Senate Permanent Subcommittee on
Investigations Examines U.S. Tax Avoidance By Microsoft and
Hewlett-Packard Via Offshore Tax Havens
September 21, 2012
U.S.-based multinationals have dodged
billions of dollars in taxes by shifting 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,
information uncovered by the U.S. Senate Permanent Subcommittee on
“Major U.S. corporations are increasingly earning their profits here but
shipping them overseas to avoid paying the taxes they owe,” said Sen.
Carl Levin, D-Mich., the subcommittee chairman. “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
Case studies of offshore tax avoidance schemes by Microsoft and
Hewlett-Packard were featured at a subcommittee hearing. Thursday’s
hearing is the latest in a decade of Subcommittee investigations into
how wealthy individuals and multinational corporations use offshore tax
schemes to dodge paying the taxes they owe. The hearing will show how
corporations use weaknesses in tax law concerning “transfer pricing” –
the shifting of property from a U.S. parent company to overseas
subsidiaries – and other loopholes in tax law and accounting rules to
earn substantial U.S. profits without paying substantial U.S. taxes.
Tax avoidance has helped push corporate income tax revenue, as a share
of all federal revenue, to historically low levels, meaning corporations
bear a much smaller share of the tax burden, leaving more for American
families to carry. According to the Congressional Research Service, the
share of corporate income taxes has fallen from a high of 32.1 percent
of federal tax revenue in 1952 to just 8.9 percent in 2009. Meanwhile,
payroll taxes – which almost every income earner, rich, middle-income
and poor, must pay – have skyrocketed from 9.7 percent of federal
revenue to 40 percent.
The hearing will outline two case studies of how U.S. multinational
corporations exploit loopholes.
One case study will show how Microsoft has developed software products
in the United States using U.S. research and development tax credits,
sold intellectual property rights in those products to offshore
subsidiaries in low-tax jurisdictions, and then used transactions to
shift the bulk of the profits from product sales around the world to the
tax havens, avoiding U.S. taxes. The case study will also show how
Microsoft’s U.S. parent corporation transferred the U.S. rights to
intellectual property offshore, and then bought back a portion of those
rights to make U.S. sales, a gimmick it used to avoid U.S. taxes on 47
percent of the revenue from Microsoft products developed and sold in the
The second case study will show how Hewlett-Packard has used a tax
loophole to avoid paying U.S. taxes on billions of dollars in offshore
income that it has returned to the United States to run its U.S.
operations. Hewlett-Packard obtained the offshore cash by directing two
of its offshore subsidiaries to provide serial, alternating loans to its
U.S. operations. With the apparent support of its auditor, Ernst &
Young, Hewlett-Packard characterized the ongoing lending as occasional
short-term loans which are exempt from U.S. taxation under the tax code.
The hearing witnesses include executives from Microsoft,
Hewlett-Packard, and Ernst & Young; officials from the IRS and the
Financial Standards Accounting Board; and academic experts.
The specific findings of the investigation are as follows.
Tax Incentives to Shift Profits Offshore. Current weaknesses in the tax
code’s transfer pricing regulations, Subpart F, and Section 956, and in
the Financial Accounting Standards Board’s (FASB) accounting standard,
APB 23 relating to deferred tax liabilities on permanently or
indefinitely invested foreign earnings, encourage and facilitate the
shifting of intellectual property and profits offshore by multinational
corporations headquartered in the United States.
Ambiguity in Accounting Standard APB 23. Ambiguities in accounting
standard APB 23 create the potential for companies to manage their
earnings by avoiding reporting U.S. tax liabilities for foreign profits,
thereby improving the appearance of their financial statements to
shareholders and investors. The financial reporting benefits of APB 23
encourage MNCs to move and keep their businesses and earnings offshore.
Aggressive Transfer Pricing. Microsoft Corporation has used aggressive
transfer pricing transactions to shift its intellectual property, a
mobile asset, to subsidiaries in Puerto Rico, Ireland, and Singapore,
which are low or no tax jurisdictions, in part to avoid or reduce its
U.S. taxes on the profits generated by assets sold by its offshore
Offshoring Profits. From 2009 to 2011, by transferring certain rights to
its intellectual property to a Puerto Rican subsidiary, Microsoft was
able to shift offshore nearly $21 billion, or almost half of its U.S.
retail sales net revenue, saving up to $4.5 billion in taxes on goods
sold in the United States, or just over $4 million in U.S. taxes each
Check-the-Box and the CFC Look-Through Rule Undermine Subpart F. In
FY2011, Microsoft Corporation excluded an additional $2 billion in U.S.
taxes on passive income at its offshore subsidiaries, relying on the
“check-the-box” regulations and the controlled foreign corporation (CFC)
“look-through” rule, which have undermined the intent of the tax code’s
Subpart F to prevent the shifting of passive CFC profits to tax havens
to avoid U.S. tax.
Short Term Offshore Loans. Since at least 2008, Hewlett Packard Co. has
used billions of dollars of intercompany offshore loans 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.
Auditor Reliance. H-P’s auditor, Ernst & Young, knew that the company
had set up a structured loan program to obtain billions of dollars in
continual, alternating loans each year from two offshore entities and
used those offshore funds to run its U.S. operations, but continued to
support H-P’s view that those offshore funds had not been repatriated to
the United States and were not subject to taxation.