Microsoft, HP Criticized for Using Offshore Accounts to Avoid U.S. Taxes

A U.S. Senate subcommittee is shining a light on activities of the two tech companies to shield profits in offshore accounts in order to avoid paying U.S. corporate income taxes.

Two of the IT industry's biggest companies were singled out for criticism for shielding profits from U.S. corporate income taxes by transferring the funds to offshore accounts.

Microsoft and Hewlett-Packard were identified by the U.S. Senate's Permanent Subcommittee on Investigations as companies that use offshore units to shield billions of dollars from U.S. taxes by taking advantage of loopholes and stretching the limits of the tax code, according to Reuters.

Both companies were served with subpoenas for documents, and representatives of each were interviewed and their activities used as case studies for a report released by the subcommittee.

The report stated that Microsoft used transactions with subsidiaries in Puerto Rico, Ireland, Singapore and Bermuda to save at least $6.5 billion in taxes.

In the case of HP, the report said it 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. News reports did not specify an amount that HP reportedly avoided paying in U.S. taxes.

Sen. Carl Levin (D-Mich.), chairman of the subcommittee, did not accuse the companies of breaking the law, although he said he was "highly dubious" of HP's legal justification for its practices.

U.S. companies have a total of $1.5 trillion in offshore funds and admit it's there to avoid U.S. tax liability. Of the top 10 companies with the most funds offshore, five are in the technology sector, Reuters reported.

"The high-tech industry is probably the number one user of these offshore entities to transfer intellectual property," Levin said.

HP spokesman Michael Thacker told eWEEK that the company fully complies with the law and that the U.S. Internal Revenue Service has never raised offshore accounts as an issue.

"HP has always had an extremely productive and professional relationship with the IRS, [which] has permanent offices at two of our facilities and has been continually auditing HP since the filing of our 1962 tax return," Thacker stated.

"We are disappointed to see what appears to be a politically motivated attack on one of America's largest employers," he said.

Microsoft's vice president for tax policy, William Sample, presented written testimony to the committee on Sept. 20 in which he stated that "in conducting our business at home and abroad, we abide by U.S. and foreign tax laws."

But Sample went further, noting that U.S. international tax laws "are outdated and not competitive with the tax systems of our major trading partners."

"Microsoft has a complex business and we must comply with the complicated tax code of the United States, resulting in an exceedingly complex tax structure," he stated.

Sample called on Congress to reform U.S. international tax policy to make it simpler and more competitive with the rest of the world.

U.S. companies with global operations seek to shelter profits overseas because if they are transferred to the U.S., they are taxed at a 35 percent rate, which is higher than many of the other countries in which they operate.