I have already written twice about Microsoft and it's tax avoidance, one noting the press reaction to this issue, and the second suggesting that the Mail had over-egged the scale of the issue (which I still suggested might amount to £103 million).
That though is still a significant amount of tax avoidance, so I re-checked whether the figure is plausible. I went back to the form 10-k (Microsoft's annual accounts) (link from here). The profits are £$22.26 billion. And on page 71 Microsoft says:
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, which have lower income tax rates.
They admit that the saving resulting is 21.1% of profit. That is $4.68 billion. That's about £2.92 billion.
Is it plausible that £103 million in the UK could form pat of that overall saving? I think so.
Microsoft are, of course, very welcome to provide an explanation as to why I am wrong.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
[…] Microsoft’s tax avoidance by use of now familiar sales operations in places like Ireland, Puerto Rico and Singapore saves them $4.68 billion in tax a year. […]
Your tax avoidance number is not correct. The 21.1% is the impact of sales taxed at a rate below the US rate of 35%. Given almost every country in the world has a corporate tax rate of less than 35%, and 90% of Microsoft profits are from outside the US, there would be a substantial potion of the 21.1% that is merely from selling internationally.I would imagine that given the majority of laptops are made by Taiwanese companies, there are a large number of sales there at 17% tax.
Of course, I am not suggesting that Microsoft isn’t avoiding tax, as it is quite clear they are, it is just your estimate is probably several billions too high.
I used Microsoft’s data
They agree they would have a 35% rate if they repatriated this profit
They choose not to to avoid tax and then exploit that opportunity to reduce rates
I think in that case the estimate is fair
But where does it say that “intention” of US law makers is that US groups should pay tax on all their overseas earnings at full federal rates (or repatriate those earnings)? If anything US law makers are moving more to a territorial basis of taxation like the UK. If they are not going against the intention of the US law makers how can this be avoidance given your definition?
Tell me how the shareholders get the funds otherwise?
They don’t as no major corporation fully pays out its earnings annually. You will note that Apple didn’t pay a dividend for years despite having a mountain of cash.
As the profits are not paid out the value of the shares increases (as more profits and cash is retained) and the shareholders get capital growth. If the shareholders need cash they sell (some or all of) the shares.
That’s called a Ponzi scheme when run in extremis
Really? Ponzi schemes have too many liabilities and not enough assets. A company that doesn’t pay out dividends to shareholders has cash sat on its balance sheet or it has reinvested it.
I thought you would be in support of well capitalised companies rather than ones leveraged up to the gills because they’ve had their earnings stripped out of them.
Cash a company is not able to use legally is not an asset
It’s management manipulation to exploit the shareholders for their own gain
I don’t really follow your point here, Richard. David B seems to raise an interesting point about what is avoidance in these circumstances. I know you don’t regard paying less tax than the maximum possible as necessarily tax avoidance (otherwise pensions deductions would fall in) so it does seem to revolve around the intention of law makers. It would be hard to contend that US law makers intend that all earnings should be brought back to the US regardless of the circumstances.
But you can’t pay the shareholders unless it is, so on the end they do expect that
Or, the company is not being run fro the benefit of the shareholders.
It is very common for some investors to prefer capital growth over income return. The funds industry is structured around this dynamic.
But that’s only possible if there is the possibility of any return
The blinkers of those in the market never cease to amaze me
So it follows that every US business which leaves money overseas is avoiding US tax. If they repatriate then the overseas business have less resources and so earn a lower return than they otherwise would so are now avoiding local taxes. Sort of damned if they do and damned if they don’t. And that’s before we get on to paying out to individual shareholders.
As I gather it, yes that is what the US government thinks
Your problem is?
Unlikely to get through moderation but here goes. Richard, remind me never to spend money extending my house as I will not be able to get the value back without removing the extension and extracting the cash.
It didn’t deserve to get through because it’s crass
But if you want to embarrass yourself that’s just fine
It is interesting to note that no deferred tax liability is required under US GAAP (on the basis that the profits are permanently reinvested). There’s clearly some senior people in the standard setters who take a different view although they could have been captured by neoliberals.
But you are assuming legislation is fixed in stone. There have been several examples of changes in the taxation, so it’s not obvious that 35% is the correct rate.
In addition, they have the ability of investing the money offshore, which is valuable. By postponing the repatriation, they are increasing the enterprise value. The optimal policy (for shareholders) is never to repatriate as that would postpone tax indefinitely. They clearly will generate more profits for shareholders the longer they wait (since the compounding is tax free, given the legislators’ intentions). How could that be not in the shareholders interest?
Shareholders need an income stream …. that’s the only reason to own shares
Capital gains are no substitute in the end when there is no access to the underlying asset
And not paying tax destroys the chance to create shareholder value