Microsoft’s tax affairs have been in the spotlight of tax authorities all over the World during the last decade.
The setup used by Microsoft involves shifting profits from sales in the US, Europe and Asia to regional operating centers placed in low tax jurisdictions (Bermuda, Luxembourg, Ireland, Singapore and Puerto Rico).
The following text has been provided by Microsoft in a US filing concerning effective tax and global allocation of income:
“Our effective tax rate for the three months ended September 30, 2017 and 2016 was 18% and 17%, respectively. Our effective tax rate was lower than the U.S. federal statutory rate primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico.“
“In fiscal year 2017, our U.S. income before income taxes was $6.8 billion and our foreign income before income taxes was $23.1 billion. In fiscal year 2016, our U.S. income before income taxes was $5.1 billion and our foreign income before income taxes was $20.5 billion.“
“Our foreign regional operating centers in Ireland, Singapore and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 87%, 76%, and 91% of our foreign income before tax in fiscal years 2018, 2017, and 2016, respectively.”
In short – Microsoft foreign profits before income taxes was $20.5 billion – out of which $18 billion was booked in low tax jurisdictions; Ireland, Singapore, and Puerto Rico.
Transfer Pricing Cases
In the US, Microsoft has a pending court case concerning IP payments to a subsidiary in Puerto Rico.
In 2018 Microsoft entered a settlement of $ 140 mill. in China. The Chinese news agency did not mention Microsoft by name but said that a company beginning with “M” and with an identical financial profile to the Seattle-based group had been penalized for transfer pricing. It suggested that while Microsoft’s China-based businesses were officially loss-making, its profits were being booked in offshore tax havens, and claimed that Microsoft had admitted to tax evasion.
In New Zealand, Microsoft has had an ongoing transfer pricing audit covering the years 2013 to 2017. Filings revealed Microsoft had transferred ownership of its New Zealand business from Luxembourg to Bermuda. The case was settled with a $25 million additional tax payment from Microsoft in December 2019.
Following the settlement Microsoft NZ revenue increased from $182.7m in 2018 to $462.3m in 2019.
The settlement appears to mirror a A$39 million back-tax deal that Microsoft Australia reached in 2018, which was also followed by a jump in revenue reported locally to A$1.48 billion from the prior year’s A$719m.
Transfer Pricing cases concerning Microsoft have also been tried in Courts in Spain, France, Denmark, and Israel.
Hearings concerning Agressive Tax Avoidance Practices:
During and following the financial crisis in 2008 – 2015, Microsoft and other global IT groups were “invited” to participate in hearings concerning tax avoidance in different forums.
- US Senate Hearings on tax avoidance
- Astralian Senate Hearings on tax avoidance and later Hearing of Microsoft on Tuesday 22 August 2017
- UK Parliament Hearings
These hearings and investigations have now lead to various guidance and legislative measures aimed specifically at the taxation of global IT groups.