Microsoft Structured Acquisition Of Skype To Avoid U.S. Taxes

On Tuesday, tech giant Microsoft announced to the world that it would be purchasing Internet communication service Skype in an all-cash, $8.5 billion acquisition deal.

One fact that has gone underreported about the deal is how Microsoft structured it to keep its taxes as low as possible. As the Wall Street Journal’s Ronald Barusch notes, Microsoft and Skype saved billions of dollars in taxes because Microsoft used its foreign profits to purchase Skype, which also happens to base its corporate headquarters in a major tax haven itself, Luxembourg.

Doing so allowed Microsoft to avoid paying taxes on its profits at the U.S. corporate tax rate of 35 percent. So how much does Microsoft pay on the profits it makes overseas in tax havens based in places like Ireland, Bermuda, and Singapore? To find the answer, we can turn to the University of Southern California’s Edward D. Kleinbard. In a paper titled “Stateless Income,” Kleinbard analyzed Microsoft’s overseas earnings. Kleinbard noted that in 2010, Microsoft has $29.5 billion in earnings overseas, and that the tax cost of these earnings if they were brought back to the U.S. would be $9.2 billion:

http://thinkprogress.org/2011/05/13/microsoft-skype-tax-havens/

Hey, M$ will have to make it conform to their product line.

My favorite was from an old list - "If GM made cars the way M$ makes software"....

"You would push a button marked 'Start' to turn off the car."

never-mind.

deal. Right or wrong, it's really no surprise that a company chooses the path of less tax.

Secondly, it can be argued that oversea earnings should have create limited U.S. tax liability.

Put yourselves in the place of the CEO (or shareholders). This is the "right" thing for the company.

If you want to talk about moral right and wrong you need to look beyond the US. Profits made in other countries are used to grow the business (and jobs) in that country or other countries. Any money the US forces back is less money for those countries and less jobs for those people. We have laws that require a "reasonable" amount of money to be returned to the US (e.g. in the form of license fees) to cover that fact that some US resources are used when a US business makes a profit overseas. You can debate what is "reasonable" but you can't argue that all profit should be subject to US taxes at the expense of foreign countries and workers.

Then there's the practical arguments. If all US corp profits were taxable overseas, it may have been arranged for Skype to "buy" Microsoft. Nothing would be different than the current agreement (names, owners, etc) but Microsoft's headquarters would be in Luxembourg and the US has even less "right" to tax the profits. I've been in a company that was "bought" but a smaller company. It can happen and I'm sure Microsoft has the lawyers and accountants who know how.

The other practical argument is that economies are growing very fast all over the world (China, India, South America). Large companies from around the world are competing to be the leaders in these places and not all will succeed. Those who don't win will likely be bought out. Being subject to large US taxes while foreign companies reinvest their profits will significantly hurt the chances that US companies survive. (Before you tell me that reinvesting overseas profits is ok because the invested money doesn't count as profit so it's not taxed at US rates, look at what Microsoft is doing - many people would call it "reinvesting overseas profit")