The technology industry remains one of the most lucrative for investors, as exhibited in recent hedge fund filings, which we covered last month. The industry also attracts the fiercest of competitions, which has forced some of its notable giants to stare at a close proximity, at the possibility of a landslide fall. Nonetheless, some have done fantastically well to stay at the very top for several years. However, according to recent findings, a majority of these tech companies have been dodging domestic taxes by shipping their cash overseas, especially to countries that are considered tax havens, as featured in an article we covered in July.
While a majority of the tech companies believed to be capitalizing on some loopholes in the U.S tax bill are yet to attract any call for scrutiny, two have been targeted by Sen. Carl Levin, who feels that these two may have used some legally questionable loopholes in shipping out cash to overseas banks. The Michigan Senator claims that the multinational corporations are using tax havens in Bermuda and the Cayman Islands, among other countries, to dodge taxes, through intellectual property rights, which do not require a lot of investment to move from one point to another.
Levin pointed out that the movement of cash to overseas has contributed largely to the plunge in corporate revenue, due to a decline in corporate tax revenue, and this cannot help the government in bridging the budget deficit. Additionally, the Senator also faulted both the Internal Revenue Service and Congress for the abuse, saying, “IRS regulations are at fault and in other cases Congress is at fault for creating the loopholes”.
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Levin, who chairs the Senate Permanent Subcommittee on Investigations, which is due to hold a hearing on the issue on Thursday afternoon, believes that, despite the 35% corporate tax rate, a majority of the companies, and especially the big multinationals, employ tax avoidance strategies, thereby reducing the burden significantly. He also noted a significant decline in the percentage of revenue collected from this stream, in relation to the overall revenue, pointing at the enormous decline in the rate over the last sixty years. In 1952, corporate tax revenue accounted for 32.1% in the national revenue, as compared to the current rate of about 9%.
Levin headed a committee, which has released a shocking report on tech multinationals cash reserves, which indicates that approximately 60% of their cash reserves reside on foreign lands. Apple Inc. (NASDAQ:AAPL) holds 67% of its cash overseas, Cisco Systems Inc. (NASDAQ:CSCO) is at 89%, Google Inc. (NASDAQ:GOOG) 48%, eBay Inc. (NASDAQ:EBAY) 88%, Oracle corporation (NASDAQ:ORCL) 84%, and Hewlett-Packard Company (NYSE:HP) 100%, literally all of its cash reserves reside in overseas banks and other assets.
Well, Microsoft Corporation (NASDAQ:MSFT) may be lacking in that list, but apparently, it is one of the two that seem to interest Levin most. Hewlett-Packard Company (NYSE:HPQ), is the other, which has been accused of using foreign alternating loan programs to evade corporate tax. The company uses its foreign subsidiaries to execute this strategy by “issuing a continuous stream of short-term loans from company subsidiaries in the Cayman Islands and Belgium to the parent company, to take advantage of a tax loophole”, said Levin.
Microsoft Corporation (NASDAQ:MSFT) on the other hand, is accused of transfer pricing schemes of its intellectual property rights, by undervaluing them, which has resulted in foreign cash shipments of approximately $4.5 billion.
In response to the accusations, Microsoft Corporation’s VP, Sample Gate, highlighted the complex nature of the Windows maker’s business, adding that the company is always working to comply with the complicated U.S tax code, which in the end leads to a complicated tax structure.