Tech Giants under US Senate Tax Probe

on Sep 26, 2012

Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HPQ) skirted billions of dollars in taxes by taking advantage of loopholes in the tax code, a US Senate Panel said, as reported by the Telegraph on 20 September 2012. The Senate’s Permanent Subcommittee on Investigations found out that both tech companies held intellectual property and subsequent royalties and license fees in tax havens such as the Cayman Islands so as to avoid US taxes.

At a news conference, Senator Levin, a Michigan Democrat and chairman of the investigative panel, called the hi-tech industry “probably the number-one user” of offshore entities for transferring intellectual property. “The tax practices and gimmicks range from egregious to dubious validity,” Senator Levin commented, as quoted by the Telegraph. Bloomberg quotes the panel’s Senator Tom Coburn, a Republican from Oklahoma, as describing the moves of the software companies as “properly legal tax avoidance”.

Bloomberg reports that according to the panel’s findings, Microsoft in particular used transactions involving subsidiaries in Bermuda, Ireland, Puerto Rico and Singapore to save at least $6.5 billion (£4 billion) in taxes. Senator Levin outlined that the tech giant used transactions within the company to assign 47 percent of its US income to a subsidiary in Puerto Rico, and also shifted income from around the world to a Bermuda subsidiary with no employees.

!m[](/uploads/story/467/thumbs/pic1_inline.png)HP on the other hand chose a somewhat different approach, namely using a series of short-term international loans, which allowed the company to tap its offshore cash resources for domestic operations without paying taxes. According to the panel report, the loans were structured to comply with the letter of tax rules allowing short-term loans from subsidiaries in Belgium and the Cayman Islands to the parent company.

Although Senator Levin did not accuse the companies of acting illegally, he noted that he was “highly dubious” that HP was in compliance with the tax law. The Senator, however, told Microsoft’s corporate vice president for worldwide tax Bill Sample that while such financial manoeuvres might be in Microsoft’s temporary interest, there was also “a heavy cost to the United States”.

Senator Levin, who has been investigating offshore tax evasion for years, pointed out that investigators focused on Microsoft and HP in particular to show patterns common across US companies. As noted in the Bloomberg article, the 35 percent US corporate tax is an incentive for companies to book profits outside the US, taking advantage of lower tax rates elsewhere. “Our report is about the symptoms of the disease, not the real disease,” noted Senator Coburn at the hearing, as quoted by Bloomberg.
The Financial Times reports that over the past 60 years, corporate taxes as a share of federal tax revenue in the US have fallen from 32.1 percent to 8.9 percent. “At a time when we face such difficult budget choices, and when American families are facing a tax increase and cuts in critical programmes from education to healthcare to food inspections to national defence, these offshore schemes are unacceptable”, pointed out Senator Levin, as quoted by the FT.
Mr Sample commented that Microsoft made “very limited use” of the tax exemptions cited by the panel, whereas Michael Thacker, an HP spokesman, noted that HP had “complied fully with all applicable provisions of the US internal revenue code”.
And while the exact consequences of the investigation on both software giants are still unclear, it would be interesting to observe whether the panel findings are going to have any impact on the tax debate between the US presidential candidates, with taxes on foreign earnings being one of the points of contention between the US president Barrack Obama and the Republican nominee Mitt Romney.


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