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 (MIOL) — a wholly owned subsidiary — for $9 billion.
MIR and MIOL are fully owned by Round Island One — the Bermuda company that operates in Ireland and also owns MACS Holdings.
MIOL manufactures copies of Microsoft products and sells them to 120 distributors in Europe, the Middle East and Africa. MIOL has 650 employees and MIR has 350 employees in Ireland, where they have an effective tax rate of 7.3 per cent and 7.2 per cent, respectively. MIR reported profits of $4.3 billion in 2011 and MIOL reported profits of $2.2 billion. Microsoft did not pay any U.S. tax on any revenues made by the Irish groups.
No U.S. tax was paid on the $9 billion licence payment from MIOL to MIR.
Singapore
In Singapore, Microsoft Asia Island Limited (MAIL) is the group that pays into the cost sharing agreement. MAIL is actually located in Bermuda and has no employees.
MAIL paid $1.2 billion to Microsoft Corporation for retail sales in Asia. MAIL licenses its rights directly to Microsoft Operations Pte. Ltd (MOPL) for $3 billion. Again, no taxes are paid on this amount. MOPL duplicates the Microsoft software and sells them to distribution entities around Asia.
MAIL and MOPL are both wholly owned subsidiaries of Microsoft Singapore Holdings Pte. Ltd, which is itself a wholly owned controlled foreign subsidiary of Microsoft U.S.
MAIL had no employees but $1.8 billion in earnings. MAIL paid an effective tax rate of 0.3 per cent. MOPL had $4.8 billion in revenues from the sale of Microsoft products, with a profit of $592 million and an effective tax rate of 10.6%. MOPL has 687 employees.
