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June 7, 2011 2:38 am
US securities regulators prodded Microsoft earlier this year into disclosing details of how it uses foreign tax planning to reduce its US taxes, the software company has disclosed.
The regulatory action comes as US companies’ strategies to reduce their tax bills have come under increasing domestic scrutiny.
The Securities and Exchange Commission also forced the company to reveal for the first time that the bulk of its $50.2bn cash mountain is held outside the US, according to correspondence that was filed on Monday.
In a statement, Microsoft said: “As part of its standard annual process for top 100 companies, the SEC contacted us with questions about domestic and overseas cash resources, which we answered earlier this year.” It added that it was filing the information publicly now because the regulators had completed their review.
The letters between the SEC and Microsoft cast a rare spotlight on a financial strategy that has enabled the company to hold down its tax liabilities.
The discussion of tax planning was prompted by the SEC’s questioning about what it called a “disproportionate” share of Microsoft’s profits that come from certain overseas countries. Some 62 per cent of the company’s international income came from those countries last year, even though they only accounted for 42 per cent of international revenues.
In a detailed response, the software company said it had benefited partly from a policy of channelling sales through low-tax regional centres in Ireland, Singapore and Puerto Rico.
This had resulted in “a higher mix of earnings taxed at lower rates in foreign jurisdictions”, the company revealed in a footnote to its recent quarterly report with the SEC, which was included as a result of the regulatory prodding.
In another query about Microsoft’s international financial strategy, the regulators asked why the company had been borrowing through bond issues in the US when it reports large reserves of cash and short-term investments on its balance sheet.
The regulatory questioning prompted Microsoft to reveal for the fist time recently the extent of its overseas holdings, the letters reveal. The company said in its recent quarterly report that $42bn of its $50.2bn in liquid reserves was held outside the US.
US companies face a tax bill on cash they bring back to the US and use for regular corporate purposes such as paying dividends and mounting share buy-backs. That has prompted a growing number to leave cash overseas and instead borrow to meet domestic needs, as Google did last month.
In its correspondence with the SEC, Microsoft repeated earlier public comments that it had issued the domestic bonds “to take advantage of favourable pricing and liquidity in debt markets.”
It also said it believed it had sufficient cash without repatriating any of its overseas cash, but added that it would expand its disclosure to shareholders in future to make clear that it may need to borrow more, or use overseas cash, to meeting future needs.
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