Microsoft Admits Keeping $92 Billion Offshore to Avoid Paying $29 Billion in US Taxes

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In this April 2, 2014, file photo, Microsoft CEO Satya Nadella gestures during the keynote address of the Build Conference in San Francisco. (AP Photo/Eric Risberg, File)

In this April 2, 2014 file photo, Microsoft CEO Satya Nadella gestures during the keynote address of the Build Conference in San Francisco. (AP Photo/Eric Risberg, File)

This post first appeared at The International Business Times.

Microsoft Corp. is currently sitting on almost $29.6 billion it would owe in US 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 US income taxes” because it says the earnings were generated from its “non-US subsidiaries” and then “reinvested outside the US.” 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 US Senate testimony from William J. Sample, the company’s corporate VP 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 US 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 US-based multinational corporations using offshore subsidiaries and so-called “inversions” to avoid paying American taxes. Such maneuvers — although often legal – threaten to signficantly reduce US corporate tax receipts during an era marked by government budget deficits.

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 US 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 has not declared itself a subsidiary of a foreign company, the firm has not technically engaged in an inversion. However, according to a 2012 US 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 US and foreign tax.” The panel’s report noted that “despite the [company’s] research largely occurring in the United States and generating US 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 (in a 3-year period), or almost half of its US 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 US taxes each day.”

US Sen. Carl Levin, D-MI, said at the time: “Microsoft US avoids US 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 and General Electric, which also employ offshore subsidiaries, are the only US-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 US corporate tax rate. US law generally permits companies to deduct the foreign corporate taxes they’ve already paid from the US’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.”

David Sirota is a senior writer for The International Business Times, a senior editor for In These Times, a syndicated columnist and the author of Hostile Takeover, The Uprising and Back to Our Future. Follow him on Twitter @davidsirota.
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  • KC

    You seem to missed the point of tax. Microsoft and companies like it benefit from being based in a country with an established economy and established infrastructure, like a highly prized educational/research system to attract talents from around the world.. In fact, most of the so-called R&D are actually derived from costly research, often lead to nowhere, done by the US government. But when one of these research idea pans out, you get a tremendous boost to the economy. So things like internet, semi-conductor, PC, concurrent computing, or CAD all have their historical roots in the academic labs. Paying tax is a way to continue the tradition and make the system sustainable. It is just like fishing in a pond: If no one is keeping the pond clean and feeding the fishes, then pretty soon there won’t be any fish left. Now, if MS decides to move to some remote island so that they do not leach off the infrastructures of US, then it is perfectly fine that they pay zero tax. Just remember there is a lot more cost associated with doing business from remote island without decent resources and that no one cares about.

  • KC

    How about just charge zero percent tax. Because there are countries that offers zero tax. In fact, with subsidies, zero regulations, tax breaks and what not, we can even have negative tax. This happens across multiple industries from manufacturing to sports. Then, what is the point of having these companies in your country, you may be better off subsidize a startup to try to out-compete these companies; That is what the Chinese are doing, subsidizing their own domestic industry and passing laws protecting them, and it seems to work pretty well for them.

  • Anonymous

    How silly. What is the logical conclusion to what you propose? Should corporations contribute anything to infrastructure? police? fire? roads? electricity? How incredibly myopic.

  • Anonymous

    Corporate american wants all the cake and they want to eat it as well; and politicians and those who buy into propaganda will do nothing to get in their way. Heck, we still have 1/2 the country calling single payer health care (almost 3xs cheaper w/ better outcomes btw) communism so there’s probably little hope they’ll do anything but continue to drink the kool-aid. My message. Love it or leave it. We must be more about greed and profit, there must be something that holds us together as Americans that trumps shareholder value.We are better than allowing our children to go hungry, our college students to face a lifetime of debt, or the veterans that are homeless. We do nothing for each other – nothing. Yet, when corporate america says ‘aww times are tough we want xyz’ they get it. In the United States corporations pay the lowest-effective tax rate in history, realize ungodly profits, and yet real-wages adjusted for inflation have not risen appreciably since 1973!

    It’s funny to consider that without the United States, without Paul Allen, Bill Gates, and Ed Roberts meeting perhaps history for Microsoft would be quite different; not that that really matters. But, I wonder If they were born in a 3rd world country without electricity or an education system what would come of them – Maybe Gates would have created a vaccine or ‘cure’ for malaria. All that aside, what nonsense it is that we continue (and we will continue) to let corporations dictate terms of what our society should look like. It’s truly as if individuals have drank from this tainted cup that prohibits them from questioning the status quo no matter how bad things get or how little corporate america is willing to invest in this country. We’re so tragic that it would be funny if it were not so pitifully harmful.

    The United States represents the largest consumer market on the planet and for every company that does not feel they should pay taxes I can guarantee you there are, literally, 100s and 1000s willing to take their place. So the notion that companies will go elsewhere is absurd. But, what is even more absurd is that we think it is okay to be black-mailed by corporations and we think there is nothing wrong with them doing so. Do we think so little of this great country that it’s not worth paying for? For gods sakes do you know how many people have died for this country and now corporations do not wish to pay to be a part of it? It disgusts me that we think this is okay – that we literally think so poorly of our country that we’re unwilling to ask corporations to pay to be here makes me sick.

  • Eric Van Bezooijen

    The way we tax corporate profits is dumb anyhow. “Overseas profits” on overseas earnings should not be taxed in the US at all. Corporations should simply have their profits taxed relative to the amount of earnings made in the US. This means it won’t matter if they relocate to the Caymans or the Bahamas. This would result in more tax revenue as well.

  • Eric Van Bezooijen

    If we lower the taxes to 0% they will demand subsidies. The purpose of a corporation is not to pay “reasonable” taxes, but to maximize shareholder return.

  • Anonymous

    The benefits of Globalism. Shame it ain’t us that sees any benefit
    And they have the nerve to tell us that the wealth trickles down

    The only thing that trickles down is the piss that they are taking.

  • Ned Carter

    Ban their garbage from our borders, seize their assets and arrest their share holders. Should end this pretty quickly. I assure you if you refuse to pay your taxes they will do every one of those things to you.

  • AnnaFrieda

    So why don’t these corporations relocate completely? I mean if things are so bad here and the evil government wants to “steal” their profits, why not close down operations in the US and set up shop in their beloved tax havens? Let’s have the courage to show them out, and being rid off these free loaders and subsidy hogs will allow us to nurture companies that actually care about this country and add value to it.

  • Anonymous

    Your statement is rather foolish and unenlightened. “A country like Ireland” isn’t concerned about bringing jobs or building to Ireland. They are only concerned with bringing the money there for even the nanosecond it is often there. There are governmental fees and the “financial industry” profits. The people get nothing. Your comments clearly illustrate your lack of knowledge and understanding of capital flows, taxation, monetary policy and your rather efficient brainwashing by FOX News.

  • http://www.immigration-weaver.blogspot.com/ weaver

    I’m surprised that this article isn’t also tagged “open-borders,”

    On the one hand, the multi-nationalists insist that they can keep these profits un-taxed offshore, but they also insist that we must provide the US Customs (and other armed-services) to ensure that their intellectual (and other) property rights are enforced (So in this case, borders matter).

    On the other hand, they use the World Trade Organization to tell us that borders don’t matter and attempt to eliminate tariffs and dictate to us how many temporary-foreign and illegal workers we must accept per year.

  • ccaffrey

    Well, we certainly don’t have to REWARD them for doing this. Make this a factor in ALL government contract awards. Why do we keep rewarding selfish behavior? It just makes rich brats.

  • Anonymous

    Why do these companies hate the United States of America so? As oopsilaffatatory says below…the benefits of globalism. Can you say NAFTA? hahahahahahahahahahahahaha hahahahaha I could’ve told you this would happen in 1995. NO U.S.MILITARY PROTECTION FOR THEM!

  • Anonymous

    So why is our government using MS products on our computers? Use Linux and Open Office and get the same productivity without all the licensing fees. And no, this is not an advertisement, but a statement that government can control its costs and refuse to reward tax dodgers. This is a choice.

  • teeky2

    The US cannot get its own house in order when corporations are not paying their fair share but continue to use our infrastructure for free, making the situation worse. Remember, it’s those same corporations who took American jobs overseas to begin with. The middle class is going away in America. Who will buy the products then? This “lower taxes for the corporations” idea amounts to blackmail of the American people on the part of corporations, those who already received huge tax breaks because they were the “job creators”. How did that work out? Corporations continued to avoid paying taxes through loopholes and laws they paid to have enacted when many already receive corporate welfare in the form of government subsidies. Is it worth endlessly bigger and bigger profits if humanity dies in the process? The present situation is unsustainable, precisely because of the worldwide corporate reform agenda.

  • Ian Gregory Young

    Apples’s doing the same thing, so I really can’t blame Microsoft for this. Hell AT&T and many other companies have loads of call-centers out in another country’s for US calls. That’s pretty damn close to this same tactic.

  • Anonymous

    BigGuv would spend that amount in roughly two months. Then what?

  • Anonymous

    Just for fun when I read your comment I thought I’d research the following based on 92 billion (not the assumed amount owed in taxes):
    A.) College at $20,000 a year = 4,600,000 (million) years worth of scholarship. Or 4.6 million of our future given 20k toward that end.
    B.) 11 years of HeadStart = 10,700,000 Children helped (there is a huge ROI – return on investment for these kids I think it’s more than 5xs per dollar invested…it actually makes money in the end for our society)
    C.) 12 years fully-funded = border patrol.
    D.) 5.6 years school lunch programs = 25,000,000,000 meals (billion) feeding 185,000,000 children. (5 billion meals annually is almost unimaginable but I triple checked the number. And, at a cost per person that is peanuts).
    E.) Almost 3 years funding the V.A…
    You get the point and it’s a simple one: Microsoft is denying those things that would help our country.

  • carolyn mordecai

    That’s why Romney will be the next president, President of the Cayman Islands.

  • Joel Tenorio

    The last time the IRS code was seriously amended was in 1986…at that time, corporations where finally banned from issuing “industrial development bonds” (IDB’s) , especially those who took advantage of the municipal tax exempt market…they would borrow at a low NIC and reinvest bond proceeds into the capital markets to increase their ROI…simply stated, they borrowed low and invested high, reaped the arbitrage profits, then collapsed or retired the debenture…quick and easy gain…it was also the time when the IRS instituted the “alternative minimum tax” a form of double taxation on the investors…we were up all nite changing bond documents beginning jan of 1987 revamping all deals on my desk…the quick and dirty is, individuals have been locked out of using “offshore” accounts, which was very lucrative for the money laundering business as well, but the corporations weren’t…why, because on the whole, we don’t have a united citizens lobby that can contribute milions into the policians coffers… can we blame the MNCs for taking advantage of the current tax laws…NO..it wouldn’t be fair..the finance officers are merely doing their job and they are good at it…why would we penalize a corporations or individual who knows there way around the tax statuates…that’s just not right. instead, Congress needs to step up and respond to the sentiments of its populace and implement a fair and just taxation structure…. the issue with subsidiaries is nothing short of a sophisticated shell game of funds…to truly understand it, you need to understand financial practices such as currency swaps and loan between subsidiaries, et al…principals such as hedging your foreign exchange risk and being able to understand your currency exposure are not among the fields of expertise our politicians truly understand… so the salient issue here is… are the corporations doing something illegal…NO..is it being perceived as immoral ? perhaps. Unethical? perhaps… but these complaints have been going on for decades now, and still no progress in an overhaul (not just amendments) of the corporate tax structure… sometimes it best to do a complete overhaul then to amend the tax codes…its simpler and less exhaustive in respect to the numerous cross references required…. Perhaps we should all get paid via 1098 to our individual LLC overseas? (not!) the US Corporate Tax codes should reflect the current globalization of the capital markets with the purpose , or mission, of justly imposing tax in a simplified manner on revenues gained from our personal disposable income…

  • NotARedneck

    There really is no (or almost no) “offshore”.

    What there is on one side are countries with economies, consumers and government spending – much of which directly benefits the wealthy and corporations. Such places must collect taxes.

    THEN on the other side there is what is called offshore – in reality tiny political fictions that are in the business of helping the wealthy evade their taxes plus organized criminals and 3rd world despots to hide the money that they stole.

    What is desperately needed is for the former to band together and close these criminal enterprises down, arrest those running them, confiscate all the funds held in them and obtain the links to other assets held in the real economy by the tax evaders, organized criminals and 3rd world despots.

    This seizure will easily pay off all government debt and get the economy back on its feet.

  • http://www.glitzqueen.com Erin Harris

    These companies should be barred from government contracts, lobbying and every similar privilege. And the bums who run them shouldn’t be received in polite society. Beyond that, of course, we need to revive our anti-trust laws to break up monopolies and change our tax and tariff laws to FORCE — not “incentivize” — companies that do business here to hire Americans and produce their wares here. Once upon a time, law was all the incentive anybody needed.

  • Anonymous

    So what is $63 billion not enough for? & How much is that $92 billion “earning” wherever it is overseas? & What part of those earnings are ours because they are made on our $29 billion in taxes that the rest of us have to make up?

  • Marsha

    been saying this forever they are developed in USA they employed us workers expanded with American’s $$$ and then sold out our jobs and had no allegiance as to where it all became possible after all aren;t all great business started “in a garage” yet I am SURE they will say they “made it all on their OWN..no loans, no investors, I say if their allegiance is to other country’s people then they need to TOTALLY move out and we Americans can start from scratch creating businesses HERE and not be slaves politically or employment wise to these companies… oh and BTW it must be nice to take those BILLIONS and help “developing countries and vaccinate other children as your employees have to suck off the government in order to survive and THEIR kid’s don’t starve.. with their pay and didn’t they say they couldn’t possibly survive paying the raised minimum wage or with unions? hmmm when is congress going to make them accountable?

  • Anonymous

    Open source.

  • Daniel Miller

    Perhaps if the IRS hit them with a tax bill for that money they would bring it back because of the bill. If the IRS can go after citizens, and corporations want to be treated like them, hit them with the bill or throw the officers in jail for tax evasion.

  • Anonymous

    At some point Americans will find it important to educate themselves and until that happens it’s probably quite ‘patriotic’ to point out the lies that are truly helping to accelerate our descent into the abyss.

    Your 650 million number is an untruth that it seems you quickly adopted as fact simply because Rush Limbaugh, Hannity, etc told you that number. You can refer to these two stories related to this. The first from the Sunlight Foundation – who engages in correcting errors like this on both sides of the aisle:
    http://sunlightfoundation.com/blog/2013/10/22/how-much-did-healthcare-gov-actually-cost/

    And for a good historical overview of how that lie found its way into all corners of Republican rhetoric and perhaps why you repeated it:
    http://mediamatters.org/blog/2013/10/24/the-myth-of-the-634-million-obamacare-website/196585

    Lastly, there are 330ish million Americans in the United States of America (give or take). Do you really think that the website costs 1.5 million dollars for every person in the U.S.? That is what you said. It might be wise focusing on the ‘legal’ tax dodging corporate culture in the United States rather than selling untruth designed to rob your fellow Americans of the dignity that accompanies having health care.

    I’m no fan of the ACA but I refuse to lie to protect behavior that we see displayed by Microsoft and many many many other companies. Too many good Americans gave their life to protect an ideal for this country and for me to simply let corporate America take all our nations benefits and then abdicate responsibility to contribute to that ideal is incredibly unpatriotic. You think corporations are our benevolent benefactors that we should kneel before and I think the purchasing power of American consumers dictates, if you are a fan of free markets, the exact opposite. Enough of this prayer at the altar of corporate greed.