While Congress’s attention has been riveted on the saga of a handful of corporations making high-profile attempts to invert to foreign countries, Microsoft's recent announcement that it's holding a staggering $92.9 billion offshore is a stark reminder of the far more consequential tax avoidance practiced by Fortune 500 companies that remain based in the United States.
Microsoft admits in its annual financial report that it would owe $29.6 billion if it paid taxes on the cash it’s stashing offshore. In the past year, Microsoft moved $16 billion offshore, which is more than the total amount the much-maligned inverter Medtronic currently holds abroad. Only General Electric and Apple disclose having more offshore cash than Microsoft.
Even more important, the company’s annual report essentially admits that the vast majority of its offshore profits are being held (at least on paper) in jurisdictions with tax rates very close to zero. Microsoft estimates that if these profits were brought back to the United States, it would pay an effective tax rate of just under 32 percent. Since the U.S. tax on repatriated profits is 35 percent minus any taxes previously paid to foreign jurisdictions, this suggests that the company has paid an overall tax rate of about 3 percent on these profits to date.
While the company is required to disclose all its “significant” foreign subsidiaries, none of the 12 subsidiaries the company now discloses are in places with 3 percent tax rates. As the Wall Street Journal reported last year, Microsoft used to disclose “more than 100” subsidiaries. Academic research suggests that in at least some cases, large multinationals that disclose fewer subsidiaries are doing so not because the subsidiaries no longer exist, but because they don’t want to disclose them.
As we have recently noted, companies know they can get away with this because of a loose accounting rule that only requires they disclose “significant” subsidiaries. It’s within the power of Congress and federal regulators to require big multinationals to disclose all of their foreign subsidiaries—including the beach tax haven subsidiaries that tech companies have found so helpful in shifting their U.S. profits abroad.
The wall-to-wall media coverage that has been lavished on corporate tax inversions has shed welcome light on the topic of offshore income shifting, and Walgreen’s recent decision to at least postpone its inversion suggests that this attention has had a positive effect. But for every company currently contemplating an inversion, there are 10 major multinationals that continue shifting their profits offshore the old-fashioned way. Congress shouldn’t lose sight of this broader, worrisome trend.