While some domestic corporations do maintain headquarter offices in the United States, their money is often elsewhere to avoid the destructive tax code. But does Microsoft get an official pass or waiver from the Obama administration?
In September of 2014, Obama and Jack Lew at Treasury took decisive action.
The rules, which take effect immediately, will not block the practice, and Treasury Secretary Jack Lew again called on Congress to enact more far-reaching reforms. But in the meantime, he said, federal officials “cannot wait to address this problem,” which threatens to rob the U.S. Treasury of tens of billions of dollars.
“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” Lew told reporters. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense.
“These transactions may be legal, but they’re wrong,” he added. “And the law should change.”
Tax analysts praised the new regulations, saying they will make it much harder for U.S. firms to bring cash earned abroad back to the United States tax-free — a major incentive in the relocations known as tax “inversions.” It was not immediately clear, however, whether the new rules would be sufficient to head off a wave of inversions expected to cascade over the American landscape in the weeks before the Nov. 4 midterm congressional elections.
Microsoft’s Offshore Profit Pile Surges Past $100 Billion Mark
Microsoft Corp.’s stockpile of offshore profits rose to $108 billion, with a 17 percent increase over the past year as the company continues reaping profits in low-tax foreign jurisdictions.
The company crossed the $100 billion mark, making it just the second U.S. corporation — after General Electric Co. — to do so, according to a securities filing July 31. Apple Inc. has more cash abroad than Microsoft, but it already has assumed for accounting purposes that it will pay tax on some of the stockpile and thus has less than $70 billion offshore that would affect earnings directly if repatriated.
What’s keeping Microsoft’s cash abroad is the U.S. tax code. The company would be required to pay the difference between its foreign taxes and the 35 percent U.S. corporate tax rate if it brought the money home.
To get its $108.3 billion back, Microsoft would have to pay the U.S. $34.5 billion in taxes. That equals a 31.9 percent rate, which suggests that the company has paid as little as 3.1 percent in taxes on its foreign income, because of operations in low-tax Ireland, Singapore and Puerto Rico.
The Internal Revenue Service and Microsoft are in the midst of an intense legal battle over the company’s transfer pricing, or intracompany transactions. The federal government is auditing the company’s returns as far back as 2004, and Microsoft has challenged the government’s hiring of outside lawyers.
Peter Wootton, a spokesman for Microsoft, declined to comment.
Repatriating Profits
Under current law, U.S. companies owe the full 35 percent rate on profits they earn around the world, but they don’t have to pay the U.S. until they repatriate the profits. That gives companies an incentive to book profits overseas and leave them there, and that’s just what they’ve done.
U.S. companies have more than $2 trillion amassed outside the U.S., according to a Bloomberg News review earlier this year of the securities filings of 304 companies.
Apple has more than $200 billion in cash stockpiled, with almost 90 percent of it overseas. As of its most recent annual report, Apple had $69.7 billion in profits on which it hasn’t assumed taxes.
U.S. lawmakers are looking for ways to get some of that cash back in the U.S. President Barack Obama supports a one-time 14 percent tax on stockpiled profits, with the proceeds going to highways and other infrastructure programs. Some Republicans favor a similar approach and are working on a detailed plan.
