Technology giants Microsoft and Hewlett Packard are among the tech companies recently accused of shielding billions of dollars from US taxation by stashing them in foreign tax havens like the Philippines and the Cayman Islands. According to a recent Reuters report, these companies have been keeping revenue out of circulation in the country’s infrastructure for years by using tax loopholes and technicalities.

The bipartisan US Senate Permanent Subcommittee on Investigations accused Microsoft and HP, among others, of using laws governing intellectual property, royalties and licensing fees to transfer funds to offshore holdings. Sen. Tom Coburn (R-OK) the ranking Republican on the investigative panel, joined with panel chair Sen. Carl Levin (D-MI) to endorse the subcommittee’s report.

Evidence for the companies’ practices comes from internal documents subpoenaed from Microsoft and HP themselves, as well as from statements made by officials interviewed by the panel. Company spokespersons do not deny the allegations, but they acknowledge the tax advantages these practices create and defend them as fair and legal.

Offshore transfers of assets to avoid a variety of penalties and tariffs at home is not a new practice, and US companies as a whole maintain about $1.5 trillion in profits in foreign accounts. But the subcommittee’s finding that the primary users of offshore tax havens are now tech companies, rather than the traditional powerhouses of industry and finance, suggests a new trend.

In the case of Microsoft, for example, the company moved over $20 billion in revenue offshore between 2009 and 2011 – an action which saved the company about $4.5 billion in taxes on goods sold in the domestic market. Royalty revenue is the primary kind of income that’s shifted, moved to countries with lower tax rates around the world. Hewlett Packard, on the other hand, used a complicated strategy of making short-term loans to a foreign entity and then back to a related US business to avoid billions in taxation.

Other companies employ combinations of these and other strategies, keeping their practices within – but just barely – the limits of the law. And a number of countries, particularly island nations such as the Caymans, are well known as offshore storehouses for US business profits. But the technology companies reach farther than most, making use of the economies of numerous other countries around the world, including Ireland and Spain.

Jason Hartman says a robust private sector is essential for economic growth, and as the world’s dependence on information technology continues to grow, tech leaders like Microsoft and HP will remain dominant entities in the global market. But as the Senate Subcommittee’s findings suggest, using offshore havens and tax loopholes to keep billions in revenue out of circulation at home constitutes at best dubious business practices, and at worst, illegal ones. (Top image: Flickr/GammaMan)

The American Monetary Association Team