US Senate claims Microsoft avoided paying $6.5 billion in taxes [Updated with Microsoft statement]

Massive US companies using loopholes to avoid paying taxes is nothing new, but a new US Senate memo gives us an idea of just how one much one company has avoided paying. According to Bloomberg Businessweek, a memo penned by Michigan democrat Carl Levin and Oklahoma republican Tom Coburn, who both head up the Senate's Permanent Subcommittee on Investigations, claims that over the past three years, Microsoft has avoided paying $6.5 billion in US taxes. The funny thing about all of this? Microsoft hasn't done anything illegal by avoiding that hefty tax bill.

The same goes for HP, which is another company the memo focuses on. In Microsoft's case, the company used transactions with its subsidiaries located around the world – Puerto Rico, Ireland, and Singapore are all specifically mentioned – to save on its tax bill. With HP, the company had its off-shore subsidiaries give it short-term loans, which meant that HP had tax-free capital to put toward domestic projects. The memo precedes a Senate hearing on this issue, with HP and Microsoft both scheduled to testify today.

This isn't just limited to HP and Microsoft either – Levin says that he focused on those two companies to highlight a problem present with a large number of US companies. Both companies claim that they haven't done anything illegal, and that much seems to be true, with Levin blaming this problem on lax IRS enforcement and the presence of too many IRS loopholes, many of which Congress is responsible for. Of course, it's easy to see why American companies try to avoid paying as much American tax as they can, since the 35% corporate tax rate in the US is higher than in other places around the world.

That high tax rate has technology companies like Microsoft and HP transferring "intangible assets" like patents overseas in an attempt to save a little cash. It isn't much of a surprise to hear that all of this is going down either, since the tax code in the US is so mind-numbingly complicated that there are plenty of loopholes for companies with good lawyers and accountants to take advantage of. One thing is definitely certain, however: if Congress wants to do something to stop this problem, it has a lot of work ahead of it. Stay tuned.

UPDATE: Microsoft has just sent us a statement, commenting on the "complicated tax code" and the "exceedingly complex tax structure" we have here in the United States. The company also talks about the way it operates internationally, and the ways it has contributed to economic growth domestically. Microsoft's statement is posted below. Additionally, if you'd like to read the full testimony given by Microsoft Corporate Vice President for Worldwide Tax Bill Sample during today's Senate hearing, the PDF can be downloaded by clicking this link.

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. That is why we've advocated for reforms to simplify the US tax code and make it more competitive with the rest of the world.

One of the business imperatives faced by Microsoft and many US-based businesses today is that we must operate in foreign markets in order to compete and succeed as a company. Foreign revenue growth helps support the growth of our U.S. operations, creating additional U.S. jobs and supporting an economic ripple effect that leads to greater growth in local communities. Our foreign growth has allowed Microsoft to increase our footprint in the U.S.

According to a recent study of Microsoft's economic impact, we increased our employment by 13.2 percent in the United States from 2007 and 2009. Through our employment, compensation, and purchases of U.S. goods and services, Microsoft's operations supported roughly 462,000 U.S. jobs. In Washington State specifically, Microsoft has been the single largest contributor to economic growth since 1990; our impact on the state accounted for 32.4 percent of the total gain in state employment.

To compete and grow, we operate a global business that requires us to operate in foreign markets. In conducting our business at home and abroad, we abide by U.S. and foreign tax laws. That is not to say that the rules cannot be improved–to the contrary, we believe they can and should be. US international tax rules are outdated and not competitive with the tax systems of our major trading partners. We believe the US should reform its tax rules to support the ability of worldwide American businesses to compete in global markets and invest in the US.