Microsoft, Apple, Google and HP have been singled out by a US Senate permanent subcommittee as relying on various "loopholes and gimmicks" year after year to avoid paying taxes.
At a hearing on offshore profit-shifting and US taxation in Washington, DC, yesterday, the US Senate's permanent subcommittee on investigations said "massive offshore profit-shifting" to the tune of $1.7tn (£1.04tn) has occurred.
He said many tech giants had been involved, singling out HP, Apple, Google and Microsoft in particular, in "exploiting the weaknesses" in US taxation and accounting law to keep funds out of public coffers.
Carl Levin, chairman of the panel, said Microsoft Ireland, for example, had officially paid Microsoft $2.8bn for certain intellectual property rights, but received $9bn in return. Microsoft Singapore received $3bn for rights for which it had reportedly paid $1.2bn.
"This means that Microsoft shifted $8bn in income offshore. Yet over 85 per cent of Microsoft's R&D is conducted in the US," Levin told the hearing. "Too many of these corporates use complex structures, dubious transactions and legal fictions to shift the profits from products overseas, avoiding the taxes that help support our security, stability and productivity."
Levin also pointed to a transfer pricing agreement with its Puerto Rican subsidiary. "Microsoft sells the rights to market its IP in the Americas to Microsoft Puerto Rico. Microsoft in the US then buys back from Microsoft Puerto Rico the distribution rights for the US. The US parent buys back a portion of the rights it just sold," he said.
Under the distribution deal, Microsoft US agreed to pay the Puerto Rico subsidiary a certain percentage of the sales revenue it receives from distributing Microsoft product in the US. Last year, 47 per cent of Microsoft's sales proceeds in the US were shifted to Puerto Rico under this arrangement.
"The result? Microsoft US avoids US taxes on 47 cents in each dollar of sales revenue it receives from selling its own products right here in this country [the US]," Levin said.
In the case of HP, that vendor set up what it called an "alternating" loan scheme in 2008 that was funded mainly by HP's Belgian Coordination Centre and the Compaq Cayman Holding Corp. Loans from those entities were used to fund HP's US operations including payroll and HP stock repurchases.
"HP did not have adequate cash in the US to run its operations," Levin told the hearing. "The loan programme was designed to... provide a continuous stream of offshore profits to the US without paying US taxes."
Apple and Google, as well as Microsoft, have apparently used a clause on the declaration of offshore passive income, dubbed Subpart F, to defer the payment of taxes for years in a row. By defining itself as a different type of legal entity, a company can avoid paying tax on such income under Subpart F. "Weak enforcement" is also to blame here, Levin noted.
"The subcommittee has learned that for fiscal years 2009, 2010, and 2011, Apple has been able to defer taxes on over $35.4bn in offshore passive income covered by Subpart F. Google has deferred over $24.2bn in the same period. For Microsoft, the number is $21bn," said Levin.
Difficult to enforce
William Wilkins, chief counsel for the Internal Revenue Service (IRS) in the US, said the issue of offshore earnings was one of the most fraught and difficult to enforce.
"Transfers of such critical business assets outside of a corporate group rarely occur, so comparable uncontrolled transactions are difficult, if not impossible, to find," he noted. "Applying section 482 to establish an appropriate arm's-length price using comparable uncontrolled transactions is relatively straightforward for the vast majority of cross-border transactions, which typically involve transfers of common goods or services.
"But enforcement difficulties arise in situations in which a US company shifts to an offshore affiliate the rights to intangible property that is core to its business."
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