British regulators have agreed to it, but the Sunday Times takes issue with the UK tax bill of Microsoft Corporation (NASDAQ: MSFT). In an article published yesterday on the popular website (behind a paywall, incidentally), the Sunday Times raised questions on the agreed-upon tax, challenging Microsoft’s method in reporting taxes. The story comes against a backdrop of growing scrutiny of U.S.-based, multi-national companies employing sophisticated tax reduction policies to keep tax bills as low as possible, while European countries are trying to raise tax returns. By large, Microsoft has avoided headlines and not been lumped in with counterparts like Apple (NASDAQ: AAPL), Facebook (NASDAQ: FB) and Amazon.com (NASDAQ: AMZN), whose policies have been challenged.
What Sunday Times Said
The story claims that there is a bone of contention over the tax payment agreements that the U.K.’s Her Majesty’s Revenue & Customs (HMRC) has struck with 143 companies, including Microsoft. Microsoft’s current deal, which covers its U.K. subsidiary, was inked in 2012 and expires in 2017. The Sunday Times recognizes that, much like many other companies, Microsoft channels its European revenue through Ireland. At 12.5%, corporate taxes in Ireland are 7.5% less that in England. In the tax agreement, HMRC agreed on just how much Microsoft could pay U.K-based Microsoft Ltd. for marketing services. The Times essential said that the revenue deal means nothing because Microsoft Ltd. only has to pay taxes on profits, which can easily be manipulated and buried under expenses. This means that Brits are cut short of tax revenue.
The Sunday Times story dug into comparing revenue in the U.K. reported by Microsoft’s Ireland business with U.K. accounts of Microsoft Ltd.’s corporate tax payments. A key takeaway is the financial cloud cover that makes it difficult to precisely pin down companies to pay their full share. Parent companies set the profits it expects to receive from subsidiaries. This number can be substantially chopped down due to monies put into research and development, marketing, pensions and more.
Everyone Taking a Turn in the Barrel
The Sunday Times noted that Microsoft said it has been fully compliant with all tax rules and regulations. For its part, HMRC has promised that no company pays less taxes through the advance pricing agreements.
This exposé isn’t anything new per se, only with respect to Microsoft being tossed into a cast of bad actors. In the U.S., where the tax rate is 35%, companies have been charged with taking headquarters overseas to avoid taxes, a move called a “tax inversion.” Big techs, including Google parent Alphabet (NASDAQ:GOOGL) agreed a few months ago to pay Britain $181 million in past taxes and is still haggling with France over avoiding taxes. The list goes on with other companies in similar situations. The recently introduced “diverted profits tax” will make things even harder in the U.K., as the tax avoidance is slowly being wiped out in Europe.
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