How Microsoft Avoids Paying $29 Billion in U.S. Taxes

Microsoft Admits Keeping $92 Billion Offshore to Avoid Paying $29 Billion in U.S. Taxes
Andrew Harrer/Bloomberg via Getty ImagesWilliam "Bill" Sample, Microsoft's vice president for worldwide tax, testifying before a Senate subcommittee in 2012.
By David Sirota | @davidsirota |

Microsoft (MSFT) 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 vice president 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 significantly reduce U.S. corporate tax receipts during an era marked by government budget deficits.

[A] small but growing group of big corporations ... are fleeing the country to get out of paying taxes.

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 hasn't declared itself a subsidiary of a foreign company, the firm hasn't 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, 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 (AAPL) and General Electric (GE), 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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One mans legal deduction is another mans loophole. If you look at Obama's personal tax return (It's available online) you will see that he is taking advantage of some fairly aggressive deductions. (Totally prefunding his childrens 529 plan in one year.) So I could say, "I don't care if that's legal, it's not right." But it's legal and to his benefit. Same with Microsoft. Also, by law the Board of Directors have a FIDUCIARY duty (Look it up!) to act in the best interest of the SHAREHOLDERS. Not the country they are domiciled in. The world is now a global economy and as always, competitive. Obama and Americas inefficient economic policies are losing at the global game and so trying to score political points with rhetoric such as this. If he were truly concerned about the budget, he should look at both sides of the balance sheet and also rein in spending. Why are he and Congress not doing that? Because they don't really care about that. BOTH parties mostly care about raising revenue so they can reward the entities that put them and keep them in power. And yes, there are many more issues and it's much more complicated than this.

August 25 2014 at 10:55 AM Report abuse rate up rate down Reply

New Flash.
Mocrosofts allegiance is where it should, the share holders

August 25 2014 at 8:51 AM Report abuse -1 rate up rate down Reply

Ignorance of how Corporations Budget Investment and Production.

Government Class in the Dark.

No Grasp of Corporate Finance and Management ?

Comedy at it's Best !

August 25 2014 at 8:05 AM Report abuse rate up rate down Reply

There is a myth that the US has the tax rate. Companies pay generallly a net rate of 10-15% due to credits, exemptions etc. No company pay the rate of 35%. If companies what to pplay the inversion game these should know longer be considered US companies. Therefore, they lose all access to US taxpayer supported agencies and programs; such as The State Department ;Treasury. Department of Defense, US Marshalls, US Customs etc,no more complainng to US governement over counterfeit products or trade infridgements. Go to the government where up are paying the lower taxes and see how helpful there are,

August 24 2014 at 11:54 PM Report abuse +1 rate up rate down Reply

In short, the Communists everywhere support every revolutionary movement against the existing social and political order of things.

In all these movements, they bring to the front, as the leading question in each, the property question, no matter what its degree of development at the time.

Finally, they labour everywhere for the union and agreement of the democratic parties of all countries.

The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win.

Working Men of All Countries, Unite!

Sound like anyone you hear today?

August 24 2014 at 10:46 PM Report abuse -1 rate up rate down Reply
1 reply to gee.effwye's comment

Wake the fkkk up

August 24 2014 at 10:47 PM Report abuse rate up rate down Reply

The proletariat will use its political supremacy to wrest, by degree, all capital from the bourgeoisie, to centralise all instruments of production in the hands of the State, i.e., of the proletariat organised as the ruling class; and to increase the total productive forces as rapidly as possible.

Of course, in the beginning, this cannot be effected except by means of despotic inroads on the rights of property, and on the conditions of bourgeois production; by means of measures, therefore, which appear economically insufficient and untenable, but which, in the course of the movement, outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionising the mode of production.

These measures will, of course, be different in different countries.

Nevertheless, in most advanced countries, the following will be pretty generally applicable.

1. Abolition of property in land and application of all rents of land to public purposes. 
2. A heavy progressive or graduated income tax. 
3. Abolition of all rights of inheritance. 
4. Confiscation of the property of all emigrants and rebels. 
5. Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly. 
6. Centralisation of the means of communication and transport in the hands of the State. 
7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan. 
8. Equal liability of all to work. Establishment of industrial armies, especially for agriculture. 
9. Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country by a more equable distribution of the populace over the country. 
10. Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production, &c, &c.

When, in the course of development, class distinctions have disappeared, and all production has been concentrated in the hands of a vast association of the whole nation, the public power will lose its political character. Political power, properly so called, is merely the organised power of one class for oppressing another. If the proletariat during its contest with the bourgeoisie is compelled, by the force of circumstances, to organise itself as a class, if, by means of a revolution, it makes itself the ruling class, and, as such, sweeps away by force the old conditions of production, then it will, along with these conditions, have swept away the conditions for the existence of class antagonisms and of classes generally, and will thereby have abolished its own supremacy as a class.

In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association, in which the free development of each is the condition for the free development of all.

August 24 2014 at 10:20 PM Report abuse rate up rate down Reply
1 reply to gee.effwye's comment

When mac2jr tells you to wake up....this is the nightmare he advocates. many dem politicians, including many lefty pundits scream for these ten planks in the communist platform?

August 24 2014 at 10:25 PM Report abuse -1 rate up rate down Reply

But, but, but, Bill Gates is such an outstanding American. This can't be true.

August 24 2014 at 7:06 PM Report abuse rate up rate down Reply

Maybe President Obama is alsuing using inversion tactics..don't you think htat he is being somewhat unpatriotic by not paying more taxes that he needs to? I may have missed it in the aritcle-but I did not see where it should be saying that the US has the highest coroprate taxes in the world. My guess is that if our taxes were lower many companies would bring back all or part of that money..Especially if we tied it to say..adding employees in exchange for lowering the taxes.

August 24 2014 at 6:23 PM Report abuse -1 rate up rate down Reply

Oh, that all...gosh does that mean people have to work 100 times harder and longer or what..

August 24 2014 at 2:23 PM Report abuse rate up rate down Reply

Get to the real problem. Washington has out of control spending. This administration has run up debts 4 times as large as the previous administration. They all use a credit card with no spending limit and feel they can continue to do so.

As a result, the United States has the highest corporate tax rates of 31.1% next to Japan in the World. As an individual if you were told they would take that kind of money from your paycheck and it will continue to get worse with no end in site.... Would you not find a way to cut your own tax burden? BTW. This is not only a democratic problem but both sides of the isle including George Bush just continued to spend........... The only person I have seen in the last ten years that has a huge track record of turning things around and working on both sides of isle to control out of control spending and get rid of governments addiction was Mitt Romney. Too bad he decided to not get involved with DC's games and wants no part of it again. My suggestion is to find the next President, regardless of political affiliation who has a strong track record of controlling spending, balancing budgets and works with both sides of the isle. Recent polls show that 69% of the US citizens want bi partism legislation out of Washington instead of these right wing fanatics or the left wing fanatics.........

Talk is cheap but a track record of working together and controlling spending and loop holes has to be done in coordination with the addiction from both parties of unlimited credit card spending then blaming each other...

August 24 2014 at 1:49 PM Report abuse -1 rate up rate down Reply