Senator: Microsoft, HP using gimmicks to dodge US taxes

Levin questions whether the two companies are complying with U.S. tax law

By , IDG News Service |  Government

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.

In response to repeated questions from Levin, Bill Sample, Microsoft's corporate vice president for worldwide tax, and Lester Ezrati, HP's senior vice president and tax director, both acknowledged that their companies considered the tax implications when setting up the programs in question.

But both also stressed they were operating within the current U.S. tax code.

"Microsoft complies with the tax rules in each jurisdiction in which it operates and pays billions of dollars each year in total taxes, including U.S. federal, state, and local taxes and foreign taxes," Sample said.

Microsoft's overseas subsidiaries help fund the company's research and development efforts, and their profits are a reward for taking that risk, Sample said. Microsoft's sales overseas are growing faster than its U.S. sales, he added.

Levin questioned how a Microsoft subsidiary was taking a substantial risk in supporting the parent company's R&D. "It's all Microsoft money, isn't it?" he said.

Ezrati noted that HP employs about 80,000 people, or about a quarter of its workforce, in the U.S. and paid about $10.3 billion in U.S. salaries in 2011.

Levin questioned the HP loan program, suggesting it was highly coordinated to avoid U.S. taxes. HP has staggered the dates on which the financial quarters of the two subsidiaries end to avoid tax penalties and keep the cash flowing in, he said.

The short-term loans from HP's Belgium and Cayman Island subsidiaries are legal and amounted to a "modest" amount of the company's cash flow in recent years, Ezrati said. The U.S. Internal Revenue Service and auditor Ernst & Young have reviewed the loan program, he added.

"HP takes seriously its obligations to accurately follow accounting principles and pay the taxes it owes," he said.

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.

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