Microsoft bought the Danish Navision Software (that made accounting software, now called Dynamics NAV) for roughly 10.8 billion kroner in 2002. Shortly thereafter, Microsoft sold the rights to the software to Microsoft's Irish subsidiary at a price which the Danish tax authorities think is too low. The Danish tax authorities now claims taxes amounting to 5.8 billion kroner from Microsoft based on the price they think would have been right.
It's a classical transfer pricing case.
Is it easy for Microsoft to get this money back into the US? And how?
Earnings are posted from the group. Credit lines and capital market borrowing similarly have limited ties to jurisdiction. Regulatory filings can be arranged to not post detailed transfer pricing information.
If they ever want to pay a dividend, the cash they have on hand for on-going concerns should more than cover it. Where it does not, they can have it "loaned" from the foreign subsidiaries and gain even more tax efficiencies...
Otherwise, much of the time, they can just leave it in control of Bermudan and Irish accounts; at least, until debt-ridden, revenue-starved, middle-class squeezed Western governments start moaning a little too loudly and the tax accountants and lawyers prepare to roll out the next tax avoidance schemes down the closest tax haven rabbit holes!
It's popular amoungst all the member nations, but there seems to be absolutely no clue what to actually do
If anyone has a suggestion there are a lot of people waiting to listen ?
That's rich, considering London is one of the biggest tax havens around.
I think it's safe to say that the political and economic landscape has changed a little since then.
http://www.theaustralian.com.au/news/world/london-is-a-magne... http://en.wikipedia.org/wiki/Taxation_in_the_United_Kingdom1...
Microsoft actually borrows in the US http://www.smartmoney.com/invest/bonds/what-s-behind-microso... as it's not in shareholders' best interests to initiate a money transfer to a US account.
The theory was that companies would use that money to create jobs, but instead they bought back a lot of stock. So it's unlikely that there will be another one in the near future, unless the political winds change.
http://online.wsj.com/article/SB1000142405270230333990457640...
That would close this loophole pdq. All this pussyfooting around just underscores that private individuals are on the hook but as a company you can do just about anything.
I don't like taxes, I disagree with plenty of them, I disagree with how they are spent. But I still pay my taxes and the fact that I pay more tax on my income (which is a very small fraction of their turn-over) than some well known multi-nationals has me seriously ticked off.
https://en.wikipedia.org/wiki/Hysteresis
Same taxes with different history of taxation yield wildly different results.
Pardon me if I'm not bowled over by that.
EDIT: According to the Wikipedia page some studies indicate that the maximum for the laffer curve in Sweden was about 70% tax.
A 70% marginal rate is not outrageously far from where the top bracket in California will be if Washington decides the best Social Security reform includes lifting the payroll tax cap. Today's effective top marginal rate in CA is ~52% in Fed+State income taxes and another 3.8% for the high-earner Medicare tax. If SS goes uncapped, adding another 12.4%, your $1M earner is hitting 68.2%. I'm dispensing with the accounting fantasy that the "employer-paid" portion of the tax isn't actually a tax on the worker.
On the other hand, the introduction of a 50% income tax rate in the UK didn't work very well[1]. It caused more than £10B of income to be shifted to an earlier year, and in the end raised only a modest fraction of the predicted extra tax revenues. It looks like a few people in government failed to notice that almost everyone who has enough income to pay that kind of tax rate in the first place also has the ability to choose when they formally realize that income, and many of the wealthiest also have the ability to choose where they formally receive the income as well.
[1] http://www.bbc.co.uk/news/business-17465733
The newish top tax rate here is coming down to 45% in April 2013, after the new government finished figuring out how much of a poison chalice they had been left by the previous one. Unfortunately, this causes problems of its own, as they are now predicting a multi-billion pound shortfall in tax revenues for 2012-2013 as wealthy folk do the opposite and defer their income to take advantage of the reduced rate. Obviously they're hoping that greater tax revenues in later years will make up for that.
Worse than these individual disruptions over a relatively short period, though, is the fact that successive governments have made it very clear that they can and will mess around significantly with tax rates for high earners, which in turn creates an incentive for any big earner to talk to tax experts and either take part in legal tax avoidance schemes or at least minimise how much income they wind up with on paper in any given year until they're convinced that it's the most tax-efficient time for a while to take it and then grab the lot at (what they hope will be) a minimum rate.
At least we're not in France, where the government seem to think they can slap a 75% tax rate on the wealthy and not suffer horrendous consequences to their already business-hostile economic and political landscape...
"Mom and Pop" restaurants, mechanics, cleaning companies, etc etc - yep./
It's not a loophole, it would be double taxation.
If Microsoft earns $10 billion in China, they should pay taxes to China on that, not pay China + the US Government. Unless you're advocating confiscatory level taxation, of perhaps 60% to 70% on corporate profits.
I understand that parent/daughter company relationships are hard but the only thing that matters is who holds the final holdings shares. Everything else is just window dressing and obfuscation.
So let's say it was manufactured in Florida, shipped from New York, and sold in California, by your logic we should be paying state taxes in Florida, New York, and California.
Is that right?
If I live in Massachusetts and earn money in New York, both states expect me to pay income tax.[0] And why shouldn't they? I'm using both of their resources.
[0] The amount paid to NY is deducted from the MA tax, down to 0. That might be different elsewhere?
I do not think that is an accurate example of what occurred in the article.
1. MS bought a Danish Company, (This is a taxable transaction), 2. MS then sold the assets (software) of the Danish Company to an MS subsidiary in Ireland, (This is a 2nd taxable transaction, but this is where MS "allegedly" sold the Danish Company asset at a price far below the market value effectively cheating Denmark out of taxes it would receive had the Danish Company sold its asset to an independent company)
Nevermind the obvious reasons "Why" MS engaged in the second transaction, MS is paying less taxes on the asset selling it from Ireland than in Denmark.
So to change your hypothetical to more accurately reflect the article - It is more like manufacturing a book in Florida, selling it to your own company in NY, who in turn sells it to someone in Florida just to avoid charging FL Sales tax which would need to be charged by a Florida company selling to a Florida resident. Of course at first glance this seems like a smart business move, but assuming the legal analysis of the article is true, then also imagine in your hypothetical there is a law prohibiting this type of transaction to its own subsidiaries in other states to prevent the circumvention of State sales tax.
Well, that's not something you want to do to Denmark, they are a member of EU and can make MS's life miserable. Plus, MS has so many assets, all over the world. They can contest it, appeal but then will pay.
Furthermore, when you value a company it could be that their assets are extremely high, but they at the same time have high liabilites. This (although I do not know if it was the case), could lead to a lower price for the company, than the market value of the product.
Soon to be 22%.
This sort of tax avoidance feel unethical to me - you have 600 employees in Denmark developing this software, but all the profits are being booked in a tax haven. Microsoft should have to move the developers to Bermuda or Ireland if they want to avoid the Danish tax.
I don't understand Danish, I can't figure this out.
The thing is, it's unlikely that Microsoft managed to underreport 11 billion kroner in profits. From what I've read, Navision showed only modest growth, just one in a series of multibillion-dollar acquisitions by Microsoft that failed to work out.
Until 2006, Navision was part of Microsoft Business Solutions, which was a breakeven operation at best. The homegrown CRM product exploded in popularity, while the acquired ERP products stagnated. Since CRM is wildly profitable, the only way for Business Solutions to have operated at breakeven was for the ERP products to lose money.
Given the poor historical performance, it would take quite the turnaround for Microsoft to have made 11 billion kroner = $1.92 billion on Navision in 2012.
I wonder if the Danish tax authority is attempting to apply Microsoft's overall profit margin to calculate a transfer price for Navision? That would really add insult to injury when it comes to Microsoft's sorry history of acquisitions.
Sources:
(1) "... their market share in their CRM software has increased but their share in ERP has decreased." http://www.technoreporter.com/technology/software/microsoft-...
(2) "Contrary to the downward trend for its four enterprise resource planning (ERP) brethren, the Microsoft Dynamics CRM product (although still only a fraction of the overall Dynamics revenue) grew significantly in revenue year over year and surpassed the one-million-users mark in 2009." http://blog.technologyevaluation.com/blog/2010/02/15/microso...
This sound like a political trial though based on Denmark wanting to keep outsiders away from it's businesses and sour grapes Denmark has against MS because they moved the business to Ireland.
$1,000 in 2002 correspond to $1,280 in 2013 (+28%) as an example.
You are comparing 5.8 billion 2013-kroner with 10.8 billion 2002-kroner.