Microsoft Admits Keeping $92 Billion Offshore to
Avoid Paying $29 Billion in U.S. Taxes
on August 22 2014 9:26 AM
Microsoft
Corp. is currently sitting on almost $29.6 billion it would owe in U.S. taxes
if it repatriated the $92.9 billion of earnings it is keeping offshore,
according to disclosures in the company’s most recent annual filings with the
Securities and Exchange Commission. The amount of money that Microsoft is
keeping offshore represents a significant spike from prior years, and the
levies the company would owe amount to almost the entire two-year operating budget of the company’s
home state of Washington.
The company says it has "not provided deferred U.S. income taxes" because it says the earnings were generated from its "non-U.S. subsidiaries” and then "reinvested outside the U.S.” Tax experts, however, say that details of the filing suggest the company is using tax shelters to dodge the taxes it owes as a company domiciled in the United States.
In response to a request for comment, a Microsoft spokesperson referred International Business Times to 2012 U.S. Senate testimony from William J. Sample, the company’s corporate vp for worldwide tax. He said: “Microsoft’s tax results follow from its business, which is fundamentally a global business that requires us to operate in foreign markets in order to compete and grow. In conducting our business at home and abroad, we abide by U.S. and foreign tax laws as written. That is not to say that the rules cannot be improved -- to the contrary, we believe they can and should be.”
The disclosure in Microsoft’s SEC filing lands amid an intensifying debate over the fairness of U.S.-based multinational corporations using offshore subsidiaries and so-called "inversions" to avoid paying American taxes. Such maneuvers -- although often legal -- threaten to signficantly reduce U.S. corporate tax receipts during an era marked by government budget deficits.
White House officials have called the tactics an affront to "economic patriotism" and President Obama himself has derided "a small but growing group of big corporations that are fleeing the country to get out of paying taxes." In a July speech, he said such firms are "declaring their base someplace else even though most of their operations are here."
"I
don't care if it's legal; it's wrong," Obama said. Meanwhile, Democratic
lawmakers have been pushing legislation they say
would discourage U.S. companies from avoiding taxes through offshore
subsidiaries. The proposals are being promoted in advance of the 2014
elections, as polling suggests the
issue could be a winner for the party. In Illinois, the issue has already taken
center stage in the
state’s tightly contested gubernatorial campaign.
Because
Microsoft has not declared itself a subsidiary of a foreign company, the firm
has not technically engaged in an inversion. However, according to a 2012 U.S.
Senate investigation, the
company has in recent years used its offshore
subsidiaries to substantially reduce its tax bills.
That
probe uncovered details of how those subsidiaries are used. In its report, the
Senate's Permanent Subcommittee on Investigations described what it called
Microsoft’s “complex web of interrelated foreign entities to facilitate
international sales and reduce U.S. and foreign tax.” The panel’s report noted that
“despite the [company’s] research largely occurring in the United States and
generating U.S. tax credits, profit rights to the intellectual property are
largely located in foreign tax havens.” The report discovered that through
those tax havens, “Microsoft was able to shift offshore nearly $21 billion (in
a 3-year period), or almost half of its U.S. retail sales net revenue, saving
up to $4.5 billion in taxes on goods sold in the United States, or just over $4
million in U.S. taxes each day.”
U.S.
Sen. Carl Levin, D-Mich., said at the time:
“Microsoft U.S. avoids U.S. taxes on 47 cents of each dollar of sales revenue
it receives from selling its own products right here in this country. The
product is developed here. It is sold here, to customers here. And yet
Microsoft pays no taxes here on nearly half the income.”
Apple and General Electric, which
also employ offshore subsidiaries, are the only U.S.-based companies that have
more money offshore than Microsoft, according to data compiled by
Citizens for Tax Justice. In all, a May report by
CTJ found that “American Fortune 500 corporations are likely saving about $550
billion by holding nearly $2 trillion of ‘permanently reinvested’ profits
offshore.” The report also found that “28 these corporations reveal that they
have paid an income tax rate of 10 percent or less to the governments of the
countries where these profits are officially held, indicating that most of
these profits are likely in offshore tax havens.”
Microsoft’s
use of the offshore subsidiary tactics has exploded in the last five years,
with the amount of Microsoft earnings shifted offshore jumping 516 percent
since 2008, according to SEC filings.
According to Microsoft’s filings, if the company repatriates the $92.9 billion it is holding offshore, it would face a 31.9 percent U.S. corporate tax rate. U.S. law generally permits companies to deduct the foreign corporate taxes they’ve already paid from the U.S.’s official 35 percent corporate tax rate. According to CTJ's Richard Phillips, that means Microsoft's disclosure implies the company is paying just 3.1 percent in the locales where it is currently holding the cash. Phillips says such an extremely low rate strongly suggests the firm is keeping the earnings not just in relatively low-tax locales like Ireland, Singapore and others the company has disclosed, but also in smaller countries like Bermuda that are considered true tax havens.
According
to a Wall Street Journal
report in 2012 about companies reducing transparency about their subsidiaries,
Microsoft “once disclosed more than 100 subsidiaries [but] reported just 13 in
its 2003 annual report and 11 in its 2012 report.”
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