Microsoft saved billions using Irish 'tax havens'

A US SENATE committee has accused Microsoft of using transactions with its subsidiaries in Ireland and other low tax countries to avoid billions in US taxes.

The company, which employs 1,200 people in Ireland, used aggressive international tax manoeuvres to avoid taxes, according to the US Senate committee memo released for a hearing in Washington late yesterday.

Senator Carl Levin, chairman of the Permanent Subcommittee on Investigations, said the high-tech industry was “probably the number-one user of these offshore entities to transfer intellectual property.”

Through transactions with subsidiaries in Ireland, Singapore, Puerto Rico and Bermuda the company saved at least $6.5 billion (€5 billion) in taxes over the past three years, the memo said.

While more than 85 per cent of its R&D) takes place in the United States, the profits are shifted “into tax havens”, the memo said.

It identifies one of Microsoft’s Irish subsidiaries (Microsoft Ireland Research – MIR ) as sharing 30 per cent of the R&D costs even though it was responsible for less than 1 per cent of R&D.

MIR does not manufacture or sell any products to customers but licenses intellectual property rights to another Irish Microsoft subsidiary, the memo notes.

It said that MIR reported $4.3 billion profits in 2011 an effective tax rate of 7.2 per cent.

Its profits were about $11 million per employee, the memo said.

Microsoft began in the 1990s to establish a “complex web of interrelated foreign entities to facilitate international sales and reduce” tax, the memo said.

It said Ireland was the first of three “low tax jurisdictions” where it established operating centres followed by Bermuda and Singapore.

Microsoft maximises profits in these three centres “in order to reduce its tax liabilities,” the memo said.

It accuses the company of transferring intellectual property rights from the US group to foreign subsidiaries by pooling research and development expenses.

The subsidiaries often do not manufacture the products it gets the rights for, it said.

In Ireland and Singapore the intellectual property rights were “immediately relicensed to a different Microsoft subsidiary, at a substantial mark up, which then manufactures the products,” the memo said.

Microsoft and HP were scheduled to testify at the hearing.

“Microsoft’s tax results follow from its business, which is fundamentally a global business that requires us to operate in foreign markets in order to compete and grow,” Bill Sample, the company’s corporate vice president for worldwide tax, said in written testimony for the hearing.

“In conducting our business at home and abroad, we abide by US and foreign tax laws as written,” he said.

(Additional reporting from Bloomberg)