It takes an incredibly powerful company to threaten the U.S. government in hopes of impacting a significant decision, but that’s precisely what Microsoft is doing. Microsoft CEO Steve Ballmer made headlines when he publicly attacked President Barack Obama’s plan to cut tax breaks on U.S. companies’ foreign profits, a plan which is currently awaiting Congressional approval. Mr. Ballmer suggests that if the tax succeeds, Microsoft may begin a significant move out of the U.S., taking with it tax revenue and jobs. He states, “It makes U.S. jobs more expensive. We’re better off taking lots of people and moving them out of the U.S. as opposed to keeping them inside the U.S.”
The plan, proposed by President Obama on May 4, seeks to help raise tax revenue and balance the budget by rolling back $190B USD in tax breaks for offshore companies over the next decade. Microsoft is not the first to oppose the measure — the National Foreign Trade Council, the U.S. Chamber of Commerce and the Business Roundtable are among the numerous others to voice their disapproval.
Previously, companies could defer paying corporate rates as high as 35 percent on most types of foreign profits, contingent that the company invests the money overseas. The idea was that foreign profits are not the domain of the U.S. President Obama disagrees, arguing that U.S. corporations’ profits are U.S. earnings. He believes that by taxing foreign profits, companies will be more likely to invest in the U.S., rather than shelter their money overseas.
Thanks to the current provision Microsoft enjoyed a very low tax rate of only 26 percent in 2008 on its profits. A company report describes, “Our effective tax rates are less than the statutory tax rate due to foreign earnings taxed at lower rates.”
Some, like Barry Bosworth, an economist in Washington at the Brookings Institution research center, accuse Microsoft and others of wrongdoing. He says the company has exploited the system, an expensive abuse that has cost our nation tax revenue and domestic investment. Indeed, Microsoft’s shell game is a bit strange — it typically develops products like Windows and then transfers the licenses for free to an Ireland subsidiary. This subsidiary then proceeds to sell them, free of U.S. taxes. Mr. Bosworth states, “What Microsoft wants to do is deduct the cost at a high tax rate and report the profits at a low tax rate. Relative to where they are now, the administration’s proposals are less favorable, so there will be some rebalancing on their part.”
Symantec Corp. and some smaller companies such as privately held Bentley Systems, an Exton, Pennsylvania-based maker of engineering software, carry out similar practices and are similarly opposed to the measure. Symantec says it’s frustrated with being called a tax cheat. Symantec Chairman John Thompson adds, “It is a little bit ironic that most of our most significant trading partners and partners globally have taken the tack that they’ll reduce corporate tax rates to stimulate economic growth and not raise corporate tax rates.”
Mr. Ballmer, perhaps the most outspoken critic, did acknowledge that the Obama proposal preserved research and experimentation cost tax breaks. He warned, though, that the cuts to foreign exemptions would raise the cost of Microsoft’s 56,552 U.S. employees. He says this could necessitate moving them overseas. Microsoft was previously embroiled in a controversy over whether it should lay off foreign workers before U.S. ones.
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