Microsoft to pay $140m in back taxes: report

Software giant alleged to have engaged in tax evasion

Software giant Microsoft Corporation was in the media spotlight Wednesday as it was said to have to pay about $140 million in back taxes to Chinese authorities over involvement in potential cross-border tax evasion, as China vowed to join international efforts to fight against this problem.

"In 2012 the tax authorities of China and the US agreed to a bilateral advanced pricing agreement with regards to Microsoft's operations in China… China receives tax revenues from Microsoft consistent with the terms of the agreed advanced pricing agreement," Microsoft told the Global Times in an e-mail reply on Wednesday.

The company's reply is in response to a Reuters report published Tuesday (US time) that said Microsoft was involved in tax malpractice in China.

Chinese State media Xinhua News Agency had first reported on Sunday that a US multinational with a name starting with the letter "M" must pay the Chinese government a total of 840 million yuan ($137 million) in back taxes and interest, as well as additional tax of more than 100 million yuan annually in the future.

Reuters alleged that the multinational was Microsoft, saying it was the only company that matches the descriptions of the firm in question in Xinhua's report as being one of the world's top 500 companies and having established a wholly owned subsidiary in Beijing in 1995.

If confirmed, it would be the first major case of multinational corporation cross-border tax evasion in China, Reuters reported on Wednesday.

An advanced pricing agreement sets the tax treatment of methods of booking prices and sales between subsidiaries, a strategy often adopted by multinationals globally.

The State Administration of Taxation, China's top tax regulator, was not immediately available to confirm this matter when reached by the Global Times on Wednesday.

Multinational corporations often practice tax avoidance or evasion by making use of their global presence and transferring profits to countries which charge lower tax rates while allocating tax-deductible expenses and costs to those that charge higher rates, said Zhang Guangtong, vice president of School of Taxation at Central University of Finance and Economics.

"Microsoft's payment in back taxes indicates that it has acknowledged its previous tax malpractice," he told the Global Times Wednesday, noting that the bilateral advanced pricing agreement is the result of negotiations between the company and tax authorities.

Tax evasion is regarded as illegal and is usually subject to a fine, yet it is difficult to find as large corporations usually keep cross-border tax maneuvers a secret.

Given the difficulty in uncovering secret unlawful tax practices, an advanced pricing agreement sets agreed pricing terms recognized by the tax authorities, and the multinational must pay taxes accordingly.

The move is also a reflection of China's commitment to join international law enforcement to clamp down on illegal tax practices, Zhang said.

Combating tax evasion was a key objective for the G20 Leaders Summit held in Australia during November 15-16.

"Tax evasion is prevalent globally, particularly in China," Lü Junshan, a tax lawyer and a director at the Finance and Tax Law Research Society, told the Global Times on Wednesday, noting a large number of multinationals' subsidiaries in China reported low profit or even losses for many years due to such tax malpractices, resulting in heavy losses for China's tax revenues.

According to Microsoft's fiscal 2014 annual report, its overall effective tax rate was 21 percent, which is well below the US and China's standard corporate rates of 35 and 25 percent respectively, triggering skepticism of its funneling earnings through "foreign regional operations."

China's tax regulator has ramped up its efforts against tax evasion in recent years. It recovered 46.86 billion yuan worth of tax revenues in 2013 from multinationals, 100 times the amount it recouped in 2005, the People's Daily newspaper reported in October citing the tax authorities.

The tax payment is the latest setback for Microsoft in China, where it is already under an antitrust investigation.