Sep. 20, 2012 at 12:07 PM ET
(Updated 1:48 p.m. Eastern) WASHINGTON -- Technology giants Microsoft Corp and Hewlett-Packard Co used offshore units to shield billions of dollars from U.S. taxes by taking advantage of loopholes and stretching the limits of the tax code, a U.S. Senate panel said on Thursday.
Describing tax avoidance as rampant in the technology sector, the Senate's Permanent Subcommittee on Investigations said tech companies used intellectual property, royalties and license fees in tax havens such as the Cayman Islands to skirt U.S. taxes.
The panel subpoenaed internal documents from the companies and interviewed Microsoft and HP officials to compile its report, and uses them as case studies.
"The tax practices and gimmicks range from egregious to dubious validity," Senator Carl Levin, chairman of the panel, said at a news conference.
Officials at HP and Microsoft strongly denied any wrongdoing.
The investigative panel's findings came hours ahead of a hearing Thursday, at which Levin is slated to reveal further details and to take testimony.
Levin, a Democrat, has been investigating offshore tax evasion for years and often issues reports calling attention to the issue. But Senator Tom Coburn, the ranking Republican on the panel, also signed onto the report.
U.S. companies have about $1.5 trillion in profits sitting offshore, and most say they are keeping it there to avoid U.S. tax. Of the top 10 companies with the biggest offshore cash balances, five are in the technology sector.
"The high-tech industry is probably the No. 1 user of these offshore entities to transfer intellectual property," Levin said.
The committee said that from 2009 to 2011, Microsoft shifted $21 billion offshore, almost half its U.S. retail sales revenue, saving up to $4.5 billion in taxes on goods sold in the United States.
This was accomplished, the panel report said, by aggressive transfer pricing, where companies put values on intercompany movement of assets. Units are supposed to use a fair market price to value such transfers, but critics say they are undervalued to minimize tax.
The report also said the software giant shifts royalty revenue to units in lower-tax nations such as Singapore and Ireland, avoiding billions of dollars of additional taxes in the U.S.
In prepared testimony, Microsoft vice president for tax William Sample said all its units serve a purpose, though he acknowledges tax considerations come into play.
"While the primary objective of our regional structure is to improve our competitiveness and efficiency in each of the three regions, we evaluated available tax incentives," also in its decisions.
Witnesses set to testify also include a tax executive from Hewlett-Packard, a tax executive from Big Four accounting firm Ernst & Young, and senior officials from the U.S. Internal Revenue Service.
The panel said Hewlett-Packard funded U.S. operations with a stream of intercompany loans, using an exception in the law for short-term loans, to avoid billions of dollars in taxes.
A spokesman for HP said it complies fully with tax law and said the IRS has never raised any concerns about the programs cited.
"We are disappointed to see what appears to be a politically motivated attack on one of America's largest employers," HP spokesman Michael Thacker said.
The committee also criticized Ernst & Young, the firm's audit, for blessing the practice.
Under tax law, foreign profits are subject to U.S. tax when they are "repatriated" back to the United States, usually in the form of a dividend.
Loans by the foreign units to a related U.S. entity are considered a dividend for tax purposes but there is an exception for loans that are repaid within 30 days, according to the committee's tax experts.
HP set up a complicated series of short term loans to these businesses that were continuous without gaps, to get around that provision, the panel found.
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