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IDG News Service - Microsoft and Hewlett-Packard are using "loopholes and gimmicks" to avoid paying millions of dollars in U.S. taxes, the chairman of a U.S. Senate subcommittee said Thursday.
Microsoft is shifting a disproportionate amount of its profits to subsidiaries in three low-tax jurisdictions, and HP is using constant short-term loans from its overseas subsidiaries to avoid paying taxes on earnings coming back into the U.S., said Senator Carl Levin, chairman of the investigations subcommittee of the Senate Homeland Security and Governmental Affairs Committee.
"It is highly dubious that some of these practices comply with existing [tax regulations] or existing law," Levin, a Michigan Democrat, said at a subcommittee hearing.
Microsoft and HP are not alone in massaging the U.S. tax law, Levin said, but a long-term subcommittee investigation has focused on the two companies. Efforts by corporations to lower their U.S. tax burden may not be illegal in many cases, but the practices of HP and Microsoft raise "serious questions," he said.
Many multinational corporations based in the U.S. "use complex structures, dubious transactions, and legal fictions to shift the profits from those products overseas, avoiding the taxes to help support our security, stability and productivity," Levin added.
Representatives of both companies defended their tax practices, saying they comply with U.S. law. Senator Tom Coburn, a Republican from Oklahoma, blamed Congress for a complicated tax code full of legal loopholes and for a high corporate tax rate.
"Tax avoidance is not illegal," he said. "There's nothing wrong with that. There's nothing immoral with that. It's the system that Congress has set up."
Coburn called for Congress to overhaul and simplify the tax code.
Levin, however, questioned the efforts of Microsoft and HP. In Microsoft's case, the company charges three foreign subsidiaries large licensing fees to sell its products. In 2011, two of those subsidiaries, in the low-tax jurisdictions of Ireland and Singapore, paid about US$4 billion for those licenses, then sold products worth $12 billion, even though U.S. tax law requires the subsidiaries to pay fair prices for the transfer of assets, Levin said.
That allowed Microsoft to move $8 billion in profits offshore and out of U.S. tax jurisdiction, he said.
Microsoft also sells licenses to its subsidiary in Puerto Rico, which then sells the distribution rights of Microsoft products back to the U.S. parent company at a profit, Levin said. Last year, 47 percent of the U.S. sales of Microsoft products were shifted to Puerto Rico, he alleged.
In 2011, Microsoft assigned about 55 percent of its profits to the subsidiaries in Ireland, Singapore and Puerto Rico, said Stephen Shay, a tax law professor at Harvard University. Shay and two other tax experts also questioned the Microsoft and HP methods.
HP uses a different mechanism to avoid U.S. taxes, Levin said. U.S. tax law requires companies to pay U.S. taxes on foreign profits sent back to the U.S., but there's an exception for short-term loans. In recent years, HP subsidiaries in Belgium and the Cayman Islands have provided a near-constant stream of short-term loans to HP in the U.S. to pay for a variety of expenses, including U.S. payroll and shareholder dividends, Levin said.