Congressional report dings Microsoft, HP for avoiding taxes

Report examines how two of technology's biggest companies exploited weaknesses and loopholes in tax and accounting rules. But they're not doing anything illegal.

Charles Cooper Former Executive Editor / News
Charles Cooper was an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet.
Charles Cooper
3 min read
Maybe they needed something to occupy their attention before the presidential candidates go head to head, but a U.S. Senate committee says that two of tech's biggest companies have worked assiduously to reduce their tax bills.
Big surprise.

Still, it was worth the time of congressional staffers who today published an extensive report in advance of an afternoon Senate hearing today on loopholes in current tax law.

"Major U.S. corporations are increasingly earning their profits here but shipping them overseas to avoid paying the taxes they owe," Senator Carl Levin, a Michigan Democrat and chairman of the Permanent Subcommittee on Investigations, said prior to the hearing.

The report traces how it says Microsoft and Hewlett-Packard took advantage of provisions in current tax and accounting codes to avoid paying U.S. tax on billions of dollars in offshore profits. However, the report does not charge the companies with doing anything illegal as both individuals and corporations routinely take steps to reduce their tax liability.

The report goes into quite some detail about how the companies' web of subsidiaries help their corporate parents reduce their tax bill to Uncle Sam. But while the 27-page report holds up a magnifying glass on the sometimes arcane tax maneuvers adopted by both companies, it's unclear whether either company is doing anything much different than other large multinationals with far-flung enterprises across the globe.

Beginning in the 1990s, Microsoft began establishing a complex web of interrelated foreign entities to facilitate international sales and reduce U.S. and foreign tax. Microsoft established three regional operating centers in low tax jurisdictions, first in Ireland, then Singapore and Puerto Rico... Microsoft makes efforts to maximize profits held in these three operating centers in order to reduce its tax liabilities.
The report also shines a light on how HP manages its sprawling operations to cut its tax bill.

Beginning in approximately 2003, HP initiated a loan program, funded with its overseas cash, to provide funding for its U.S. operations. This loan program, from at least 2008, appears to have been used as a way to de facto repatriate billions of dollars each year to the United States to fund most of HP's U.S. operations, and provide those operations with economic use of the company's foreign earnings without a formal dividend distribution that would be taxable.

It says that since 2008, HP has used a couple of offshore entities -- one in Belgium, the other in the Cayman Islands -- "have provided billions of dollars to fund general operations for HP in the United States, including payroll and HP share repurchases."

In a written statement, Bill Sample, Microsoft's corporate VP in charge of worldwide tax, said that Microsoft complies with the tax code of the United States, "resulting in an exceedingly complex tax structure."

While expressing support for reforms to simplify the U.S. tax code, Sample noted that "in conducting our business at home and abroad, we abide by U.S. and foreign tax laws. That is not to say that the rules cannot be improved -- to the contrary, we believe they can and should be. U.S. international tax rules are outdated and not competitive with the tax systems of our major trading partners."

HP said in a written statement that the company has "complied fully with all applicable provisions" of U.S. tax law. It added that reviews by its auditor Ernst & Young "never raised any concerns about these programs" and expressed disappointment at "what appears to be a politically motivated attack on one of America's largest employers."