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In May, HP Lost $190 Million, Might Lose More

Written by Aaron Markowitz
Edited by Sarah Mejia
6a00e5538644e288340192aad0d6b0970dHewlett-Packard Co has a net worth over $50 billion and provides almost 350,000 jobs worldwide. In recent years, HP effectively repatriated up to $9 billion annually through loans from overseas subsidiaries, and the amount of untaxed profit brought back to the United States is now being investigated by the Internal Revenue Service. The Wall Street Journal article “Corporate Loopholes in Tax Law Targeted,” by John McKinnon and Ovide Shira, reports that this leading technology company avoided paying billions of dollars.

With the current tax laws in place, any United States-based company making money internationally has to pay taxes when the money is brought back to the US. The current tax percentage is 35%, which is more than double Canada’s low rate of 15%. Just several months ago HP was fined roughly $190 million dollars for breaking corporate tax law. In 2007, Congress passed a law making it illegal to use offshore techniques that had no economic substance (such as having a foreign tax credit by using frivolous trades). Since the birth of this law, HP has been under heavy fire from the government and has been caught pursuing frivolous trades at least once.

HP is currently shipping some of its overseas earnings back to the United States via loans. This practice is not exclusive to HP, with other major firms such as Microsoft Corp taking part as well. HP’s actions show that the believes that the rewards outweigh the risks, and as of now they are strategically “correct”. Saving $9 billion annually to lose one case of $19 billion has been worth it so far. However, is it ethical for HP’s CEO and executives to avoid paying taxes knowing that they will only pay a fraction of the gains, if caught, in a fine? Current CEO Meg Whitman believes that it is worth it to try and find loopholes, and HP is not alone in this thinking. AIG, Goldman Sachs, and Arthur Anderson (which no longer exists for this reason) all have pioneered tax-dodging strategies and sold them as services to many firms.

I see this as a utilitarian issue wherein each party is interested in its own best interest. All parties involved are going to try to make the rational decision that gives them more utility rather than less. The government will pursue the law to ensure that it receives expected revenues, while businesses will pursue methods to minimize tax outlays. This dynamic, however, becomes very complex when considering that executives of other major companies are shipped off to federal prison for financial fraud. My opinion is that the government is doing what it should rationally do: perusing this case and trying to get some of their “stolen” money back. On the other hand, HP is going to find ways that will save money even if unconventional (paying fines less than the amount brought in). If I were the CEO of HP I would find any way possible to save my company costs legally, to avoid becoming the second coming of Enron. Enron was based on the stock going up perpetually, much like a Ponzi scheme, and HP has similar incentives to keep the stock rising. If HP’s stock (HPQ) has dropped from $52 to $14 in the past few years it would be a strong tell to abandon what they are doing and try to recover in some more substantial shift in strategy. HP seems to be more similar to Enron then most people believe. They have been caught practicing illegal tax-dodging as just some variation of its overall tax-dodging policy, and pushing on even when caught.. They are even looking like they are using some parallel version of special purpose entities, which were a main reason that Enron collapsed.

So what can HP do? If the US decides to put a restraint on what HP is doing, it may be economically viable for them to uproot and move to another country. At least the move would create fewer ethical complications. Even just a move to a less strict country would avert criminal charges. This tactic has been used before by several large American based corporations, as outlined in the Wall Street Journal article “US Firms Move Abroad to Cut Taxes”. Companies have changed headquarters to countries such as Bermuda, the UK and Ireland. The worldwide presence of HP will make this easier than most people believe. If a company the size of Eaton can save $160 million annually, one can only imagine how much the powerhouse HP can save without risking collapse. Ironically, it may be that their intention to remain a US firm could put them at risk. If HP stays on the track on which they are now, employees will lose their jobs, shareholders will lose their money, and HP will lose its company.

 

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

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Browning, Lynnley. “HP Loses $190 Million Tax Case against IRS.” Reuters. Thomson Reuters, 15 May 2012. Web. 31 Oct. 2012. <http://www.reuters.com/article/2012/05/15/us-hp-tax-idUSBRE84E0L820120515&gt;.

“HP Net Worth.” . N.p., n.d. Web. 23 Sep 2012. <http://www.theirnetworth.com/Businesses/HP/&gt;.

McKinnon, John, and Shira Ovide. “Corporate Loopholes in Tax Law Targeted.” Wall Street Journal 09 21 2012, Regular B1, B5. Print.

McKinnon, John D., and Scott Thurm. “U.S. Firms Move Abroad to Cut Taxes.” The Wall Street Journal. N.p., 28 Aug. 2012. Web. 23 Oct. 2012.

“Understanding Wicked Problems.” . N.p., n.d. Web. 23 Sep 2012. <http://www.ac4d.com/home/philosophy/understanding-wicked-problems/&gt;.

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