United States software giant Microsoft has defended its right to use Offshore hubs in Ireland, Singapore and Puerto Rico, which helps reduce its tax rate, in a submission to the US federal inquiry into corporate tax avoidance.
It is the latest technology company to claim it pays its fair share of taxes, following similar statements by Google and Apple in their submissions last week.
Microsoft confirmed its overall effective tax rate was well below the standard US corporate rate of 35 per cent.
It said it was working within international tax rules that allowed income it reported on its US tax return “as fully taxable in the US without regard to the location of the customer”.
It is unclear from the submission or the company’s annual reports how much tax the company paid on its Australasian profit s- the company claims it is above the 30 per cent company rate.
But at the same time it goes into an extensive explanation of why Microsoft uses the lower-tax nation of Singapore as a hub for its Australasian operation.
The submission said Microsoft channels its earnings through foreign hubs – it called these “regional operations centres” - in Ireland, Singapore and Puerto Rico.
This allows it “to licence the rights to use the relevant intellectual property to produce and sell Microsoft products in respective regions” such as Australasia.
“The Singapore ROC group, organised in 1998, supplies products and services to the APAC region, also representing billions in customer revenue earned and operating expenses incurred serving 18 countries throughout Asia Pacific,” the submission confirms.
It said the APAC group operating costs are funded by the Singapore ROC, which employs over 2300 employees and contractors and owns and operates datacentre facilities that distribute software to APAC customers.
“Regional production, marketing and G&A functions are performed by the Singapore ROC,” the submission said. “The profits earned from the APAC business, after appropriate taxable payments to the US group for technology rights and other support and the payment of support fees to the local subsidiaries, are earned primarily by the Singapore ROC group.”
Microsoft said local entities are “generally required to act under the direction of Microsoft with regards to marketing campaigns, pricing, terms and conditions and policies and procedures” .
“The local subsidiaries provide very limited input into the creation of marketing or technology intangibles embodied in the material provided by Microsoft,” the submission said.
Under long-standing international rules, tax is paid where the value is created. Traditionally this has been where companies have had a “physical” location.
But the rise of online commerce deals with intangibles like intellectual property. This has made it easy for corporations to shift the location of their primary value-generating asset, their intellectual property rights, to lower-tax nations.
The practice, while completely legal under the current rules, has come under question as government revenues dry up.
The use of hubs is an annoyance to governments outside the US. In November, the Chinese government hit Microsoft with a $140 million tax bill, becoming the latest of a series of US technology companies accused by the Chinese government of tax evasion.
But Microsoft, which has previously disputed the backdated figure, said the company “complied with the tax rules in each jurisdiction in which it operates and pays billions of dollars each year in total taxes”.
“The resulting income is reported on our consolidated US income tax return as fully taxable in the US without regard to the location of the customer,” it said.
Microsoft said its overall effective tax rate was 20.7 per cent, 19.2 per cent and 23.8 per cent for fiscal years 2014, 2013, and 2012, respectively.
“The reduction from the United States federal statutory rate stems from foreign earnings taxed at lower rates from producing and distributing our products and services through our ROCs in Ireland, Singapore, and Puerto Rico,” the submission said.
“Our foreign earnings, which are taxed at rates lower than the US rate and are generated from our regional operating centers, were 81 per cent, 79 per cent, and 79 per cent of our foreign income before tax in fiscal years 2014, 2013, and 2012, respectively.”
It said the company was working within US, and other foreign tax laws as written. “That is not to say that the rules cannot be improved – to the contrary, we believe they can and should be. Microsoft is supportive of the current discussions regarding changes to international tax laws.”
The key things to note here is