholding tax or special levies).

### D3 adjustments: C-NTB → C-TB → TB (losses and carry-overs)
- Concept:
  - C-NTB reflects net value including losses; C-TB should reflect aggregated profit-making corporations in a current year before carried-over loss deductions.
  - TB (tax base used to calculate liability) = C-NTB + current-year positive adjustments for losses (D3.1) − deductions for carried-over losses (D3.2).
- These adjustments are necessary because taxation commonly treats profit-making and loss-making corporations asymmetrically (no direct reimbursement for current-year losses; carry-over rules apply).

### Calculating potential CIT liability from potential TB
- Apply statutory CIT rate(s) to potential TB; when multiple rates exist, separate the aggregate base into components subject to different rates (e.g., reduced rates for small corporations) using available distributional data.
- Reflect CIT tax credits and additional tax liabilities (minimum/alternative taxes) that are not proportional to the tax base to derive potential CIT liability before and after credits/additions.
- If reliable third-party data exist for potentially deductible credits/additions, include them; otherwise use declared values and note that the CIT gap will resemble the CIT base gap.

### Data quality caveats and operational considerations
- Top-down approach requires that national accounts are compiled independently of tax declarations; if national accounts heavily use tax return data to compile corporate GOS, the top-down comparison is meaningless.
- National accounts should adequately capture the non-observed economy; errors or biases in national accounts due to misreporting or non-responses will affect gap estimates.
- Data limitations (missing adjustments or unreliable third-party data) tend to bias estimated potential CIT base/liabilities toward underestimating CIT gaps, because declared values may be used as proxies for adjustments that should be estimated independently.
- Audit-derived bottom-up estimates (random or operational audits) can complement top-down analysis but face non-detection bias and selection bias; random audits are costly.

*Source: Technical Notes and Manuals 18/02 | 2018 — Chapter 4 (Differences between GOS and N-CTB in the United States, 2010)*

### BOX 1  Treatments for Foreign Source Incomes

### BOX 1  Treatments for Foreign Source Incomes

### Distinguishing taxable and non-taxable foreign source income
- Tax treatment depends on each country’s domestic CIT legislation, CIT legislation in the foreign jurisdiction, and tax treaties.
- National accounts and Balance of Payments (BOP) statistics show aggregate flows of incomes and financial transactions between resident and non-resident entities but do not necessarily provide complete data for estimating the domestic CIT base.
- The OECD model tax treaty stipulates that income from foreign immovable properties is only taxable in the (foreign) countries in which they arise, while other property income (interest and dividends) is taxable in the countries where recipients reside.
- There are many varieties of tax treaties, making it difficult to classify potentially “taxable” income and “non-taxable” income from aggregated national accounts and BOP numbers.

### Guidance on data sources and adjustments for foreign source incomes
- Unless concerns about foreign source income is one the main motivations for the CIT gap estimation, it is generally necessary to use tax return data to quantify “non-taxable” foreign source income to be excluded from the potential tax base estimation when transforming potential FAP to potential C-NTB.
- If using tax return data, check that the magnitude of the foreign income is sufficiently smaller than the aggregate receipts of foreign source incomes in BOP data.
- If foreign source income is one of the main motivations for the CIT gap estimation, adjustments will need to be based on independent data sources, for example academic studies of offshore incomes or leaked data from offshore advisors or banks.

### Examples of treatments for foreign source income (from Table 3)
- Receipt of interest from foreign entities
  - Classification in national accounts and BOP: Receipt of property income (interest)
  - Treatment in OECD model treaty: Taxable, while foreign country can also tax with a certain limit
- Receipt of dividends from foreign entities
  - Classification in national accounts and BOP: Receipt of property income (dividends)
  - Treatment in OECD model treaty: Taxable, while foreign country can also tax with a certain limit
- Receipt of rent for immovable properties located in foreign countries
  - Classification in national accounts and BOP: Receipt of property income (Withdrawals from income of quasi-corporations)1
  - Treatment in OECD model treaty: Non-taxable
- Receipt of royalties for owned patents and similar property from foreign entities
  - Classification in national accounts and BOP: Exports of services
  - Treatment in OECD model treaty: Taxable
- Profits from international shipping and air transport services
  - Classification in national accounts and BOP: Exports of services (if customers are non-residents) or final or intermediate consumption (if customers are residents)
  - Treatment in OECD model treaty: Taxable
- Business profits of foreign branches
  - Classification in national accounts and BOP: Not included in GOS
  - Treatment in OECD model treaty: Non-taxable, if permanent establishment exists in the foreign country

- Footnote 1: When land located in a foreign country is owned by a resident entity, a notional resident unit is identified for statistical purposes as being the owner of the land in the foreign country. Then income arising from rent is recorded as direct investment income of the resident owner.

### Differences between Current-year Net Tax Base (C-NTB) and Tax Base (TB)
- Calculation asymmetry:
  - Corporations are generally not allowed to claim direct reimbursement for losses in the year they arise; losses are usually carried over and deducted from profits in later tax periods (though some countries allow offset of losses against profits in previous periods by reimbursing taxes paid for those years).
- Conceptual relationship:
  - The Current-year Net Tax Base (C-NTB) is an aggregated value over the entire economy, reflecting both positive and negative results of individual corporations’ activities.
  - Potential CIT liabilities should reflect only aggregate results of profit-making corporations in a current year, excluding results of loss-making corporations.
  - The potential C-NTB needs to be transformed to the potential C-TB (Current-year tax base), which should be larger than the C-NTB by the amount of absolute value of aggregate losses arising in the current year. Thus, potential C-TB = potential C-NTB + aggregate losses.
  - The potential tax base (TB) is derived by subtracting deductible carried-over losses from the potential C-TB. Deductibility of carried-over loss is stipulated in CIT legislation and is usually limited to the amount of profit at the maximum.

### Procedures for adjustments from C-NTB to TB
- Key data required:
  - Aggregate losses in the current year.
  - Aggregate deductible carried-over losses in the current year.
- Preferred data sources:
  - Use corporate survey data showing aggregate losses by corporations if available.
  - In most countries, reliable data on aggregate losses are not available other than from financial statements or tax returns.
- Cautions when using tax return data on losses:
  - Declared losses in tax returns may include anomalies because declared loss amounts are not directly relevant to the amount of tax liability in the current year; misreporting and under-reporting can be overlooked by tax administrations.
  - Audits for loss-making corporations are often limited if audit targets are selected to achieve more revenues in the short run.
  - It is necessary to exclude anomalies by carefully checking for internal inconsistencies over time, for example by comparing “declared losses” with “declared carried-over losses” in subsequent periods for the same taxpayers.

*Source: BOX 1  Treatments for Foreign Source Incomes (from the provided content).*

### BOX 2  Magnitude of Differences between GOS and C-TB in the United States

### BOX 2  Magnitude of Differences between GOS and C-TB in the United States

### Overview
- The Bureau of Economic Analysis (BEA) estimates GOS by using tax return data for CIT submitted to IRS, making adjustments for conceptual differences between the CIT tax base and gross operating surplus, and accounting for an estimated CIT gap using a bottom-up approach.
- The BEA exercise illustrates quantitative links between GOS and C-TB and highlights which adjustment items drive differences between national accounts GOS and the CIT tax base.

### Aggregate amounts and IRS misreporting (2010)
- Aggregate net corporate profit declared by taxpayers in 2010: 1,254.2 billion USD
- Amount of misreporting (under-declarations) estimated by IRS (bottom-up approach using audit results): 401.5 billion USD
- BEA adjusts both positive and negative sides for conceptual differences between GOS and TB using survey data and CIT return data.

### BEA adjustments to construct GOS from TB (Table 1 excerpt as presented)
- GROSS OPERATING SURPLUS (CORPORATE BUSINESS)2,842 7
- RATIO TO GOS
- PLUS:(+) 2,715 5
  - (+) receipt of interest(+) 1,773.562.4%
  - (+) foreign source income(+)   3 3 6 .111. 8%
  - (+) dividends from domestic corporations(+)   176 .16.2%
  - (+) net capital gains from sales of property(+) 152.35.4%
  - (+) non-deductible interest payment(+) 129.74.6%
  - (+) costs of trading or issuing corporate securities(+) 62.32.2%
  - (+) inventory valuation adjustment(+) 41.01.4%
  - (+) business entertainment(+)   17. 80.6%
  - (+) other items(+) 26.70.9%
- MINUS:(-) 3,902 4
  - (–) payment of interest(–) 1,883.4–66.3%
  - (–) depreciation(–) 1,20 9.2–42.5%
  - (–) bad debt expense(–) 316.3–11.1%
  - (–) net current transfer payment(–) 99.8–3.5%
  - (–) intangible amortization(–) 96.6– 3.4%
  - (–) income out of scope for CIT(–) 84.9–3.0%
  - (–) expenditures for intellectual property(–) 55.3–1.9%
  - (–) state and local taxes on corporate income( – )   47.7–1.7%
  - (–) expenditures for mining exploration( – )   25 .1–0.9%
  - (–) excess of employer expenses for DB plans(–) 20.7– 0.7%
  - (–) rent and royalties for natural resource(–) 19.2– 0.7%
  - (–) depletion of domestic minerals( – )   17.7–0.6%
  - (–) other items(–) 26.5–0.9%
- POTENTIAL NET TI-C1,655 7
- ADJUSTMENT FOR MISREPORTING ON INCOME TAX RETURNS
  - (–) 401 5
- TOTAL RECEIPTS LESS TOTAL DEDUCTIONS, IRS1,254 2

### Key quantitative findings from the BEA adjustments
- The largest positive adjustment is receipt of interest: 1,773.562.4% (as presented).
- The next largest positive adjustment is foreign source income:   3 3 6 .111. 8% (as presented).
- The largest negative adjustments are payment of interest (1,883.4–66.3%) and depreciation (1,20 9.2–42.5%) (as presented).
- Other non-negligible positive adjustments include dividends from domestic corporations (176 .16.2%) and net capital gains from sales of property (152.35.4%).
- Other non-negligible negative adjustments include bad debt expense (316.3–11.1%) and net current transfer payment (99.8–3.5%).

### Implications for estimating the tax base from GOS
- Careful treatment of payment/receipt of interest is key to appropriately estimating the tax base from GOS, given that interest-related adjustments are the largest contributors to differences.
- Differences between consumption of fixed capital in national accounts and depreciation in accounting reports are large, making depreciation a major adjustment item.
- Other items—receipt of dividends, foreign source income, bad debt expenses, and income outside the scope of CIT—are smaller individually but still non-negligible and should be considered.
- Although relative importance of adjustments may differ across countries, every adjustment item should be considered when estimating potential tax base from GOS.

### Broader methodological notes (as relevant to the U.S. example)
- After constructing a potential TB, multiplying by relevant CIT statutory rates and adjusting for tax credits and additional liabilities yields potential CIT liabilities; if multiple CIT rates apply, separate parts of the base must be used.
- Declared CIT base and liability must be matched with estimated potential CIT base and liability in terms of scope and timing; use of calendar-year aggregation is recommended to align with national accounts recording conventions.
- When tax periods deviate from a calendar year, reallocations or classification into early (E) and late (L) groups can be used to approximate calendar-year collections.
- Measuring actual CIT declarations requires attention to initial versus modified declarations, timing of payments (including advance payments, interest, penalties, reimbursements), and unpaid arrears; unpaid arrears should be separately recorded as a CIT collection gap.

*Source: BEA (2015)*

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_Source: https://www.imf.org/-/media/files/publications/tnm/2018/tnm1802.pdf_