Transfer pricing is sort of just a pile of black magic. Microsoft's American business is required to charge their European subsidiary some "fair market price" for the Windows intellectual property, but what is a fair price for a license to sell Windows on the European continent? Unlike with fungible goods, there is no established market for this product that the IRS can easily refer to.
In this case Microsoft is saying that some amount of their IP was developed by their overseas subsidiary and thus doesn't need to be included in the transfer pricing calculation, so in their process of making up imaginary amounts of money to charge themselves for their own products they also need to deduct that. If e.g. most of the Windows networking stack was created in Germany they need to figure out what percentage of the value of the overall Windows IP is added by the ability to connect to the internet.
Understandably, it's possible for reasonable observers to disagree on the values chosen here, this is not a case of black and white corporate misconduct (tax issues essentially never are).
Yes it is. Microsoft routes a lot of its business through the Dublin and Belfast offices. At least now they have an actual office and a DC there. Previously, it was literally just a routing office. Apple and Google do the same as well.
it can, sort of. it really depends on what you are optimizing for
there are nearly infinite permutations on how to form your business entities, what combinations of jurisdictions you use
and then you can structure which one does what operations where
additionally, all the countries compete for your business so are really competing against each other
most recognize that volume of transactions within their economy to many entities is more important than their passive taxation to one governmental entity, so they incentive the former
Part of me is like: 25% tariff, blanket, on everything unless there's an exemption. The list of exemptions can then be carefully curated. I don't care if it's 500 pages long for everything from honey to computer chips; but then at least we know that stupid tax stuff is unprofitable.
part of me is like: why does that particular governmental entity deserve additional payment just because its regulatory environment is uncompetitive in that regard and can't balance its own budget.
> Today, we’re sharing an update about our ongoing audit with the U.S. Internal Revenue Service (IRS), [… which has been investigating] how we allocated our income and expenses for tax years beginning as far back as 2004. […] The IRS says Microsoft owes an additional $28.9 billion in tax for 2004 to 2013, plus penalties and interest.
“Many large multinationals use cost-sharing because it reflects the global nature of their business.”
A comparable example might be Apple, where sales of my (american) app being sold from (american) servers somehow curiously involves the Republic of Ireland and their low corporate tax rates…
Apple pays the majority of taxes to US. They report US income and pay taxes for that to US. Ireland is involved only so far as EU income. So if your American app is sold to European users, the income is recognized as EU, and reported to Ireland.
Of course it is valid. The principal on which much of taxation is based is that it is a tax on the benefit that the income provides. And that benefit accrues in the US.
The only way it can be claimed to be invalid is by conflating legal with moral.
This is a common misconception but not actually true.
If Apple sells a copy of your app to an American customer the revenue from their royalty is booked to Apple Inc. (the U.S. company) and they would pay U.S. income tax on that sale.
The only time the sale would be booked to their Irish subsidiary is if the customer was located in Europe, or it would go to one of their other international subsidiaries depending on the specific location of the customer.
Legal BEPS exist and is more complicated than this oversimplification. While Apple didn't do Stanley Works "moving" to Bermuda, Tim Cook is no slouch in the financial domain as that was (and is) his wheelhouse. The calculus involves a myriad of factors including a risk appetite, leadership ethics, lots of data, and decision support. As an aside, I once parted ways with 2 potential business partners because they were on the privately-admitted illegal side of BEPS and tax minimization in speech and action. (Last I heard, they're lobbyists for political interests based in another country.)
Also, the books for taxes and the books for securities regulators aren't precisely equivalent per jurisdiction based on how things are counted or not counted. For example, in general, Norwegian and US accounting practices tended to be/are vastly different in some areas... hence a need for local external auditors.
It's simple enough, an Irish company called Apple licenses its very valuable IP to its entities in cheaper countries so they can do things like manufacturing, server farms, customer support.
(It also carries on these some of these functions in Ireland, as it happens, and pays a ton of tax at the relatively high income tax rates there.)
It's frankly curious to me when a multinational chooses to base itself anywhere less favourable.
At one point, it wasn’t an Irish company. Now technically the American company sold or transferred its IP to the Irish company. But it did so as a fiction, to avoid taxes, and neither I nor a government I help elect are obligated to honor that fiction.
> "a ton of tax at the relatively high income tax rates there"
Firstly, that's not Apple paying income tax, that's their employees.
Secondly, they don't pay much in the way of corporation or other taxes that usually apply because of a sweetheart deal (Google also has one IIRC), which is why much of the EU is up in arms about the Irish government's behaviour here, that effectively allows these multinationals to operate across the EU without paying the usual expected taxes, giving them an advantage over local businesses and depriving governments of income, and there have been various court cases about it.
The infraction happened in 2004-2013. So that would be over three billion dollars per year.
Microsoft’s operating income in fiscal year 2005 was about $15B and in 2013 almost $27B. So you can kind see where the IRS is getting this number: if they believe that Microsoft evaded tax worth about 10-15% of its earnings before taxes, that’s how it would add up to this whopping sum.
It seems like Microsoft believes they can settle for something much lower. The stock price doesn’t seem to be hurting pre-market at all.
I think a lot of the market is people pointing at other people as if they had done the due diligence that they couldn't be bothered with, and those people pointing back.
>
Big investors will have eyes and ears inside the IRS, so will have known for years about this already.
Sorry, just so I'm clear, you are claiming that major hedge funds have "moles" in the IRS that illegally funnel them the private tax information of major public companies?
At what point does information such as this become "insider information" and illegal to share? These "eyes and ears" need to have their taxes audited...
IRS started a tax investigation in 2007 of Microsoft's 2004-2006 tax returns, which has been somewhat exposed to the public due to the lawsuits along the way.
It was likely known about and also is a small percent of the market cap. The present value will also be reduced by the time value of money, which is not inconsequential over the quite a few years this will take to settle.
> It seems like Microsoft believes they can settle for something much lower.
They could hire the best lawyers, accountants, lobbyists, etc in the world. Unless someone at microsoft did something criminal, it's likely they could knock a significant portion off the tax bill.
> The stock price doesn’t seem to be hurting pre-market at all.
Microsoft's market cap is $2.5 Trillion. The one-time tax bill amounts to about 1% of its 'total value'. It's like a one time $1000 special property tax on your $100K rental property. It sucks but it's not the end of the world. Besides, even if they had to pay $30 billion in back taxes, MSFT's customers are utlimately going to pay for it, not microsoft. It doesn't affect microsoft's market share in OS, Office, Servers, etc.
> It seems like Microsoft believes they can settle for something much lower. The stock price doesn’t seem to be hurting pre-market at all
Given the Stock Markets inability to predict the Twitter buyout despite public documents stating Elon Musk's contract to buy at $54.20/share throughout 2022, I'm pretty sure that stock market investors are literally illiterate, unable to read public documents.
Anyone who bought Twitter at $35/share after the contracts public disclosure knows what I'm talking about.
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AMC / APE for another example. Anyone who short sold AMC and bought long APE made bank this past year (before the AMC/APE stock ticker merge there were public documents in December 2022 stating AMCs intention to merge the two one-for-one)
I believe I saw an opportunity as wide as $8 for AMC and $1.50 for a legally equivalent APE a few months ago.
Literally public documents with public court signatures and everything, but so many people remaining ignorant for months, providing anyone 'who can read' an opportunity to make tons of nearly risk free money.
There are a million reasons that those trades were not free money. e.g. it's quite expensive to short stocks like AMC. Not knowing that makes me think you weren't actually in that trade.
Start putting your money in the market and you won't be talking about easy money for "anyone who can read" for very long.
>AMC / APE for another example. Anyone who short sold AMC and bought long APE made bank this past year (before the AMC/APE stock ticker merge there were public documents in December 2022 stating AMCs intention to merge the two one-for-one)
This is called "pairs trading", right? Is there any way it can blow up? Remember that this is AMC, which could be out of business in six months or could go up 3000% in another idiotic bubble.
I made a fair bit of money off Twitter because it was as simple as buying stock at the market rate. Anyone who reads the papers knew the price of Twitter to the penny and could have bought in with a phone call. The sort of trade you're talking about sounds harder to pull off safely. That's no excuse for the hedge funds, of course.
I don't think it's quite that simple. After the offer was submitted he famously tried hard to NOT buy Twitter. In the end his attempts to back out of the purchase because of the supposed undisclosed bot problem were thrown out in court, but iirc he could still have pulled out by paying "only" a couple billion dollars in fines or something. I guess it comes down to "do you believe Elon Musk when he says something" and plenty of people understandably didn't.
That doesn't make them "literally illiterate" though.
LOL, like they would ever do that! They will make MS customers pay for it, if they can't convince the IRS to lower the bill significantly, which they probably can.
I know I am in the minority but I cannot understand how mercilessly taxing providers of services that improve our lives is not... theft, honestly.
It is not about how much money they make but about about a third party appropriating what a company that provides such a big value does because, hey, you are "stealing me because I exist"...
Yeah, and if that takes a $30B hit to settle past accounting issues, that’s still $30B no longer poised for an acquisition or on hand to settle some EU action next year.
Losing a quarter of your cash reserves for no gain isn’t going to ruin today’s business but it sure will frustrate existing strategies for the future.
But I bet a lot of that is in long term treasuries which, if you want to use them as legal tender, are kinda down in price right now (if you don't hold them til maturity). And if they need to take a loan to pay it, those bonds are going to be at fairly high rates. Overall, it's gonna be a stock price haircut for sure. I'm guessing at least 10-20% because of all the money they could have MADE with that money.
Why should they do that? They should simply add more annoying advertising and other BS to their products, especially Windows OS. What are customers going to do, go elsewhere or switch to another OS that doesn't have ads?
No message about how greedy Europe wants to steal money from big tech, yada yada yada. Oh, it's the USA this time? Wait, does this mean that these big tech were really not paying their fair share and the USA was just slow to get caught to it? I guess so.
No it doesn't. What it definitely could mean with democrats in power is the USA becoming just as insane as Europe thinking the big corporations are the "bad guys" and we have to "drill" them.
It's a Western problem, not a Europe problem. It's more so in Europe but this contagion that big corporations are evil and governments are good is growing more and more in the US too.
This spells bad news for "MICROSOFT B.V.", the famous Dutch software company that has reported being responsible for billions of revenue of the Microsoft Corporation over those years.
Is it? These companies and that specific structure involves paying the IRS off in “Advance Pricing Agreements” where they tell the IRS how they won’t pay taxes and the IRS signs off on it
Readit News
In this case Microsoft is saying that some amount of their IP was developed by their overseas subsidiary and thus doesn't need to be included in the transfer pricing calculation, so in their process of making up imaginary amounts of money to charge themselves for their own products they also need to deduct that. If e.g. most of the Windows networking stack was created in Germany they need to figure out what percentage of the value of the overall Windows IP is added by the ability to connect to the internet.
Understandably, it's possible for reasonable observers to disagree on the values chosen here, this is not a case of black and white corporate misconduct (tax issues essentially never are).
https://en.wikipedia.org/wiki/Double_Irish_arrangement
there are nearly infinite permutations on how to form your business entities, what combinations of jurisdictions you use
and then you can structure which one does what operations where
additionally, all the countries compete for your business so are really competing against each other
most recognize that volume of transactions within their economy to many entities is more important than their passive taxation to one governmental entity, so they incentive the former
> Today, we’re sharing an update about our ongoing audit with the U.S. Internal Revenue Service (IRS), [… which has been investigating] how we allocated our income and expenses for tax years beginning as far back as 2004. […] The IRS says Microsoft owes an additional $28.9 billion in tax for 2004 to 2013, plus penalties and interest.
A comparable example might be Apple, where sales of my (american) app being sold from (american) servers somehow curiously involves the Republic of Ireland and their low corporate tax rates…
https://fortune.com/2017/10/31/trump-tax-reform-apple-multin...
There are other possible criticisms on corporate tax and Apple, but this isn't a valid one.
The only way it can be claimed to be invalid is by conflating legal with moral.
If Apple sells a copy of your app to an American customer the revenue from their royalty is booked to Apple Inc. (the U.S. company) and they would pay U.S. income tax on that sale.
The only time the sale would be booked to their Irish subsidiary is if the customer was located in Europe, or it would go to one of their other international subsidiaries depending on the specific location of the customer.
Also, the books for taxes and the books for securities regulators aren't precisely equivalent per jurisdiction based on how things are counted or not counted. For example, in general, Norwegian and US accounting practices tended to be/are vastly different in some areas... hence a need for local external auditors.
Corporate Inversions: Stanley Works and the Lure of Tax Havens (2002)https://www.hbs.edu/faculty/Pages/item.aspx?num=29288
(It also carries on these some of these functions in Ireland, as it happens, and pays a ton of tax at the relatively high income tax rates there.)
It's frankly curious to me when a multinational chooses to base itself anywhere less favourable.
Firstly, that's not Apple paying income tax, that's their employees.
Secondly, they don't pay much in the way of corporation or other taxes that usually apply because of a sweetheart deal (Google also has one IIRC), which is why much of the EU is up in arms about the Irish government's behaviour here, that effectively allows these multinationals to operate across the EU without paying the usual expected taxes, giving them an advantage over local businesses and depriving governments of income, and there have been various court cases about it.
Microsoft’s operating income in fiscal year 2005 was about $15B and in 2013 almost $27B. So you can kind see where the IRS is getting this number: if they believe that Microsoft evaded tax worth about 10-15% of its earnings before taxes, that’s how it would add up to this whopping sum.
It seems like Microsoft believes they can settle for something much lower. The stock price doesn’t seem to be hurting pre-market at all.
Big investors will have eyes and ears inside the IRS, so will have known for years about this already.
Sorry, just so I'm clear, you are claiming that major hedge funds have "moles" in the IRS that illegally funnel them the private tax information of major public companies?
What possible source do you have for this?
https://www.seattletimes.com/business/microsoft/microsoft-ir...
This has been going on since 2007. The IRS sued Microsoft in 2015 [1] and been publicly targeting them since 2020 [2].
[1] https://www.seattletimes.com/business/microsoft/microsoft-ir...
[2] https://www.propublica.org/article/the-irs-decided-to-get-to...
Dead Comment
They could hire the best lawyers, accountants, lobbyists, etc in the world. Unless someone at microsoft did something criminal, it's likely they could knock a significant portion off the tax bill.
> The stock price doesn’t seem to be hurting pre-market at all.
Microsoft's market cap is $2.5 Trillion. The one-time tax bill amounts to about 1% of its 'total value'. It's like a one time $1000 special property tax on your $100K rental property. It sucks but it's not the end of the world. Besides, even if they had to pay $30 billion in back taxes, MSFT's customers are utlimately going to pay for it, not microsoft. It doesn't affect microsoft's market share in OS, Office, Servers, etc.
> Microsoft owes the Internal Revenue Service (IRS) $28.9 billion in back taxes, not including penalties and interest
This is almost CERTAINLY true. MSFT will be able to tie this up in court, and has tremendous motivation to do so.
Given the Stock Markets inability to predict the Twitter buyout despite public documents stating Elon Musk's contract to buy at $54.20/share throughout 2022, I'm pretty sure that stock market investors are literally illiterate, unable to read public documents.
Anyone who bought Twitter at $35/share after the contracts public disclosure knows what I'm talking about.
---------
AMC / APE for another example. Anyone who short sold AMC and bought long APE made bank this past year (before the AMC/APE stock ticker merge there were public documents in December 2022 stating AMCs intention to merge the two one-for-one)
I believe I saw an opportunity as wide as $8 for AMC and $1.50 for a legally equivalent APE a few months ago.
Literally public documents with public court signatures and everything, but so many people remaining ignorant for months, providing anyone 'who can read' an opportunity to make tons of nearly risk free money.
Start putting your money in the market and you won't be talking about easy money for "anyone who can read" for very long.
This is called "pairs trading", right? Is there any way it can blow up? Remember that this is AMC, which could be out of business in six months or could go up 3000% in another idiotic bubble.
I made a fair bit of money off Twitter because it was as simple as buying stock at the market rate. Anyone who reads the papers knew the price of Twitter to the penny and could have bought in with a phone call. The sort of trade you're talking about sounds harder to pull off safely. That's no excuse for the hedge funds, of course.
That doesn't make them "literally illiterate" though.
"Microsoft on the Issues Blog – An update on our IRS tax audit"
Or:
Microsoft SEC 8-K: "IRS is seeking an additional tax payment of $28.9 billion"
(I've emailed mods to suggest these.)
No wonder why they’re talking about charging for windows 12 features, has to come from somewhere!
https://finance.yahoo.com/quote/MSFT/cash-flow?p=MSFT
They could in effect write a check today for it.
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It is not about how much money they make but about about a third party appropriating what a company that provides such a big value does because, hey, you are "stealing me because I exist"...
Now people will vote me negative, I know...
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Losing a quarter of your cash reserves for no gain isn’t going to ruin today’s business but it sure will frustrate existing strategies for the future.
Um...
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It's a Western problem, not a Europe problem. It's more so in Europe but this contagion that big corporations are evil and governments are good is growing more and more in the US too.
But wait til you hear of Ugland House (https://en.wikipedia.org/wiki/Ugland_House) in the Caymans - 10,000 sq ft, 5 stories...
... and registered offices of 42,000 companies.
If EU doesn't like one country has too low tax rates, that's an EU matter.
Dead Comment
All they have to do is find the agreement
Would love to see them