The Senate Permanent Subcommittee on Investigations has begun an inquiry into the tax accounting practices of two of the nation’s largest corporations. Leading the charge is Senator Carl Levin, D-Mich., who claims Microsoft and Hewlett-Packard both use loopholes in the corporate tax laws to move profits offshore and avoid paying taxes.
However, the subcommittee investigation did confirm the companies are acting within the letter of the law. Microsoft and Hewlett-Packard have used the tax investigation to make the case that the country’s corporate tax laws must be reformed to make the United States globally competitive and encourage companies to keep profits stateside.
A brief overview of corporate tax rules
Currently, the United States’ corporate tax code stipulates that accounts owned by U.S. companies and their subsidiaries overseas do not get taxed until they are repatriated to the United States. The U.S. taxes both profits made in the United States and profits made abroad, an archaic rule that gives companies an incentive to keep profits overseas, since global profits are tax-deferred until they are repatriated.
Tax think tanks and business groups believe current law is complex and punitive, inflicting the highest corporate tax rate in the industrialized world on companies that do business abroad.
Investigation of Microsoft and Hewlett-Packard reveals legal accounting practices
The Senate’s investigation found that between 2009 and 2011, Microsoft transferred $21 billion in profits it made in the United States to subsidiaries overseas. This strategy saved the company $4.5 billion in taxes.
Hewlett-Packard was found to loan itself money from the overseas accounts of its subsidiaries to avoid storing profits in the United States and subjecting it to the country’s high corporate tax rate. The loans were classified as occasional, short-term loans legal under current tax code.
Senator Levin and his supporters lambasted the companies, calling their “offshore schemes” unacceptable in the face of the pending fiscal cliff, which would raise taxes on individual Americans while cutting spending on social programs.
The senator cited a study by the Congressional Research Service that found revenue from corporate income taxes fell from representing 32.1 percent of all federal tax revenue in 1952 to just 8.9 percent in 2009. Meanwhile, payroll taxes paid by individual Americans as a percentage of federal revenue increased from 9.7 percent to 47 percent.
Despite these claims, Microsoft and Hewlett-Packard stood by their legal tax accounting practices while asking the Senate subcommittee for reforms to the outdated corporate tax code. The companies argued that they would not have to ship profits overseas if the United States code was more globally competitive and less punitive.
The current corporate tax code is likely in need of reform. However, corporations like Microsoft and Hewlett-Packard should continue to follow the code to the letter of the law until Congress takes action to reform the code to modernize it and make it more competitive with the tax rules of other industrialized countries. If your company is facing a tax audit or investigation, contact an experienced tax attorney.