Does Microsoft pay most of its income tax in just 4 countries?

Sometimes monitoring the media in secrecy jurisdictions leads in unexpected directions, such as questioning how much income tax Microsoft pays outside of the US, Ireland, Singapore and Puerto Rico.   

The Bermuda Royal Gazette has an article on Microsoft’s Bermuda subsidiaries being subject to a tax inquiry, based on a Huffington Post report.

Following a mention in the article which said that Microsoft’s most recent filings with US authorities “list no subsidiaries operating in Bermuda” led to the Microsoft website and this list (last updated September 30th 2013) of over 100 countries in which Microsoft has subsidiaries. The list includes Bermuda as well as the British Virgin Islands, Luxembourg, Macao, the Cayman Islands, Hong Kong, Mauritius and Panama, all of which feature prominently on the 2013 Financial Secrecy Index.

The next step was Microsoft’s 2013 online annual report. This is where the main questions of this post come from; it would be great to get feedback from tax or financial specialists from this point.

– Microsoft’s website lists four Operation Centers in Puerto Rico, Singapore, Dublin (Ireland) and Reno, Nevada.

– Dublin and Reno are Operation Centers for licensing, which according to this source generates 70% of Microsoft’s global revenues. Ireland is a popular destination with multinationals seeking to lower their tax bills, while Nevada is a secrecy jurisdiction within the US.

– Note 13 to Microsoft’s 2013 Annual Report refers to Income taxes. It has several tables, the first two showing income taxes paid and income before tax for the last three years: although over 75% of Microsoft’s income in 2013 was outside the US, this income was only taxed at an effective rate of 8.6%.

Microsoft Income, tax paid and effective tax rate (2013, in million USD)

tax paid and income

Source: based on Note 13 of Microsoft’s annual report

The next table calculates Microsoft’s overall effective tax rate as 19.2%, resulting from “foreign earnings taxed at lower rates” which are deducted from the standard federal tax rate of 35%. (The effective tax rate of 19.2% can also be calculated based on the data on income tax and income as in the table above.)

And then comes this text under the table:

“The reduction from the federal statutory rate from foreign earnings taxed at lower rates results from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico. Our foreign earnings, which are taxed at rates lower than the U.S. rate and are generated from our regional operating centers, were 79%, 79%, and 78% of our international income before tax in fiscal years 2013, 2012, and 2011, respectively” (bold added).

Does this mean that all (or most) international earnings are channeled through the regional operating centers? So the other 109 Microsoft subsidiaries outside of the US, Ireland, Singapore and Puerto Rico for the most part do not generate earnings for tax purposes? Including the 40 subsidiaries in Europe, 13 in Africa and 12 in the Middle East?

In 2012 it was reported that Microsoft paid no income tax in the UK on online sales of GBP 1.7 billion. At the time it was said to be channeling payments through Ireland and Luxembourg.

In Spain, El Pais found that in 2011 Microsoft had invoiced most of its income in the country (EUR 125 million) to the Irish Operations Center. Through further consolidations with a holding company in Spain, it had got a tax credit of 28 million euros.

The Microsoft website says the Operations Centers “support all operations in their regions, including customer contract and order processing, credit and collections, information processing, and vendor management and logistics.” If the operations centers support all operations in their regions, is it possible that Microsoft is using similar arrangements as in the UK and Spain for every country it operates in?

Further questions:

– How does Microsoft achieve an 8.6% effective tax rate on its international income?

Even in low-tax jurisdictions Ireland and Singapore the rates are higher than that. According to the Financial Times the corporate tax rate in Ireland is 12.5%, while in Singapore it is 17% according to the Ministry of Finance website.

If these rates apply to Microsoft in Ireland and Singapore, to get to an 8.6% overall international tax rate the company would have to be paying below 8.6% on average in all other jurisdictions. Is this where the subsidiaries in secrecy jurisdictions such as Bermuda come in?

The Microsoft annual report is not much help in answering these questions. The geographical data section doesn’t have that much data, splitting revenue into “United States” and “other countries”.

And finally: why is Microsoft reporting a 51% effective tax rate in the US for 2013, when the federal statutory rate is 35%?

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