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

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"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:

For example, Microsoft Corporation’s Financial Statements in its 2010 Annual Report indicated that the company has $29.5 billion in “permanently reinvested earnings” outside the United States (that is, after foreign-tax earnings of foreign subsidiaries that Microsoft does not currently intend to repatriate to the United States). Microsoft also noted that the tax cost of repatriating those earnings to the United States would be $9.2 billion.

The $9.2 billion would amount to paying a rate of 31 percent. The missing four percent would come from foreign tax credits — meaning, the taxes the company paid overseas. That means the effective corporate income tax rate for Microsoft for its overseas profits is a paltry 4 percent — almost 9 times lower than the U.S. corporate income tax rate. In its last quarterly statement, Microsoft noted that “$42 billion of its $50.2 billion in cash and short term investments was held by its foreign subsidiaries.”

Unsurprisingly, Microsoft is part of a coalition of companies advocating for a repatration tax holiday, which would allow them to bring money they have stashed offshore back to the U.S. at a dramatically lower tax rate.

But Microsoft isn’t the only company involved in the acquisition that has been getting a sweet deal with overseas profits. As stated before, Skype’s office is based in Luxembourg. The effective corporate income tax rate in Luxembourg? 0.4 percent (See “The Revenue Effects of Multinational Firm Income Shifting, Kimberly Clausing). MarketWatch’s Therese Poletti notes that Skype’s financial disclosures show “dizzying array of offshore entities and holding companies associated with its biggest investors.” The private equity firm Silver Lake, which owns 39 percent stake in Skype, is also a major tax dodger. “Two of the three Silver Lake Funds which own shares in Skype are based” in the Cayman Islands and George Town in the caribbean. eBay, which “retained a 30% stake in Skype, giving investors a return of about $1.4 billion,” uses eBay International AG unit for its Skype ownership. Despite being an American company, this unit is based in Bern, Switzerland.

While many in the financial world are unsure of the results of the recent acquisition, there is clearly one group that won’t be benefitting: U.S. taxpayers who will continue to watch supposedly “American” businesses exploit the tax code and set up tax havens to avoid paying taxes in our country.

Seth Hanlon, the Director of Fiscal Reform for the Center for American Project’s Doing What Works initiative, contributed to this post.

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