Are Microsoft and HP Part of Romney’s 47 Percent?

Using Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HPQ) as particular examples, the Senate’s Permanent Subcommittee on Investigations published an extensive report indicating U.S. tech companies have taken advantage of provisions in the tax code to avoid paying billions of dollars in taxes.

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The report, published several hours prior to the Senate’s Thursday afternoon hearing, claims that American companies have placed $1.5 trillion in profits offshore to avoid U.S. taxes.

“Major U.S. corporations are increasingly earning their profits here but shipping them overseas to avoid paying the taxes they owe,” said the chairman of the Permanent Subcommittee on Investigations, Senator Carl Levin, in a news conference. Levin, a Democrat from Michigan, has investigated offshore tax evasion for many years.

Because five of the top ten companies with large offshore funds came from the technology sector, the Senate subcommittee chose to focus its 27-page report on that industry. It subpoenaed internal documents from Microsoft and HP and interviewed company officials to form a case study.

According the committee’s findings, from 2009 to 2011, Microsoft shifted $21 billion offshore, saving the software company $4.5 billion in taxes on items sold in the United States.  The amount represented almost half of its U.S. sales revenue. Aggressive transfer pricing allowed the company to undervalue the assets when they were moved abroad and therefore minimized its taxes.

Hewlett-Packard, the report said, began a loan program in 2003 to transfer overseas cash to fund its operations in the United States. In its tax code, the U.S. makes exceptions for short-term loans; this loophole allowed HP to avoid paying billions of dollars in taxes. A spokesman for the company said the IRS has never shown any concern over the program, but under tax law, foreign profits are subject to taxes when the are repatriated back to the United States.

While the Senate subcommittee does not plan to charge either of the companies, Senator Levin said the tax practices ranged from, “egregious to dubious validity.”

Officials from Microsoft and Hewlett-Packard have denied any wrongdoing.

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