Microsoft and Hewlett-Packard (HP) were cited as two examples of companies that use aggressive tactics to dodge U.S. taxes by Sen. Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations, which held the hearings in Washington, D.C.
Levin did not accuse the companies of doing anything illegal.
But he opened the five-hour hearing with a 30-minute dissection of the tactics he said Microsoft and HP have used to shield huge portions of their earnings -- including profits from making and selling their products in the United States -- out of reach of the Treasury Department.
Chiefly, Microsoft sold its intellectual-property rights to subsidiaries in Dublin, Singapore and Puerto Rico. But the revenue those entities booked from selling Microsoft products far exceeded what they paid to acquire the rights -- differences that were taxed at lower foreign rates.
For instance, Microsoft's regional operating center in Ireland paid $2.8 billion in 2011 for rights to sell Microsoft products in Europe, the Middle East and Africa. It then licensed those same rights to another Microsoft subsidiary operating in Ireland but headquartered in Bermuda.
Altogether, Microsoft avoided paying at least $6.5 billion in U.S. taxes over three years by using such maneuvers, according to the report.
HP, meanwhile, used billions of dollars of offshore loans to repatriate untaxed foreign profits back into the U.S. to run its U.S. operations, the subcommittee report contended.
"The bottom line of our investigation is that some multinationals use our current tax system to engage in shams and gimmicks to avoid paying the taxes they owe," Levin said. "The resulting loss of revenue is one significant cause of the budget deficit, and adds to the tax burden that ordinary Americans bear."
At a time when huge budget cuts are looming, "these offshore schemes are unacceptable," he said.
Both Microsoft and HP said they comply with tax laws.
"Microsoft has a complex business and we must comply with the complicated tax code of the United States, resulting in an exceedingly complex tax structure," the company said in a statement. "That is why we've advocated for reforms to simplify the U.S. tax code and make it more competitive with the rest of the world."
HP said its finances have been consistently reviewed and approved by its auditor, Ernst & Young, and that "HP has always had an extremely productive and professional relationship with the IRS, who has permanent offices at two of our facilities and has been continually auditing HP since the filing of our 1962 tax return. They have never raised any concerns about these programs."
The hearing came as the federal government lurches toward a Jan. 1 "fiscal cliff" triggered by expiring Bush-era tax cuts and more than $100 billion in mandatory spending cuts.
It also came in the midst of political clashes over whether and how to raise revenues to help reduce federal deficits. Many Democrats have complained that the government is missing out on collecting billions of dollars because companies are stashing profits abroad, thus avoiding taxes. Republicans want to cut the corporate tax rate of 35 percent and ease the tax burden on money that U.S. companies make abroad, which they say would encourage them to invest at home.
At the hearing, Levin struggled to keep the complex tax tactics straight. William Sample, Microsoft's vice president of worldwide tax, gave clipped answers that Levin frequently interrupted.