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US Multinationals Back On Levin's Tax Radar

by Mike Godfrey, Tax-News.com, Washington

25 September 2012


A hearing organized by the Democrat-led Senate’s Permanent Subcommittee on Investigations has examined the alleged movement of profits offshore by multinational corporations and accused them of 'taking advantage of weak, ambiguous' sections of the United States tax code.

In his extensive opening statement, Carl Levin (D – Michigan), the Subcommittee’s Chairman, noted how, previously, the Subcommittee had demonstrated how “various schemes have helped shift income to offshore tax havens and avoid US taxes,” and that “the resulting loss of revenue is one significant cause of the budget deficit”.

He pointed out that the share of federal tax revenue contributed by corporations has “plummeted in recent decades”, while US multinational corporations have accumulated USD1.7 trillion in earnings offshore, on which no US tax is owed until the income is repatriated under Subpart F of the tax code.

“The loss to the US Treasury is enormous”, he stated. “During its current investigation, the Subcommittee has learned that for fiscal years 2009, 2010 and 2011, Apple has been able to defer taxes on over USD35.4bn in offshore passive income covered by Subpart F. Google has deferred over USD24.2bn in the same period. For Microsoft, the number is USD21bn."

He also examined, in detail, the actions of two US companies – Microsoft and Hewlett-Packard (HP) – as case studies of how “US multinational corporations, first, exploit the weaknesses in tax and accounting rules and lax enforcement; second, effectively bring those profits to the US while avoiding taxes; and third, artificially improve the appearance of their balance sheets”.

He attacked, firstly, the use by a US company of transfer pricing “to sell or license valuable assets that it developed in the US to its subsidiary in a low tax jurisdiction for a price that is lower than fair market value”.

He alleged that Microsoft has moved substantial income abroad by selling intellectual property rights to its subsidiaries Singapore, Ireland and Puerto Rico, while HP is said to have used complex offshore loan transactions to avoid paying taxes while still using the money to run its US operations.

In his testimony, William J. Wilkins, the Internal Revenue Service's (IRS) Chief Counsel confirmed that “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. In fact, over the course of the past decade, applying (the tax code) in such circumstances has been the IRS’s most significant international enforcement challenge.”

However, William J. Sample, Microsoft’s Corporate Vice President, Worldwide Tax, testified that, as “one of the business imperatives faced by Microsoft is that we must operate in foreign markets in order to succeed as a company, (and) the primary objective of our regional structure is to improve our competitiveness and efficiency,” although he added that Microsoft had “evaluated available tax incentives”.

He confirmed that Microsoft “complies with the tax rules in each jurisdiction in which it operates and pays billions of dollars each year in total taxes, including US federal, state and local taxes, and foreign taxes,” and has made little use of the US tax code’s more esoteric exceptions.

In like manner, Lester Ezrati, HP’s Senior Vice President and Tax Director, emphasized that the company’s success in foreign markets is complementary to and drives US employment. He confirmed that the company is under continual audit by the IRS and had complied fully with the tax code, adding that the IRS has reviewed detailed information on its group loan transactions.

TAGS: compliance | tax | business | tax compliance | tax incentives | law | corporation tax | enforcement | offshore | legislation | transfer pricing | United States

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