WASHINGTON (Bloomberg) — A Senate committee memo says Microsoft used aggressive international tax maneuvers to avoid billions of dollars in taxes over the past three years.
The committee memo, released in advance of a 2 p.m. hearing, said Microsoft used transactions with subsidiaries in Puerto Rico, Ireland, Singapore and Bermuda to save at least $6.5 billion in taxes. In 2008, Hewlett-Packard created a series of short-term internal loans that allowed the company to tap its offshore cash for domestic operations without paying taxes, according to the memo.
Sen. Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations, didn’t accuse the companies of acting illegally.
“These loopholes and abuses exact a tremendous cost,” Levin told reporters at a briefing Thursday. “What these gimmicks do is shift the burden of taxes onto citizens and business who don’t use armies of lawyers and accountants.”
Levin and the panel’s top Republican, Tom Coburn of Oklahoma, sent the memo to committee members.
The report describes the ways companies can move profits outside of the country and keep them there to avoid U.S. taxes. Representatives from Microsoft and HP were scheduled to testify at Thursday’s hearing.
“Microsoft’s tax results follow from its business, which is fundamentally a global business that requires us to operate in foreign markets in order to compete and grow,” Bill Sample, the company’s corporate vice president for worldwide tax, said in his written testimony for the hearing. “In conducting our business at home and abroad, we abide by U.S. and foreign tax laws as written.”
U.S.-based companies owe U.S. taxes on profits they earn around the world. They receive credits against that liability for taxes paid to foreign governments, and they don’t have to pay U.S. taxes until they bring the money home.
The gap between the 35 percent U.S. corporate tax rate and lower tax rates in the rest of the world gives companies an incentive to book profits outside of the U.S. Levin said technology companies can easily move intangible assets such as patents outside of the U.S. with intra-company transactions at low prices.
“The high-tech industry is probably the number-one user of these offshore entities to transfer intellectual property,” he said.
Levin’s investigators sent letters to companies and used subpoenas to get information that companies don’t typically disclose. He said they focused on Microsoft and HP to show patterns that are common across U.S. companies.
Levin attributed such tax avoidance in part to a lack of enforcement by the Internal Revenue Service, gaps in IRS regulations and “loopholes” created by Congress.
The Senate memo highlighted HP’s use of loans to tap its offshore cash. The loans, the report said, are structured to comply with the letter of tax rules that allow short-term loans from foreign subsidiaries in Belgium and the Cayman Islands to the parent company, even though they provide a continuous tax- free stream of capital to the company.
The memo, citing company documents, said as much as $5 billion was available to the parent company in 2008. HP holds $29.1 billion in untaxed earnings outside the U.S., according to the company’s most recent annual filing.
HP has fully complied with U.S. tax law and the IRS has not raised concerns about the programs described in the memo, the company said in a statement.
“We are disappointed to see what appears to be a politically motivated attack on one of America’s largest employers,” it said.