Puzzle this. Microsoft believes the U.S. government is trying too hard to prove that it’s avoiding federal income taxes. The latest legal salvo out of the company’s Redmond, Wash., headquarters alleges that the IRS improperly hired outside lawyers to help prosecute its tax avoidance case against the tech giant.
But the company’s newest annual financial report, released without fanfare late last Friday, inadvertently confirms that the IRS’s assertion that Microsoft is shifting its profits offshore for tax purposes is basically true.
Like other corporations, Microsoft is required to annually disclose its offshore “permanently reinvested earnings” — profits that it has declared, for tax purposes, to be foreign profits that the company has no intention of repatriating to the United States. Companies also disclose the amount of tax they would pay if these profits were officially repatriated to the U.S. If Microsoft wants to convince the IRS, or the American public, that it is innocent of the tax-dodging charges that have been leveled against it, these disclosures aren’t helping its cause.
Microsoft’s latest annual report discloses that the company now has a total of $108.3 billion in permanently reinvested offshore profits, an astonishing $15 billion jump over the $93 billion they reported at this time last year. But some things don’t change: the company says that its U.S. income tax on repatriation of these profits would be $34.5 billion, or a 31.9 percent tax rate.
Since the tax due on repatriation is 35 percent minus whatever tax has already been paid to foreign governments, this means that Microsoft has paid an effective income tax rate of just 3.1 percent on its $108.3 billion offshore hoard, the same tiny rate that it reported last year. This disclosure strongly indicates not only that Microsoft is offshoring its profits more aggressively than any other company except Apple, but also it is continuing to put these profits — at least on paper — in low- or no-tax countries. Of course, this is exactly what the IRS is accusing Microsoft of doing.
So here’s the inconsistency: In its annual financial reports, Microsoft dutifully admits that it is aggressively stashing its profits in offshore tax havens, even as it protests the vigor with which the IRS is trying to crack down on this tax-avoidance activity. Perhaps the company’s PR and accounting departments need to get on the same page.