Microsoft Corporation (NASDAQ:MSFT) has been hit by $140 million in back taxes and interest by the Chinese government, in a rare case concerning cross-border tax evasion in the country.
Though the software group disputed much of the news agency’s article, it said it had agreed to pay $140 million as a “bilateral advanced pricing agreement”.
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Penalized for transfer pricing
An article published by Xinhua, China’s official news agency, on Sunday did not name Microsoft Corporation (NASDAQ:MSFT), but said that a company whose name begins with “M” and with financial details identical to those of Microsoft had been penalized for transfer pricing. The news agency said that while the software group’s China-based businesses were officially loss making, the profits were being booked in offshore tax havens, adding that the software giant had admitted to the tax evasion.
However, Microsoft Corporation (NASDAQ:MSFT) said the settlement with Chinese authorities relates to a “bilateral advanced pricing agreement” rather than back taxes.
The Redmond, Washington-based company said: “In 2012 the tax authorities of China and the United States agreed to a bilateral advanced pricing agreement with regards to Microsoft Corporation (NASDAQ:MSFT)’s operations in China”. The company’s spokesman said in an emailed statement: “China receives tax revenue from Microsoft consistent with the terms of the agreed advanced pricing agreement”.
According to a Reuters report, an advanced pricing agreement sets the tax treatment of transfer pricing, or methods of booking prices and sales between subsidiaries, which Microsoft Corporation (NASDAQ:MSFT) uses across the globe. Citing Microsoft’s fiscal 2014 annual report, the Reuters article points out that Microsoft’s overall effective tax rate was 21% – well below the standard U.S. corporate rate of 35% – primarily because it channels earnings through “foreign regional operations centers” in Ireland, Singapore and Puerto Rico.
A difficult year for Microsoft China
Earlier this year, authorities from the State Administration for Industry and Commerce for the People’s Republic of China visited the offices of Microsoft Corporation (NASDAQ:MSFT) in the cities of Beijing, Chengdu, Guangzhou and Shanghai. The SAIC said it seized email and other relevant materials, and also wanted to interview several Microsoft executives. The investigation into Microsoft is one of several faced by foreign businesses in China as Beijing steps up enforcement of its antimonopoly law.
In May, the Chinese government banned Windows 8 being installed on public sector PCs in what was reported at the time as a response to it ending support and security updates for Windows XP. However, the software group does offer extended support to enterprise customers at an additional price.
Several multinational companies operating in China have also come under the scrutiny of Chinese authorities. United Kingdom’s largest pharmaceutical company, GlaxoSmithKline plc (ADR) (NYSE:GSK) (LON:GSK), was accused of “economic crimes” in China, as some of its employees allegedly bribed doctors and hospital staffs to boost its sales. ., Inc. (NYSE:MRK) also faced an investigation in China on cost and pricing issues during the wake of price fixing scandals in the country.