Transfer Pricing and the Persistent Zero Taxable Income of Foreign-Controlled U.S. Corporations.

Abstract Grubert et al. (1993) document a persistence of foreign-controlled domestic corporation taxable income around zero which has been interpreted by many, including tax policymakers, as suggesting transfer pricing. We examine foreign-controlled domestic corporations (FCDCs) within the wholesale trade industry from 1981 to 1990 to determine if this prevalence of near-zero taxable income is linked to manipulation of transfer prices on inventory purchases. We find no difference in the relation between sales and gross profit between near-zero FCDCs and near-zero control companies that are uncontaminated by cross-jurisdictional income shifting manipulation. Our inability to document transfer price manipulation by investigating an industry and the accounts where manipulation is alleged to be most egregious suggests that previous inferences of transfer price manipulation based on the persistence of foreign-controlled U.S. corporation taxable income around zero are premature.