For Microsoft, $93B Abroad Means Avoiding $30B Tax Hit

walterbyrd (182728) writes "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."

Comments

Okay... and?

[beelsebob]

Why should they repatriate it? What's wrong with keeping money earned abroad, abroad?

Re:Okay... and?

[Anonymous Coward]

The summary, of course, missed Microsoft's legitimate response to people's enquiries:

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.”

It's almost like the editors wanted to publish a biased article or something. Scandalous.

Re:Okay... and?

[meerling]

Because most, if not all, of the big companies use various means to offshore money that should have US taxes paid on them oversea so they can avoid it.
Apparently Microsoft is no exception to that, nor even all that exceptional if that's all they've "shielded" from US taxation.

Re:Okay... and?

[BitterOak]

because they don't pay tax on it there either.

But shouldn't that be up to the foreign countries where the money is earned? If a country doesn't want to tax earnings in its borders, that's their business. It doesn't mean the US or any other country should have a claim on it.

Re:Okay... and?

[Trepidity]

If it's earned there, yes, though that's not always the case. Companies play a lot of games with where they choose to book expenses and income. Lots of companies are officially earning a lot of money in places like Luxembourg and Ireland that is really earned elsewhere.

Re:Okay... and?

[alen]

because washington state wants to tax every penny microsoft makes around the world

Re:Okay... and?

[Notabadguy]

RTFA.

-Microsoft develops product in U.S, generating tax credit for R&D.
-Microsoft shifts ownership, or "Profit Rights" of product off-shore, to say....The Bahamas.
-Microsoft Bahamas subsidiary sells U.S developed product to Americans.
-Microsoft Bahamas claims all profit. Microsoft America gets all Tax Credits.

And that's how they avoid paying taxes. It's legal. It might not be "right," but it's legal, and won't change until our nation's useless politicians do something about it. This debate has been going on for a decade or more.

Re:Okay... and?

[BitterOak]

without US political and military might, Microsoft wouldn't be nearly as safe doing business abroad as they are now.

i don't know exactly how much they should owe for this service, but it's stupid to say it's nothing.

By your logic everyone in the world should pay taxes to the US for keeping the world a safe place to do business.

Re:Okay... and?

[IamTheRealMike]

The USA is unique in considering all income earned anywhere to be taxable in the USA, even if that money never actually touches America. No other country has a tax system that works like this, perhaps because it's stupid. Instead they have double taxation treaties so if money is earned abroad and you pay taxes there, you can spend the money back home at your HQ without it being taxed a second time. America doesn't, so companies that earn a lot of money abroad simply don't spend it on their HQ. They find things to spend it on in other countries instead.

Re:Okay... and?

[BitterOak]

RTFA.

-Microsoft develops product in U.S, generating tax credit for R&D.

And paying salaries to U.S. employees who pay income tax on it and spend their money in the US, thereby also paying US sales taxes.

-Microsoft shifts ownership, or "Profit Rights" of product off-shore, to say....The Bahamas.

Which only makes sense, since the US is one of the few countries in the world to tax people's oversea earnings. Only makes sense then that people and companies would move those profits offshore. If tax policies in the US were more reasonable, Microsoft wouldn't have to do that.

-Microsoft Bahamas subsidiary sells U.S developed product to Americans.

On which those Americans pay sales tax.

-Microsoft Bahamas claims all profit. Microsoft America gets all Tax Credits.

But as you said in your first part: the tax credits are for R&D, not for making profits!

Re:Okay... and?

[TubeSteak]

Instead they have double taxation treaties so if money is earned abroad and you pay taxes there, you can spend the money back home at your HQ without it being taxed a second time. America doesn't,

[Citation Needed]

Rebuttal: The US system works by requiring Corporations to pay the difference between the foreign and US taxes.
Citation: http://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z

/Personal income is likely to get double taxed, but that's not what we're talking about.

Re:Okay... and?

[Richy_T]

While the dollar is still the currency of choice for buying oil, they are.

Not likely to last much longer though the rate they're printing them at.

Re:Okay... and?

[Em Adespoton]

I'd be interested to know if the majority of that money was in Ireland. If it wasn't, this is a non-story. If it was... well, there are ways of making the money "non-US" and you can rest assured that MS knows ALL of these ways. Their tax lawyers are just as good as IBM's IP lawyers.

Re:Okay... and?

[SuilAmhain]

It's only resting in our account...

Re:Okay... and?

[IamTheRealMike]

Citation: http://www.irs.gov/Businesses/... [irs.gov]

Despite the URL, that page only talks about individuals, not companies. Can you show me I'm clearly wrong for companies? Additionally it says the states do their own thing as well and some simply ignore tax treaties.

That said, I might well be wrong! The US tax code is notorious for being amongst the worlds most complicated, in fact it probably is the most complicated tax code in the developed world at least. So if I'm wrong that would not be surprising, although even if your statement is correct for companies too it still amounts to paying tax on the same income twice. Even if it's at a lower rate than US income, this is nonetheless double taxation.

Re:Okay... and?

[phantomfive]

/Personal income is likely to get double taxed, but that's not what we're talking about.

You can deduct taxes paid to foreign governments, even as a private citizen.

Re:Okay... and?

[crazyvas]

To add to that: generally, personal income is not double taxed either in this respect. Anything one hears to the contrary is usually political FUD.

Quote below from IRS. Heck, they even point out how to give them the least of your money. http://www.irs.gov/Individuals...
--------
If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes.

Taken as a deduction, foreign income taxes reduce your U.S. taxable income.

Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
---------

Re:Okay... and?

[thaylin]

Fail.

They are paying taxes on them. In the domiciles abroad. Near the end of TFA is:

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.”

It is conveniently politically correct to refer to other countries with lower tax rates as "tax havens". The reality is if the US tax rates were at (or at least near) the foreign rates than funds which could be repatriated would be. Note the word could. No company would bring home 100% as they are operating businesses overseas and need to invest there too.

0 is 10% or less

Re:Okay... and?

[superwiz]

Why would that be a rebuttal? The money is still earned on territory outside of the US. It's invested outside of the US. Why should US collect taxes on non-US activities?

Re:Okay... and?

[ArmoredDragon]

You can deduct it from your income, just the same as if it were a business expense, but they still tax you on that money anyways. If you had made that money inside of the US instead of somewhere else, you'd be taxed quite a bit less.

Or to put it another way, that's just sugar coating the fact that you're still really being taxed twice just for the privilege of having a US citizenship, even if you've never had anything to do with the US (which is why the US is pretty much the only country whose citizenship people will renounce for tax purposes.)

Re:Okay... and?

[ArmoredDragon]

To add to that: generally, personal income is not double taxed either in this respect. Anything one hears to the contrary is usually political FUD.

That's very much incorrect. It's treated as a deduction, which means you still pay the US tax anyways, in addition to the foreign tax.

Say you live in Australia and made $200,000USD one year. Australia would tax roughly $68,500USD off of it. That leaves $131,500 to you. The US then taxes you on that amount. How much of that you pay in US taxes depends on the source of the income, and how you're employed. If you're self employed, your tax liability for that amount is 28% base plus 16% to make up for US payroll taxes (your typical US worker sees about 8% payroll taxes and the employer pays the other half, but since you have no employer you have to pay the whole thing.) If this is earned income (i.e. not dividends, not capital gains, not income made from charging rent) then you're liable for about $36,500 of it, otherwise you're liable for the whole thing.

So yeah even though you're potentially taxed less, you're still very much taxed twice, possibly even completely double taxed depending on how you make your money.

This is why some people who make a lot of money overseas and have jack diddly to do with the US will go out of their way to renounce their citizenship. The US really is the only country that actually sends you a bill just for being a national, regardless of whether or not you make use of its utilities.

Re:Okay... and?

[Microlith]

And paying salaries to U.S. employees who pay income tax on it and spend their money in the US, thereby also paying US sales taxes.

The 1% pushing the tax burden off on the 99%, who can't play international games with their finances.

Which only makes sense, since the US is one of the few countries in the world to tax people's oversea earnings.

No, that's not relevant. They play a shell game to make sure that all earned profits are earned in areas with little to no tax, then claim they made no profits. Or, if you're GE, you claim you made a $1B loss while reporting billions in profits to your shareholders.

If tax policies in the US were more reasonable, Microsoft wouldn't have to do that.

Like what, pledging fealty to corporations and letting the people of the country subsidize their existence?

On which those Americans pay sales tax.

Which helps local municipalities only - ignoring that sales taxes are regressive.

But as you said in your first part: the tax credits are for R&D, not for making profits!

Indeed, they claim the tax credits and losses in the US, but the profits outside. It's a massive scam, really.

Re:Okay... and?

[khchung]

/Personal income is likely to get double taxed, but that's not what we're talking about.

You can deduct taxes paid to foreign governments, even as a private citizen.

Which is the entire point, which, it seems, everyone rebutting GP missed.

If you are an American, working in country X, and paying $Y tax in country X. If $Y is less than the tax $Z you would have paid in America, then you need to pay American Govt $Z-Y (i.e. Z was deduct, which is your point), even though your work, your job and your company have absolutely no relationship with America. You paid $Z-Y just for the privilege of being an American citizen.

If you were from most other country in the world, working abroad in country X, then you pay $Y tax in country X, and then END OF STORY.

Most of countries in the world don't tax their citizens working and living abroad at all, which was GP's point, there is nothing to deduct.

Re:Okay... and?

[sillybilly]

Yeah, they are trying to create an economy out of complicated tax code, and provide a job to tax preparers. If everyone could do their taxes, then you'd have less economic activity, and less tax revenue. But creating a negative value, just to create jobs, to give someone a job over it is equivalent to me walking down the street and smashing windows in with bricks because it creates jobs for contractors, economic activity, and more tax revenue for the government. Fuck economic activity like that. You need an economy to create the things that are useful, not economic waste for the sake of having an economy and jobs. Why can't you live without a job, or "less" job, say 1/10th of what you work in a year? Because of the cost of living. And food you can almost earn in a single month in each year that would last you the entire year. Much of the other cost is bullshit.
As far as MS goes. they might be thinking of jumping ship, and going where there are smarter people, as that's their core holding, brainpower, nothing else. And it's not like there are no smart people in the US, after all they are the same breed as the Irish immigrants, British, Italian, German, even Japanese, etc. The major difference is the educational system. Life goes to where it can find water, flies go to where they can find shit, and MS goes to where they can find well educated brainpower.

Re:Okay... and?

[tomhath]

You can deduct it from your income, just the same as if it were a business expense

It's a credit against tax due not a deduction from income. Big difference.

Re:Okay... and?

[Anonymous Coward]

It's almost like the editors wanted to publish a biased article or something.

Or a truthful one, see below.

And to those apologists who claim it's the laws that are at fault, not Microsoft, the thing to remember is that all those millions of dollars Microsoft has used to buy those laws were extorted from their customers. They charged massive monopoly rents for their lockin-based software so they could have enough cash to buy as many legislators as they needed to avoid funding infrastructure and civil protections in the states and countries they're based in.

Microsoft has a massive system by which to avoid taxation, detailed in another Senate report from last September.

American companies keep 60 per cent of their cash overseas and untaxed, some $1.7 trillion, according to a U.S. Senate HSGAC Permanent Subcommittee on Investigations released in September 2012.

That report used Microsoft as a case study for the leaps and bounds that U.S. corporations go through to minimize their tax exposure, and illustrate the current flaws with the international corporate tax regime.

The Senate investigation found that Microsoft reduced its 2011 federal tax bill by a whopping $2.43 billion — or 44 per cent — by using a wide, international network of controlled foreign corporations and the exploitation of various loopholes in the U.S. corporate tax code.

According to Microsoft, the company paid $3.11 billion in federal taxes in 2011.

According to the full Senate report, Microsoft Corp does 85 per cent of its research and development in the United States. Of its 94,000 employees, 36,000 are in product R&D. The company had reported revenues of $69 billion, but with a federal tax liability of $3.11 billion only paid an effective federal tax rate of 4.5 per cent. That’s much lower than the top statutory rate of 35 per cent for corporations.

Puerto Rico
Microsoft Operations Puerto Rico (MOPR) is the company that pays for the right to sell Microsoft products in the Americas. MOPR makes digital and physical copies of Microsoft software and sells it throughout the United States and the rest of the Americas through different regional distributors.

When an American buys a copy of Microsoft Office in a Best Buy in Manhattan, that was produced in and shipped from Puerto Rico.

MOPR is owned by a Bermuda-based entity, MACS Holdings, which in turn is owned by Round Island One, a fully owned Microsoft subsidiary that is based in Bermuda but operates in Ireland.

To review: An American buys a copy of Microsoft Office at Best Buy in Manhattan. Best Buy bought that copy of Office from a Microsoft distributor. The regional distributor bought that copy of Office from Microsoft Operations Puerto Rico. Microsoft Operations Puerto Rico is owned by MACS Holdings, which itself is owned by Round Island One, which itself is owned by Microsoft Corp.

The reason for that convoluted supply chain — the reason why that copy of Office wasn’t just shipped from Microsoft Corp in Redmond, Washington to Manhattan — is that 47 per cent of the profits from that sale go to Puerto Rico, untaxed by the U.S. federal government.

Those profits were taxed by Puerto Rico at an effective rate of 1.02 per cent in 2011, a massive savings from the U.S. corporate tax rate of 35 per cent. Over three years, Microsoft saved $4.5 billion in taxes on goods sold in the U.S. alone. The company saved $4 million per day by routing domestic operations through Puerto Rico.

Ireland
Microsoft Ireland Research (MIR) is the entity that buys into the R&D cost sharing agreement in exchange for the right to sell Microsoft in Europe, the Middle East and Africa.

MIR doesn’t actually create or sell any products to any customers. Instead, MIR immediately licenses the Microsoft intellectual property rights to Microsoft Ireland Operations Limited

Re:Okay... and?

[jader3rd]

-Microsoft develops product in U.S, generating tax credit for R&D.

And paying salaries to U.S. employees who pay income tax on it and spend their money in the US, thereby also paying US sales taxes.

That is so incredibly irrelevant. We're talking about the taxing of one legal entity, don't try and push the conversation to knock on affects to other legal entities.

Oh, what the heck, let's talk about those other legal entities. If Microsoft paid all of the taxes from revenue generated in the US, those employees would have a lower tax bill, and could have better lives. As a matter of fact, perhaps all citizens of the US would have a lower tax burden. That might really help those who are just trying to find a way to eat every night.

Re:Okay... and?

[Anonymous Coward]

Not sure if trolling or ignorant... so I'll give you the benefit of the doubt. Apple pioneered it, but an increasing number of tech companies rig up a series of subsidiaries based in Ireland and the Netherlands and assign their profits to those subsidiaries to escape US taxes, while the parent companies still take advantage of all the perks of basing themselves in the US.

Re:Okay... and?

[Fjandr]

Most of it is not actually earned abroad, due to accounting practices. MS USA sold all of their IP to MS Ireland, and pays MS Ireland a fee for every copy of MS software sold in the USA. That fee is almost certainly for an amount nearly (or actually) equal to the sales price. As a result, they claim a write-off on every title sold that's just about equal to that title's sales price. As a result, MS USA says they earned nothing on those titles. It's all based on technicalities that are unavailable to real people. Only corporations are allowed to account for profits and losses in such a way as to reduce their tax bills to nothing.

Re:Okay... and?

[Barsteward]

They should just pay the taxes in the country it was earned, not set up elaborate tax avoidance schemes. the world would be a better place if all the global companies paid the tax they should.

Re:Okay... and?

[tlhIngan]

It's almost like the editors wanted to publish a biased article or something. Scandalous.

Exactly. It's exactly the same thing Apple, Google and everyone else has.

Hell, in Apple's case, it's cheaper to borrow the money in the US than repatriate it. When Apple needed $17B, they took on debt against future US earnings, because it would cost them less to pay back that principle plus interest than it would if they were to bring in the money from offshore into the US (which I think would've been close to $30B to get $17B they could spend). And Apple has very rarely taken on debt intentionally.

An unintentional side effect is well, Apple, Microsoft and Google have to spend that money outside the US, so they hire developers and other people to work outside the US as well.

Re:Okay... and?

[fustakrakich]

So, it's wrong to put the burden of proof upon the taxpayer as to what they owe?

Absolutely, if the government claims you owe money, they damn well better provide the documents. Your banks and employers send it all in every month. They are the ones who should do all the paperwork. That's one of the things my taxes should pay for. Internal Revenue Service, not litigators.

Re: Okay... and?

[Impy the Impiuos Imp]

Disadvantaged? Capitalism is making their average health, wealth, and longevity skyrocket. No, if concern over the poor in third world countries is your metric, the only people to say "fuck you" to are western liberals who decry this as a "race to the bottom".

Re:Okay... and?

[MooseMiester]

We have the highest corporate tax rates in the world. The lefties perpetuate the myth that the "evil rich" and "evil corporations" aren't paying "their fair share" whilst they increase taxes over and over again. And then, when these companies and individuals react in predictable ways they cry foul, shame on them.

Sadly the truth is that they use these taxes to BUY VOTES not do good for the rest of us. But the kool-aid of "punish the successful" is a strong elixir.

It's gotten so bad under this administration that companies are pulling up stakes and leaving altogether - witness Burger King. It's common sense, take my money, I'll get mad. What we should be doing is rewarding and celebrating success, so more people want to be successful instead of making it a crime.

Why should they?

[doghouse41]

So why this assumption that they should be paying tax on this money to the US taxman?
Presumably it was all earned outside of the US.
As a UK taxpayer, I'd be much happier if they would pay UK tax on it (maybe we should offer them a deal - 1% of something is a better deal than 50% of nothing ;-)
And no doubt French, German, Japanese, Australian, etc tax payers would feel the same way.

So what's so special about the Americans?

Re:And ironically

[Dragon Bait]

Bill Gates openly supports creating an income tax in Washington to pay for education.

Just because Bill Gates is successful at the capitalist game doesn't mean that he is a capitalist. Same goes for Warren Buffet.

Re:Don't feed the parasites!

[Nimey]

Freedom of speech isn't freedom from consequences of your speech, sweet cheeks. He's free to associate with a disgusting ideology that holds certain people inferior because of how they're born, I'm free to mock him for it. For that matter, I'm free to mock your ignorance.

Re:And ironically

[Nimey]

I'll take "No True Scotsman" for $1000, Alex.

Re:Don't feed the parasites!

[war4peace]

You bastard, you're wrong!!!

I suck dicks for free.

Re:Tax them anyway

[MerlynEmrys67]

Please have congress pass a law that says they have to pay taxes on money kept overseas. Then have the president sign it. The second that you do that - the company will comply with the law as it is written as opposed to complying with the law as you wish it had been written.

Re:How can it be...

[Anonymous Coward]

(GP here) By the same logic I used in my post: even if you change your name while abroad, you are still the same person, and have to keep paying taxes. Besides, the US is already applying extra-territorial measures against a number of countries (Cuba/Iran/Russia/etc.). If the US govt. doesn't apply this to corporations, it's because the govt. doesn't want it.
I will reply to my own question: this all shows that the US is all about corporatism.
One man talked about this some 80 years ago:

I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902–1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.

http://en.wikipedia.org/wiki/Smedley_Butler#Lectures
The tragicomic part is that US people are expecting these corporations to give something back... They will just leave and find a more profitable place. Corporations are said to be people, but in reality, they don't even have a nationality, their only authority is money.

Re:Citizens United says...

[NotSanguine]

Do they want to collect taxes form people who work in other countries? Good luck with that.

Actually, that's the law

Re:Don't feed the parasites!

[I'm New Around Here]

Freedom of speech isn't freedom from consequences of your speech, sweet cheeks. He's free to associate with a disgusting ideology that holds certain people inferior because of how they're born, I'm free to mock him for it.

Personally, I agree that you are free to mock him for it. It just seems like so much hypocrisy when the liberal mantra for the last twenty years is "You can't judge me!" Now that you have a voice, all you can do in the face of opposing views is attack and mock. In my view, your attitude is no different than what you claim his attitude is. Intolerance for people who are not in your group.

Go on, attack and mock those who you don't agree with. Attack me all you want. It just shows your intolerance. Not that those who agree with you care that you are all intolerant. Intolerance is now the greatest virtue of the liberal mind, as long as it is in support of liberal ideology.

For that matter, I'm free to mock your ignorance.

Ignorance?

I guess you missed the rhetorical nature of my comment.

Anyway, thanks for the reply. I don't agree with your viewpoint, but you have the right to have it.

Re:Don't feed the parasites!

[Nimey]

Go on, attack and mock those who you don't agree with. Attack me all you want. It just shows your intolerance. Not that those who agree with you care that you are all intolerant. Intolerance is now the greatest virtue of the liberal mind, as long as it is in support of liberal ideology.

It's amazing, isn't it, just how many conservative victims are on /. these days. Bonus points for whining about someone not tolerating your intolerance, and for whining about it in an intolerant way.

And here I thought conservative ideology was that we should man up and not worry about hurt feelings or political correctness. Shows what I know.

Been there, done that.

[EdmundSS]

Microsoft are simply copying what Apple does. IBM and others are doing it too.

They're all hoping that they can get the tax law changed so that they can repatriate the profits without paying the current tax rate.

Re:tax by transaction

[St.Creed]

What, no Value Added Tax?

Brain-dead tax policy.

[jcr]

I don't think there's any other country in the world that taxes money coming INTO the country from foreign operations.

The US tax code is insane.

-jcr

Wait a second!

[kimvette]

Wait a minute. Let's follow legal reasoning.

Corporations are people, right? When a person lives and works overseas, even though the money is earned overseas, they're still supposed to file a return and pay taxes on those earnings, right? How can Microsoft claim legal personhood, and then neglect to pay taxes on their offshore earnings?

Re:tax by transaction

[St.Creed]

Okay. Well, actually I applaud that. The tax on groceries hits the people with the lowest wages the hardest (relatively), reducing their intake of vegetables even more. Locally, I think the VAT is reduced to one third of the standard percentage for essentials like food.