To fund its $8.5 billion acquisition of Skype, Microsoft tapped into its trove of cash stashed in offshore tax havens:
Will Microsoft’s $8.5 billion purchase of Skype be a wake up call for lawmakers on the need for corporate tax reform?
Skype can thank a large part of its big payday on the country’s corporate tax code and being organized outside of the U.S.
Most U.S. corporations make zero fiscal contribution to the federal government. Microsoft is one of America's top tax dodgers:
In 2010, Microsoft continued to use tax loopholes by shifting income to Ireland, then the Netherlands, then to Bermuda – practices called Double Irish and Dutch Sandwich. “The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax,” Bloomberg News reported in October.
Corporations such as Microsoft use a scheme called “transfer pricing” to avoid $60 billion in taxes each year.
U.S. companies amassed at least $1 trillion in foreign profits not taxed in the U.S. as of the end of last year, according to data compiled by Bloomberg. That cumulative total, based on filings by 135 companies, increased 70 percent over three years, from $590 billion in 2006.
While some of the offshore earnings reflect sales abroad, much of the growth results from expanding use of transfer pricing, said Martin Sullivan, a tax economist who formerly worked for the Treasury Department and Arthur Andersen LLP.
The system allows for creating paper transactions between subsidiaries of the same company to allocate expenses and profits to selected countries. For instance, when technology firms license their patents to offshore subsidiaries in low-tax countries, profits from sales overseas are booked to the foreign units, not the U.S. parents. The tax savings add to profits.
Once the profits leave the U.S., they are permanently reinvested offshore:
Legal avoidance is booming, according to data collected by Bloomberg Businessweek from the footnotes of annual 10-K statements of companies on file at the Securities and Exchange Commission. Congress says that companies don’t have to pay tax on actively earned profits from their foreign subsidiaries as long as they keep the money permanently reinvested outside the U.S. in subsidiaries that are organized as foreign corporations. Each year the parent companies state in their 10-Ks how much money is stored in that category. For 30 big companies, the profits kept abroad grew 560 percent, to $740 billion, from the end of 2000 to the end of 2010, SEC filings show.
In 2008, a Senate report revealed that another avoidance maneuver used by firms such as Microsoft uses derivatives illegally dodge dividend taxes:
Through programs with names like “dividend enhancement” and “dividend uplift,” the banks are using complex equity swaps, fake loans and sham stock sales, sometimes through entities in the Cayman Islands, an offshore tax haven, to disguise dividend payments to clients, the report said. […]
For example, the report discloses that from 2000 through 2007, Morgan Stanley used sham stock loans and other schemes, some involving Microsoft shares, to disguise dividend payments, thus helping its clients to dodge more than $300 million in United States dividend taxes.
The report also says sham stock loans were handled through a Morgan Stanley subsidiary, Cayco, in the Cayman Islands, which paid out to investors dividends totaling $1.1 billion over 2000 through 2007 that were disguised as nontaxable.
Microsoft even dodges a manufacturing tax in the state of Washington by sending licensing fees through Reno, Nevada.
Here's how the practice works: Microsoft's product teams, based mostly in Redmond and Issaquah, build software products such as Windows Vista, Windows Server, SQL Server, and Office. But sales of these products to PC manufacturers and corporate customers are conducted from a License and Operations office in Reno, Nev., where there is no corporate income tax. Microsoft records the revenue for these sales (traditionally about 31 percent of overall revenue) in Nevada and does not pay the Washington business and occupation tax required on software reproduction.
Ironically, the developing nation of India, which largely benefits from Microsoft's evasion of U.S. taxes has been forced to prosecute the corporation for using avoidance schemes in its own country:
Basing its ruling on the terms of Microsoft's own EULA (end-user license agreement), an Indian court has ordered the company to pay tax on royalty income generated in the country, Tax India Online (TIOL) reports.
For years, Microsoft argued that a wholly owned local subsidiary, GraceMac Ltd, which conferred license rights to Indian end users, derived no income from India. And for years GraceMac declared nil income, even though it has received anything from 35 per cent to 73 per cent of net revenues, through a sister company based in Singapore.