At the hearing, the subcommittee revealed ways in which tech giants Microsoft and Hewlett-Packard have taken advantage of tax loopholes and used transfer pricing arrangements to avoid paying billions of dollars in U.S. taxes. It said Microsoft transferred the U.S. rights to intellectual property offshore, and then bought back a portion of those rights to make U.S. salesan action it characterized as a "gimmick" to avoid U.S. taxes on 47 percent of the revenue from Microsoft products developed and sold in the U.S.
Between 2009 and 2011, the Redmond, Washingtonbased company used transactions with subsidiaries in Puerto Rico, Ireland, Singapore, and Bermuda to shift nearly $21 billion offshorealmost half of its U.S. retail sales net revenue, saving up to $4.5 billion in taxes on goods sold in the U.S., according to the subcommittee.
Investigators also said that Microsoft was able to use other tax regulations to avoid paying an additional $2 billion in U.S. taxes on passive income, such as royalties, at its offshore subsidiaries. Other companies that use this strategy include Apple and Google, the subcommittee said. In fiscal 2009, 2010, and 2011, Apple deferred taxes on more than $35.4 billion in offshore income, and Google on more than $24.2 billion, the investigators found.
Hewlett-Packard, subcommittee investigators revealed, has used a series of short-term internal loans that allowed it to tap its offshore cash for domestic operations without paying taxes. Under tax law, foreign profits are subject to U.S. tax when they are "repatriated," or brought back to the U.S. But there is an exception for loans that are repaid within 30 daysa loophole that HP exploited, according to the committee's tax experts.
At the hearing, Microsoft and Hewlett-Packard denied any wrongdoing.
Attorneys say the goal of Levin's committee has been to shed light on the ways in which global corporations find ways to shirk their tax obligations. "Levin has made clear that he thinks that even if they are operating within the letter of the law, their ethics are at best questionable," says DLA Piper's Ryan.
Levin's committee has also been seeking ways that Congress can fix the system, or at least plug loopholes. One idea floated by the Obama administration is that even if a portion of a company's profits reside in a foreign subsidiary, those profits should be taxed in the U.S. if the foreign tax rate is low. "But this would require a fundamental change in tax law, and corporate America would view any such proposal as anticompetitive," Ryan says.
In Europe, meanwhile, lawmakers have been hammering multinationals that use transfer pricing schemes to avoid paying taxes in the jurisdictions in which they operatedespite the fact that they earn billions throughout Europe. In France, authorities reportedly raided Google's offices in Paris and seized documents related to a tax dispute. The French government has already presented Google with a tax bill for $2.18 billion. Amazon has been given one for $252 million. Facebook Inc. is also believed to be on the hook for back taxes. And in the United Kingdom, members of Parliament in November accused Amazon, Google, and Starbucks Corporation of being "immoral" and "manipulative," and of "practicing tax avoidance on an industrial scale." An investigation revealed that Starbucks had paid no corporate tax in Britain for 14 of the last 15 years, prompting boycotts and demonstrations.
Other companies engaging in these practices are less visible and therefore perhaps less vulnerable. But outrage in Europe is so strong, many predict that the European Union will soon try to make a coordinated effort to curb these practices. In a strident speech at Davos in January, the British prime minister, David Cameron, declared that abuse of tax systems was "an issue whose time has come."
He said the U.K. would use its presidency of the G8 group of rich nations to push for global action against corporate tax evasion and "aggressive" tax avoidance. And in a swipe at Starbucks, he declared that "any businesses who think that they can carry on dodging their fair share or that they can keep on selling to the U.K. and setting up ever-more complex tax arrangements abroad to squeeze their tax bill right downwell, they need to wake up and smell the coffee because the public who buy from them have had enough."