Court documents in Microsoft's battle with IRS detail how the company moves money offshore to avoid taxes

Kip Kniskern

Offshore tax loopholes have existed for far longer than Microsoft’s 30 year existence, and the company certainly isn’t alone in making the most out of maximizing tax relief in an increasingly global economy. In fact, as Directions on Microsoft analyst Wes Miller pointed out on Twitter, Microsoft may have a fiduciary duty to its shareholders to maximize value in the company by minimizing taxes.
However what’s less clear is just exactly how Microsoft uses offshore tax loopholes (or incentives, depending on how you look at it), that is, until now. In a feature article in this Sunday’s Seattle Times, tech journalist Matt Day has taken to a number of documents that have come to light in the ongoing courtroom battle between the IRS and Microsoft to shine a light on the process of moving money from the US or abroad to Puerto Rico, Singapore or Ireland to gain significant tax relief.

Microsoft tax relief
For an interactive introduction into Microsoft’s tax moves, visit The Seattle Times

Typically, US corporate taxes are levied at a rate of around 35%, which is very high compared to other countries, and may indeed be forcing companies like Microsoft to seek tax relief however they can. In the past ten years, using systems of offshore relief, Microsoft has paid an average effective rate of 21.7%, according to the Times’ article, but it gets there by paying an average of only 4.5% outside of the country, a rate lower than any of the countries in which it does business.
The way companies pay, or don’t pay taxes is getting a lot more scrutiny recently, partly because of the increasing rate of globalization of large multi-national corporations, and their increasing sophistication at paying as little taxes in as many places as possible.  The Times charted the rates of both individual and corporate earnings and their effective taxes:
Rate of global taxes
Corporate vs. individual tax payments

.. and as you can see, while taxes are keeping up with individuals, corporations are making more and more profits with taxes not nearly keeping pace.
Microsoft isn’t by any means the only corporation to do what they can to keep their taxes low, nor is it even among the leaders in avoiding taxes.  Their feud with the IRS about tax payments, however, is giving us an uncommon look at just how the company moves money around to maximize their profits and at the same time minimize their taxes.