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Tax 1% of $4 Billion in Income Company Shifts to Territory

The Washington Post reported last week that Microsoft saved as much as $4.5 billion in Federal taxes from 2009 to 2011 by shifting “almost half of its net revenue” from retail sales in the States, “roughly $21 billion … to a Puerto Rican subsidiary.” The paper recalled the findings of the U.S. Senate Committee on Homeland Security and Governmental Affairs Investigations Subcommittee last September regarding the Microsoft tax maneuver.

Not reported by the Post but equally as startling is how little Microsoft paid in taxes to Puerto Rico along with saving $4.5 billion in Federal taxes. In 2011, it was a mere $41 million on sales of $4.015 billion — a tax rate of only 1.03%.

Stephen Shay, who had been U.S. Treasury Department’s Deputy Assistant Secretary for International Taxation earlier in the Obama Administration and the Department’s International Tax Counsel during the Reagan Administration, revealed this in a Subcommittee hearing last September.

Shay disclosed that Microsoft engaged in the same tax dodge with subsidiaries in Ireland and Singapore.

But the company paid a much lower rate in taxes to Puerto Rico, a U.S. territory, than to Ireland and Singapore. In Ireland, it paid an effective tax rate of 5.69%, and in Singapore, 2.78%.

The lower Puerto Rico rate raises the question of whether the territory is adequately taxing the company or, whether in its zeal to make Puerto Rico a tax haven, the insular government is levying taxes at rates lower than it needs to attract companies, depriving itself of sorely needed revenue and placing a greater tax burden on the islands’ residents. If Puerto Rico had taxed Microsoft at the rate Ireland did in 2011, it would have received more than $228 million instead of $41 million.

The New York Times quoted Puerto Rico’s secretary of Economic Development and Commerce last week as saying that the territory is “catching up to Ireland and Singapore” as a tax “shelter.” Secretary Alberto Bacó Bagué was referring to the new insular law that enables residents of the States who move to Puerto Rico to avoid any tax — Federal or territorial — on profits from trading stocks and bonds.
Wealthy U.S. citizens who move to Ireland or Singapore have to pay Federal taxes on stock and bond trades equal to 23.8% of the profits.

The tax rate data that Shay gave the Subcommittee chaired by Carl Levin (D-MI), however, showed that Puerto Rico is ahead of Ireland and Singapore as a corporate tax haven as well as an individual tax haven.

Shay explained that Microsoft sells or leases to its Puerto Rico subsidiary rights to sell the company’s products in the Western Hemisphere, including the States. It does the same for its Ireland and Singapore subsidiaries with sales rights to other parts of the world.

Forty-seven percent of Microsoft’s sales in the States from 2009 through 2011 were made on paper through its Puerto Rico subsidiary.

In Fiscal Year 2011, the three subsidiaries accounted for 55% of the company’s earnings before taxes. Only 1,914 of Microsoft’s 90,000 employees, however, worked in the three locations.

Microsoft workers in Puerto Rico and the two countries accounted for an average of about $8 million in earnings before taxes per person — compared to an average of approximately $311,900 for all of Microsoft’s employees.

“[T]these results are not consistent with a commonsense understanding of where the locus of Microsoft’s economic activity … is occurring,” Shay noted. “The tax motivation of the income location is evident,” he added.

The tax expert pointed out that Microsoft’s tax example is far from unique. In fact, the company’s planning to avoid Federal taxes through Puerto Rico and other locations outside of the States is typical of multinational companies based in the States.

The company avoids Federal taxes on sales booked as being made through its subsidiary in Puerto Rico as well as through earnings attributed to its Ireland and Singapore subsidiaries because Federal income taxes are not due on income from subsidiaries outside of the States until parent companies receive the profits.

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