IN THESE fiscally strained times, those seen as not paying their fair share are obvious targets. Having already launched a crusade against wealthy individuals using Swiss banks and others to evade tax, are America’s tax police about to tighten the screws on the deep-pocketed of the corporate world? Carl Levin is doing his best to make that happen. Under his leadership, the Senate subcommittee on investigations has shone a harsh light on the use of offshore tax schemes in recent years, producing several detailed and damning reports. On September 20th it released a document highlighting widespread tax avoidance by American multinationals, through the shifting of profits to subsidiaries in havens with corporate tax rates far below America’s 35% levy, and through the use of loopholes in America’s tax code to bring some of that cash home without triggering a liability. True to form, Mr Levin came out swinging, denouncing the “legal contortions, gimmicks and charades” on display as “egregious”. Tax avoidance, unlike tax evasion, is legal. But many large companies push into legal grey areas with aggressive strategies designed to increase “tax efficiency”. A common way to move profits offshore is through transfer pricing, when subsidiaries in different countries charge each other for goods or services “sold” within the group. This is particularly popular among technology and drug companies that have lots of intellectual property, the value of which is especially subjective. These intra-company royalty transactions are supposed to be arm’s-length, but are often priced to minimise profits in high-tax countries and maximise them in low-tax ones. The hearing featured a case study involving Microsoft’s shifting of IP rights for software developed in America, and the earnings that flow from them, to divisions in lower-tax Puerto Rico, Ireland and Singapore. One witness, Professor Stephen Shay of Harvard Law School, pointed out that in 2011 these three units enjoyed an average effective tax rate of just 4% and managed to book $15.4 billion of pre-tax profit—55% of Microsoft’s worldwide total. Their 1,914 employees generated an eyebrow-raising $8m of profit each, compared with $312,000 each for the 88,000 working in the rest of Microsoft. Whether or not this apportionment of profits complies with transfer-pricing rules, it is “not consistent with a commonsense understanding of where the locus of Microsoft’s economic activity…is occurring,” said Mr Shay. The claim that fair transfer prices were paid is “just not credible given the bottom-line outcome,” he added.

In 2011, the Senate investigators asserted, Microsoft’s parent company was paid $4 billion by Ireland and Singapore for rights that the two subsidiaries used to generate three times that amount in royalty payments from other bits of the group. Under one cost-sharing agreement, they said, head office sold Puerto Rico certain rights then repurchased them straight afterwards for a lot more, a money manoeuvre that saved the group $4 billion in tax over three years. A Microsoft man who was grilled at the hearing said the staffers’ sums ignored hefty, regular “buy-in” payments that the foreign subsidiaries have to make to the parent.

A second case study concerned lightly-taxed foreign profits brought back to America by Hewlett-Packard. America doesn’t chase its companies for income tax if the income is kept overseas. The moment it returns, it is fair game. (As a result, American firms hold $1.5 trillion overseas, 60% of their total cash.) However, an exception is made for funds that flow back as short-term loans to other parts of the corporation. HP has taken advantage of this loophole to provide a steady flow of liquidity to its American operations using loans from Belgian and Cayman subsidiaries. In a 30-month period from 2008 to 2010, for instance, these two alternated their lending (of several billion dollars in all) so as to provide the American division with unbroken funding while keeping each loan below the 60-day ceiling allowed under the exception, according to the subcommittee memo.

Characterising this steady financing as short-term lending is “the ultimate example of form over substance” and undermines a fundamental tenet of American tax policy, huffed Mr Levin. When an HP executive tried to insist the manoeuvre did not constitute profit repatriation, the senator wielded an internal HP document in which it was discussed—in the repatriation-strategy section. The Senate investigators said they suspected other companies were doing the same thing but couldn’t say how prevalent the practice was.

Who to blame for all this darting through loopholes? To no one’s surprise, Mr Levin pointed the finger mostly at the companies that engage in “tax alchemy”.

But companies are bound to exploit weaknesses in the rules; not to do so would be to put themselves at a competitive disadvantage. Microsoft issued a statement pointing out that “In conducting our business at home and abroad, we abide by US and foreign tax laws.” HP’s loans appear to comply with the letter of the IRS rules, even if they flout the spirit of the tax code. The company decried the hearing as “what appears to be a politically motivated attack.” Tom Coburn, the subcommittee’s top Republican, said tax avoidance is a mere symptom of the disease, the real sickness being America’s high corporate-tax rate and a ridiculously complex set of rules.

The rule-setters and enforcers deserve their share of the blame. It is true that enforcement of arm’s-length deals is tricky because no two intangible assets are quite the same, making it hard to establish a fair price. Moreover, the IRS has to rely in part on the taxpaying company’s own projections of cash flows, risks and so on. But the agency leans too often on the side of leniency. It does not help that transfer-pricing regulations have grown unwieldy. Some experts describe them as unworkable.

The Financial Accounting Standards Board also took some flak at the hearing. Jack Ciesielski, an independent accounting expert, was scathing about a FASB exception that allows firms to avoid reporting and reserving for American tax liabilities for foreign earnings if they plan to invest these “permanently” overseas—a loophole that they continue to exploit even as they lobby for a tax break so they can bring those same profits home.

By focusing on a few striking cases, Mr Levin and his staff have increased their chances of making a splash with an issue that many find mind-numbingly technical. And profit-shifting is, as he put it, doubly problematic today, given the fragility of the economy and the fact that corporate-tax receipts are at historic lows as a percentage of federal revenue. Expect the IRS to take a dimmer view of avoidance schemes going forward. Whether it will prove a match for the multinationals’ phalanxes of lawyers and beancounters is another matter.