Monday, May 25, 2015



Aggressive Transfer Pricing. Microsoft Corporation has used aggressive transfer pricing transactions to shift its intellectual property, a mobile asset, to subsidiaries in Puerto Rico, Ireland, and Singapore, which are low or no tax jurisdictions, in part to avoid or reduce its U.S. taxes on the profits generated by assets sold by its offshore entities.

Offshoring Profits. From 2009 to 2011, by transferring certain rights to its intellectual property to a Puerto Rican subsidiary, Microsoft was able to shift offshore nearly $21 billion, or almost half of its U.S. retail sales net revenue, saving up to $4.5 billion in taxes on goods sold in the United States, or just over $4 million in U.S. taxes each day.

Beginning in the 1990s, Microsoft began establishing a complex web of interrelated
foreign entities to facilitate international sales and reduce U.S. and foreign tax. Microsoft established three regional operating centers in low tax jurisdictions, first in Ireland, then Singapore and Puerto Rico.

Most of Microsoft’s revenues are attributable to its high-value intellectual
property, including patents and copyrights related to Microsoft Windows and Microsoft Office.

In order to transfer intellectual property rights from the U.S. group to foreign subsidiaries, Microsoft and the regional operating centers engage in a worldwide cost sharing agreement.

As part of this cost sharing agreement, Microsoft pools its worldwide research and
development expenses, which totaled $9.1 billion in FY2011. The participating entities each pay a portion of the research and development cost based on the entity’s portion of global revenues.

Microsoft’s Puerto Rico operating center contributes 25% of the research and development costs,In exchange for its contributions, Microsoft Puerto Rico obtains the right to sell retail products in the United States and the rest of North and South America. 

Microsoft PR makes digital and physical copies of the Microsoft products and sells them back to several Microsoft subsidiaries located in the United States, and those subsidiaries then sell the products to American consumers.

Through this process, Microsoft is able to greatly reduce its U.S. tax bill. Microsoft shifts about 47% of the gross revenues from U.S. sales to its operations in Puerto Rico, which is not subject to U.S. tax laws and the PR government instead levies a tax of just 1-2% on Microsoft.
In 2011, Microsoft PR paid Microsoft U.S. $1.9 billion as part of MOPR’s cost sharing obligations. MOPR then reported $4 billion in profits in 2011, which was taxed at 1.02%.

The 177 employees of the Puerto Rico entity, therefore, earned MOPR about $22.5 million per person. At the same time, MOPR employees made an average salary of $44,000 a year, commensurate with the skills they contributed rather than with the accumulated profits being stockpiled in what served as a low tax jurisdiction for Microsoft.

By routing its manufacturing through a tiny factory in Puerto Rico, Microsoft saved over $4.5 billion in taxes on goods sold in the United States during the three years surveyed by the Subcommittee.