Senators accuse HP, Microsoft of avoiding billions in taxes

Microsoft and Hewlett-Packard used offshore tax havens and other strategies to avoid billions of dollars in taxes, according to a Senate memo released Thursday.

Microsoft used U.S. tax credits to develop software in the United States, but then sold the intellectual property rights to subsidiaries in Puerto Rico, Ireland and Singapore, according to the memo. Those strategies, called transfer pricing, allowed Microsoft to avoid U.S. taxes on 47 percent of its revenue, saving the company $4.5 billion, the study found.

Senators said HP directed two of its offshore subsidiaries to provide serial, alternating loans to fund its U.S. operations. The company characterized the money as short-term loans, which are exempt under U.S. law.

{mosads}The memo claimed the move allowed HP to “effectively repatriate untaxed foreign profits back to the United States to run their U.S. operations, contrary to the intent of U.S. tax policy.”

The memo was released by Sen. Carl Levin (D-Mich.), chairman of the Homeland Security and Governmental Affairs subcommittee on Investigations, and Sen. Tom Coburn (R-Okla.), the panel’s ranking member.

Levin has been a longtime critic of offshore tax strategies used by multinational corporations, and his subcommittee released a report last October slamming the sort of corporate tax holiday sought by multinationals like Microsoft and other leading tech companies.

In a Thursday statement, Levin also noted that Microsoft and HP were just a couple of the companies using offshore techniques, and said policymakers should limit corporations’ ability to use those tactics as they look to both overhaul the tax code and reduce deficits.

“Major U.S. corporations are increasingly earning their profits here but shipping them overseas to avoid paying the taxes they owe,” Levin said in a statement. “At a time when we face such difficult budget choices, and when American families are facing a tax increase and cuts in critical programs from education to health care to food inspections to national defense, these offshore schemes are unacceptable.”

Officials from HP and Microsoft told the senators at a hearing on Thursday that their companies did not do anything illegal, and that their tax records were the byproduct of their work in a global marketplace.

Bill Sample, a Microsoft vice president, said the company supports a simpler tax code to make the United States more competitive with the rest of the world. 

Many corporations have urged the U.S. to move away from its current system of taxing businesses on income made anywhere in the world. Companies can defer paying those taxes until bringing income back into the United States. But the business community prefers a so-called territorial system, which is used by most industrial countries and would essentially only tax U.S. companies on income made within America’s borders.

“One of the business imperatives faced by Microsoft and many U.S.-based businesses today is that we must operate in foreign markets in order to compete and succeed as a company,” Sample said. “Foreign revenue growth helps support the growth of our U.S. operations, creating additional U.S. jobs and supporting an economic ripple effect that leads to greater growth in local communities.”

He noted that Microsoft supports about 462,000 jobs in the United States.

Lester Ezrati, an HP vice president, said his company is global in scope and derives 65 percent of its revenue from non-U.S. customers. He said HP has 80,000 U.S. employees, many of them highly paid.

“In summary, for over 70 years, HP has been a symbol of American innovation and the entrepreneurial spirit that helps drive the U.S. economy,” he said.