Insight: Microsoft use of low-tax havens drives down tax bill
Jul 27, 2011, 2:14 p.m.
By Lynnley Browning
FAIRFIELD, Connecticut (Reuters) - If you want to know why tax from surging corporate profits isn't making much of a dent in the United States' crippling budget deficit, a glance at Microsoft Corp's recent results provides some clues.
Things were rosy in the giant software company's just-ended fiscal fourth quarter, which produced record sales of nearly $17.4 billion, a 30 percent increase in after-tax profit, and a 35 percent gain in earnings per share.
But for the Internal Revenue Service and foreign tax authorities, things weren't so rosy. Microsoft reported only $445 million in taxes in the U.S. and other foreign countries, just 7 percent of its $6.32 billion in pre-tax profit.
Given the rancor in Congress and in the country about how to tackle the nation's budget deficit and debt, including how companies stash profits overseas and enjoy lucrative tax breaks, it is instructive to see how the top brass at Microsoft's Redmond, Washington, headquarters achieved this eye-popping tax result.
Partly it was because the company had a one-time refund of $461 million from the IRS for previous overpayments and because of its over-estimation of tax rates in previous quarters. There may be increased sales of products to consumers overseas, though it is not clear from company disclosures how much of a factor this might be.
But Microsoft is straightforward about the core reason for its lower tax bill: It is increasingly channeling earnings from sales to customers throughout the world through the low-tax havens of Ireland, Puerto Rico and Singapore.
Microsoft's pre-tax profits booked overseas nearly tripled over the past six years, to $19.2 billion in the fiscal year that just ended, from $6.8 billion in the year ended in June 2006, according to company filings. By contrast, its U.S. earnings have dropped, to $8.9 billion from $11.4 billion in the same period. Foreign earnings now make up 68 percent of overall income.
The change is fueling its shrinking tax bills. According to its 2010 annual report, by keeping a good chunk of foreign earnings away from the U.S., Microsoft has accumulated $29.5 billion overseas -- and that is before the impact of its last financial year.
In theory, the company has saved $9.2 billion in U.S. federal taxes on that figure, though if it brought the entire $29.5 billion back home tomorrow its tax bill would be lower because of credits for foreign taxes paid and other U.S. deductions.
Microsoft's effective worldwide tax rate fell to 17.5 percent in the last fiscal year, down from 25 percent the previous year and 31 percent in the year to June 30, 2006. The company said it expects to owe tax at an effective rate in the next year of between 19 percent and 22 percent.
Few companies, including Thomson Reuters, pay the standard U.S. corporate rate of 35 percent thanks to loopholes and deductions but the Microsoft tax rate is still at the low end when compared with other large technology companies.
In their last reported fiscal years, Google Inc's