Microsoft (NASDAQ:MSFT), once again finds itself deep in controversy and this time, on foreign shores. The company has been hit with a $140 million in taxes and interests presented by the Chinese government. This came to light in a rare incident of cross-border tax invasion.
An article was published by the Chinese news agency known as Xinhua on Sunday. The article didn’t fully disclose the company in question but referred to it as company “M”. The news agency accused Microsoft (NASDAQ:MSFT) of sending away profits to tax havens while the China based business was suffering loss.
The software group made it a point to disagree with all the accusation yet agreed to pay the $140 million as bilateral advanced pricing pact instead of the taxes. According to sources, in 2012 the tax authorities of the two countries signed a bilateral advanced pricing agreement with operations of Microsoft (NASDAQ:MSFT) in China. It was clearly stated that the Chinese will receive the tax revenue from Microsoft (NASDAQ:MSFT) in regard to its advanced pricing agreement.
According to Reuters report, the agreement allows tax treatment for transfer pricing, booking prices and sales among subsidiaries across the Chinese border. Microsoft (NASDAQ:MSFT)’s tax rate according to its fiscal report is set at 21%, which is below the US corporate rate of 35%. It is believed that this disparity could be due to earnings channeled through foreign regional operations centers, specifically located in Ireland, Singapore and Puerto Rico.
A thorough investigation into the company offices in Beijing, Chengdu, Guangzhou and Shanghai by the State Administration for Industry and Commerce for the Republic of China took place in an attempt to enforce antimonopoly law. The investigation seized company email and materials as well as tried to interview many executives.
By May, the government banned Window 8 from being installed into the public sector PCs in reply to the company’s end to provide free support and security updates for Windows XP. Microsoft (NASDAQ:MSFT) had simply shifted to offer support to enterprise customers for a fee.
Microsoft (NASDAQ:MSFT) isn’t the first or the only company that has been put into hot waters by the Chinese government. Not long ago Glaxo-SmithKline (NYSE:GSK) faced accusations of economic misconduct in China. The employees were accused of bribing doctors and nurses to boost sales. Another anonymous company was also under investigation for pricing and cost related scandals. China has proven itself a difficult survival region for many companies regardless of its large customer base. It won’t be long now that companies start weighing their benefits against the risk of bad reputation, capital loss to authorities and fatal surroundings. So, either China needs to relax its regulations for these foreign brands or the companies need to seek out better opportunities instead of trying to dodge the policies.
A broader perspective might be at play here, with China exercising extreme measures to establish who the boss is in their land. Some drastic measures need to be taken before this tax evasion war takes an uglier turn.