SEATTLE -- About 15 years ago, Microsoft made a bet that paid off to the tune of $27 billion after the December signing of tax overhaul legislation.
The scale of the benefits from that tax bill was revealed Wednesday when it released its fiscal second-quarter earnings, which included a charge to reflect the new tax structure.
Here's how Microsoft's wager worked:
The former U.S. corporate income tax rate, 35 percent, was among the highest in the world. Like many companies, Microsoft hoped that the U.S. tax system would get friendlier at some point, and lobbied to that effect.
In the meantime, the company tried to slash the portion of its profit taxable in the United States. The tax code previously allowed companies to defer taxes on foreign earnings they deemed permanently reinvested outside the United States.
As Microsoft grew in the 2000s, it structured its global subsidiaries to minimize its tax bill, placing key subsidiaries in Ireland, Singapore, Puerto Rico (a foreign country according to U.S. tax law) and Bermuda -- places with little or no corporate income tax.
Underpinning that system were intra-company payments, common among companies with international operations, for things like intellectual property and sharing the costs of building Microsoft products. They had the effect of pushing most of Microsoft's profit outside the United States. The company, for its part, has said its global footprint reflects its scale, and that it pays the appropriate amount of taxes to governments worldwide.
The portion of Microsoft's sales and profit that came from the United States used to be about the same. In 2003, the United States was home to 68 percent of Microsoft's sales, and 69 percent of its profit. In 2004, those figures were 68 percent and 67 percent.
That changed dramatically after Microsoft's system of global subsidiaries took effect. On paper, Microsoft's international business became extraordinarily profitable, while the profitability of sales in the United States cratered.
In the most recent five years, half of Microsoft's sales came from customers in the United States, but just 18 percent of its profit. During the fiscal year that ended in June, Microsoft reported foreign income before taxes of $22.7 billion, and just $453 million in the United States.
Microsoft's foreign income permanently reinvested abroad -- taxed at a low single-digit effective rate, according to company filings -- piled up, reaching $142 billion as of June 30.
If Microsoft had brought those earnings back to the United States, the company said last year, its tax bill would have been $45 billion.
Instead of tapping that cash and triggering U.S. taxes, when Microsoft needed more money than its U.S. operations were generating, it borrowed, as it did when the company bought professional social networking site LinkedIn for $26 billion in 2016.
The tax overhaul President Donald Trump signed in December, which cut the corporate rate to 21 percent, also eliminated deferrals on foreign income, assessing taxes of 8 percent to 15.5 percent on sums held abroad.
That meant a large tax bill for Microsoft, but one far smaller than under the previous tax structure.
Microsoft took a $17.8 billion charge to adjust its overseas books to the new law, Microsoft said Wednesday in reporting quarterly earnings -- or $27 billion less than Microsoft would have owed had it chosen to repatriate the cash last year.
Business on 02/02/2018
Print Headline: Microsoft's bet pays off: Tax bill cut