Senate report slams Microsoft and HP for tax-dodging

Posted by Emma Woollacott

Microsoft and Hewlett-Packard have - entirely legally - avoided billions of dollars in taxes over the last three years, according to a US Senate Committee.

The US Senate Permanent Subcommittee on Investigations chairman, Democrat Senator Carl Levin says the companies have shifted profits to low-tax jurisdictions overseas, and have used loopholes in the law to avoid taxes on repatriated income that should be subject to taxation.

"Major US corporations are increasingly earning their profits here but shipping them overseas to avoid paying the taxes they owe," he says.

"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."

The committee yesterday hears the details of offshore tax avoidance schemes by Microsoft and Hewlett-Packard, as part of a decade-long investigations into how wealthy individuals and multinational corporations use offshore schemes to dodge the taxes they owe.

While payroll taxes have shot up from 9.7 percent of federal revenue in 1952 to 40 percent today, the share of corporate income taxes has fallen from 32.1 percent to just 8.9 percent over the same period.

In the case of Microsoft, it's alleged, the company has developed software products in the US - using US research and development tax credits - but then sold intellectual property rights in those products to offshore subsidiaries in low-tax jurisdictions.

It then used transactions to shift the bulk of the profits from product sales around the world to these tax havens, avoiding US taxes.  

In addition, the hearing was told, Microsoft's US parent corporation transferred the US rights to intellectual property offshore, and then bought back a portion of those rights to make US sales - thus avoiding US taxes on a staggering 47 percent of the revenue from Microsoft products developed and sold in the United States.

Hewlett-Packard, meanwhile, is accused of using a tax loophole to avoid paying US taxes on billions of dollars in offshore income that it has returned to the United States to run its US operations.  It obtained the offshore cash by directing two of its offshore subsidiaries to provide serial, alternating loans to its US operations.  

Ernst & Young, the company's auditor, is accused of being in on the act, supporting HP  in characterizing the ongoing lending as occasional short-term loans, which are exempt from US taxation.