Friday, 28 April 2017 11:39

Follow the money: how Microsoft evades the taxman Featured

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Microsoft has used regional sales units in Ireland, Singapore and Puerto Rico to build up a cash stash of US$108 billion outside the US, according to court papers that have emerged during a case between the software giant and the US Internal Revenue Service.

Groups in these three locations have been vested with the rights to make gains from the sales of Microsoft products globally.

A report in the Seattle Times said that when someone bought a Microsoft product from a store just 6-1/2 km from the Redmond headquarters, the money paid vended its way to Nevada and finally across the Atlantic after stopping twice in the tax haven of Bermuda.

The IRS has been examining Microsoft's tax filings for the years 2004 to 2006, a process that it began in 2007. A note of acrimony crept into the dealings between the two entities when the IRS sued Microsoft, its former chief executive Steve Ballmer, Craig Mundie, Jeff Raikes, Jim Allchin and others to force them to agree to hand over documents and be interviewed.

In November 2015, a judge ordered Microsoft to comply with the demands made by the IRS.

Outlining the curiously circuitous route that money from sales of Microsoft products takes, the Seattle Times said money made its way to a subsidiary in Reno; less than half stayed there, however, and the balance was sent to Puerto Rico.

This was hardly the end of the route: Microsoft's Puerto Rican company paid 2% local tax and accounted for part of Microsoft’s research costs, and then sent part of the remaining cash onwards to Ireland.

From here, the money finally made its way to RI Holdings, which had its headquarters in a law firm in Hamilton, Bermuda. This British territory does not charge any corporate tax.

Tax evasion.

Similar routes have been created for Microsoft's operations in other parts of the world.

The papers revealed in the IRS case showed that between 2001 and 2006, Microsoft had done a series of internal deals that took money upfront to switch the rights to code and other assets created mostly in the US to subsidiaries in Bermuda, Ireland, Singapore and Puerto Rico.

A Microsoft spokesman told the newspaper that it had paid US$4.4 billion in taxes in the most recent US fiscal year. Cash tax payments made by the company have averaged out at an effective rate of 21.4%; the maximum US corporate tax rate is 35%.

But outside the US, it is a different tale, with tax paid being as low as 4.5%, according to the company's disclosures.

The tax evasion was initiated in 1994 when three of Microsoft co-founder Bill Gates senior tax and finance managers put their names to documents that founded the GraceMac Corporation in Nevada to serve as piggy bank to be filled by Microsoft with royalty rights to software created in Washington state.

In the next 10 years, another 55 subsidiaries were set up in Nevada, a state that does not tax profits from businesses.

To do a repeat of these procedures outside the US, Microsoft set up its first subsidiary in Ireland in 2001, followed by one in Singapore in 2004. A year later, the unit in Puerto Rico, which was making CDs, was converted into a sales centre for the Americas.

Each of these regional sales hubs records some profit in Bermuda and thus a portion of the cash earned from countries from Australia to Germany is not taxed at all.

In the UK, where Microsoft sold US$3.3 billion worth of products in fiscal 2014, it paid US$3.3 million in tax, an effective rate of about 3%. This was because the profits were booked by an Irish entity.

The Seattle Times said Microsoft had refused to provides details about how much it earned in each country and how much tax it paid there.

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Sam Varghese

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Sam Varghese has been writing for iTWire since 2006, a year after the site came into existence. For nearly a decade thereafter, he wrote mostly about free and open source software, based on his own use of this genre of software. Since May 2016, he has been writing across many areas of technology. He has been a journalist for nearly 40 years in India (Indian Express and Deccan Herald), the UAE (Khaleej Times) and Australia (Daily Commercial News (now defunct) and The Age). His personal blog is titled Irregular Expression.

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