Microsoft Politics Taxation

Microsoft's tax avoidance schemes: national and in Washington State

(revised, 2014/10/28)

Bloomberg reported in 2012: “A U.S. Senate committee memo said Microsoft Corp. (MSFT) used aggressive international tax maneuvers to avoid billions of dollars in taxes over the past three years. … Microsoft used transactions with subsidiaries in Puerto Rico, Ireland, Singapore and Bermuda to save at least $6.5 billion in taxes.” It “shifts some income from around the world to a Bermuda subsidiary that has no employees.”

In Microsoft Admits Keeping $92 Billion Offshore to Avoid Paying $29 Billion in US Taxes David Sirota elaborates:

The panel’s report noted that “despite the [company’s] research largely occurring in the United States and generating US tax credits, profit rights to the intellectual property are largely located in foreign tax havens.” The report discovered that through those tax havens, “Microsoft was able to shift offshore nearly $21 billion (in a 3-year period), or almost half of its US retail sales net revenue, saving up to $4.5 billion in taxes on goods sold in the United States, or just over $4 million in US taxes each day.”

You can download the Senate committee report here.  It says that as of March 31, 2012, Microsoft reported $59.5 billion in cash. $50 billion of that cash (89%) was held overseas.  For comparison, Johnson & Johnson and HP held 100% of their cash overseas.  Apple Computer held $74 billion overseas (67% of their cash).  Google held 48% of their cash overseas. So Microsoft isn’t alone in being a tax cheat.

The Senate report notes that in 1952 corporate taxes generated 32.1% of federal tax revenue. In 2012 corporate taxes generated 8.9% of federal tax revenue.

CR Sridhar writes:  “Oil giants EXXON and CHEVRON earning in the year 2009 profits of $19 billion and $10 billion respectively paid zero Federal income tax. One of the biggest banks in America Citigroup, after posting a profit of $ 4 billion and receiving a bailout of $2.5 trillion, paid nothing to the US treasury. …  A New York janitor earning slightly more than $33,000 has an effective tax rate of 25% while GE, with billions of dollars in revenue pays zero tax. The big losers are the salaried middle class who pay for the games the rich play in tax havens. ”

Getting back to Microsoft…  Not only does Microsoft avoid federal taxes. They also avoid Washington state taxes.

Danny Westneat of the Seattle Times wrote in 2011, “Microsoft reports it is getting a $104.5 million break in its sales taxes — a threefold jump compared with what it reported the year before.  …. If we didn’t give Microsoft the $104.5 million tax break, it would have $52.668 billion cash on hand.”  Westneat says that perhaps school children, the poor, and the disabled would be better beneficiaries of the legislature’s largesse.

Jeff Reifman says in an August 2014 article for Crosscut (“Where are Washington’s K-12 dollars? Just ask Microsoft shareholders“) that Microsoft “accounted for its software licensing sales through the new office [in Nevada] to avoid paying taxes on them, even as the bulk of its facilities, software development and sales continued from Washington state.” Nevada has no corporate income tax. “Because the facilities and employees that built and sold Microsoft’s software overwhelmingly exist in Redmond, the state could have challenged Microsoft Nevada’s accounting as an illegal step doctrine.”   Reifman speculates that the state chose not to challenge the accounting for political reasons.

It gets worse. In 2010 the legislature agreed to exempt Microsoft from paying royalty tax on worldwide sales; instead it would pay only on sales in Washington State. Former Microsoft executive Ross Hunter led the charge for this tax break, according to Reifman. “Hunter also snuck in language which granted large taxpayers such as Microsoft amnesty from unpaid royalty back-taxes.”   Hunter claimed that the change would generate additional revenue, because other software companies would come to the state. Such additional revenue failed to materialize.  Reifman concludes, “we can conservatively estimate Microsoft’s savings from lobbying and dodging the state royalty tax between 1997 and 2014 at $5.34 billion.”  The exact numbers are kept secret. “One study by the Department of Revenue found it took $588,000 worth of tax credits for each local job created.”

Microsoft: Tax Dodger

As I reported here last year, at a state Finance Committee work group meeting on the topic accountability for tax preferences,  Greg LeRoy, Executive Director of Good Jobs First, testified remotely about Making Economic Development Tax Credits Transparent. His group analyzed 240 “megadeals” in which state legislatures gave away $75 million or more in tax preferences.  The number of such giveaways has risen sharply since 2008.  The average cost to the state  per job is  $465,000.  The Boeing tax break is the largest given to date. But there are hundreds of older tax breaks.  LeRoy gave Washington a grade of D for transparency, D- for Job Creation/Quality, and D+ for Enforcement/Clawbacks.

A promising approach to bring an end to such tax breaks is for the legislature to adopt a so-called tax expenditure budget (see this and this), which would require tax expenditures on preferences to be listed in the state budget and reauthorized or allowed to expire every two years.

My interest in this topic was newly inflamed by the planned boycott of Microsoft next month in response to its tax avoidance (see Boycott Microsoft (Black Friday Mourning Picket!) November 28).    Another reason for my interest is a discussion I had with State Rep Cyrus Habib (like Hunter, a Democrat from the 48th LD) recently. When I mentioned Microsoft’s tax breaks, Habib denied that such tax breaks still exist. He claimed the legislature closed tax breaks for Microsoft last year.  The information gathered in this article suggests that Habib misspoke.

If I’m wrong about Microsoft’s state tax breaks, or if the issue is a lot more complex than I have made it out to be, someone please enlighten me. If I’m largely correct about Microsoft’s tax breaks and about legislators’ responsibility for their existence, then there needs to be accountability.

It’s undeniable that Republicans go out of their way to protect corporate tax breaks. Many Republicans have pledged not to raise taxes and not to eliminate tax breaks (which they consider the same thing as raising taxes).  On July 30 Senate Republicans voted to block a bill to limit offshore tax breaks. As reported by Politico, Sen. Chuck Schumer unveiled a bill this September to limit the benefits of tax inversions but Republicans oppose the reforms.

Clearly not all Democrats are immune to supporting tax breaks for corporations.  Gov. Gregoire showed little or no interest in eliminating tax breaks.  Gov. Inslee not only ran on a platform of not raising taxes but spearheaded the largest corporate tax break in US history last year (the $8.7 gift to Boeing).   On the other hand, Inslee and Democrats in the legislature tried to eliminate some tax exemptions in 2013 but they were thwarted by GOP opposition, as reported here.

But Microsoft is the biggest users of H-1B visas (source). Sections of Redmond and Bellevue are filled with East Indians working for the software giant.  Heck, why should Microsoft bother paying state taxes to fund education when they can get trained workers from overseas?

Unfair tax breaks for rich corporations will end only when enough citizens realize they’re being screwed and realize that the problem isn’t taxes per se but the regressive nature of the nation’s tax system.

Let’s hope the boycott event on Nov 28 is big and noisy, like the one imagined here.

Protest against Microsoft tax dodging

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