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”.
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.
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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.
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Several multinational companies operating in China have also come under the scrutiny of Chinese authorities. United Kingdom’s largest pharmaceutical company, GlaxoSmithKline plc, was accused of “economic crimes” in China, as some of its employees allegedly bribed doctors and hospital staffs to boost its sales also faced an investigation in China on cost and pricing issues during the wake of price fixing scandals in the country.
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