Microsoft’s Bermuda Subsidiaries Subject To Tax Inquiry, Documents Show
Three Bermuda subsidiaries of Microsoft Corp. are involved in a tax inquiry launched by another country, according to documents made public by the Bermuda Supreme Court. The look into the three shell companies, the existence of which Microsoft does not acknowledge in public filings with regulators, comes as the technology giant is under pressure for its low tax bills. Two of the previously undisclosed companies are affiliated with Microsoft’s Irish subsidiaries that were alleged eight years ago to have helped the company shave its tax bill.
Like other tax havens, Bermuda’s financial system is notoriously secretive. But in 2005, under international pressure, the Bermuda government approved a law that enables foreign governments to request detailed information about shell companies on the islands as part of their own tax investigations. The Microsoft subsidiaries were targeted through an order under this Tax Information Exchange Agreement — or TIEA.
The existence of the inquiry was first discovered by OffShoreAlert, a newsletter widely read by those interested in the Caribbean business of tax avoidance and evasion. After the inquiry was mentioned earlier this month in the newsletter, the cases were removed from the public record. “They’re not available,” Peter Miller, assistant registrar at the Bermuda Supreme Court, told The Huffington Post. “Rescinding orders were made with respect to the TIEAs. … Orders of the court were made to seal them.”
The Bermuda filings do not reveal which country originated the inquiry. Over the summer, the Organization for Economic Co-operation and Development began looking into the tax strategies of global technology giants, with a specific emphasis on what’s known as transfer pricing — shuffling profits into countries that have little or no tax obligations.
Microsoft, whose most recent filings with the U.S. Securities and Exchange Commission list no subsidiaries operating in Bermuda, declined to comment for the record. Corporations are only required to list “significant subsidiaries” on their SEC filings. For more than a decade, Microsoft has chosen to roll back the number of subsidiaries it disclosed. In 2002, the company listed all 81 subsidiaries in operation at the time. The next year, it listed only 13, the ones it deemed significant, and it has continued to list roughly that number since.
The briefly public documents did not allege any wrongdoing or illegal behavior on the part of Microsoft, and the unknown nation’s inquiry could very well lead nowhere.
Linda Carlisle, a top corporate tax attorney with Washington’s Miller & Chevalier, said that when her clients have been on the business end of such information requests, they have treated the matter extremely seriously. “People pay attention to it,” she said.
Carlisle, a former senior Treasury Department official now specializing in tax arrangements similar to the one set up by Microsoft, explained (using the U.S. as a hypothetical example): “The TIEA is where the Internal Revenue Service or the Treasury Department comes in and says, ‘It’s necessary for me, in the enforcement of my domestic laws, to get information that you may have in your possession or can get, foreign government, and you agree to give that to me.’
“The information has to be specifically requested,” said Carlisle, “so if I’m the United States getting information under a TIEA, I’m looking at a specific taxpayer and I have some reason to assume there’s a question under my laws. It’s more than just, ‘Oh, we always ask for this all the time.'”
For a TIEA order to make it to the Bermuda court, Carlisle said, it first had to be vetted by the Bermuda government. “The government first determines if the request has been made sufficiently for it to go out to its taxpayers,” she explained. “Because, remember, this is a government-to-government agreement. The government first determines, ‘Has the United States been specific enough in their request for me to act?’ Assuming they have, then the foreign government goes out to one of its taxpayers and says, ‘Oh, by the way, I love you dearly. I’m collecting information on behalf of the Internal Revenue Service of the United States.'”
Microsoft has saved billions in U.S. tax payments by moving money offshore, according to a high-profile investigation by the Senate’s Permanent Subcommittee on Investigations. Last year, it was able to use its overseas cash to purchase Nokia, a deal that would have been more difficult had it not amassed such an outsized pool.
Despite Microsoft’s contribution to the deficit, the tech giant is a member of Fix the Debt, a deficit-reduction advocacy group in the U.S. One of the organization’s top policy goals: Creating a “territorial tax system” that would exempt all foreign profits from U.S. taxes.
The practice of companies’ stashing money offshore to avoid taxes doesn’t just alter market calculations or cost the U.S. Treasury. The Federal Reserve Bank of St. Louis has produced research showing that the U.S. economic recovery has been slowed by all the money stored offshore and not reinvested in America.
In the U.K., Microsoft came under fire in December, when it was revealed that the company paid no British tax on 1.7 billion pounds from British software sales. The country has a robust populist movement, dubbed UK Uncut, that takes aim at corporations paying little or no taxes, even as the government’s austerity policy slashes social spending.
Bermuda is officially designated a British Overseas Territory, but it operates with significant autonomy.
At the center of Microsoft’s web of offshore subsidiaries are two of the company’s top in-house lawyers, Keith Dolliver and Benjamin Orndorff, who work at headquarters in Redmond, Wash. Dolliver and Orndorff serve as the chairman and vice chairman, respectively, of four Bermuda-based shell companies, including the three tied up in the inquiry. They also serve on a dozen other boards of Microsoft subsidiaries, including Skype, the online video chat service that Microsoft acquired in 2011 — again using all cash.
Two of the Bermuda subsidiaries, dubbed Flat Island Co. and Round Island One, are affiliated with Ireland-based subsidiaries of the same name. In 2005, those Irish companies came under scrutiny for allegedly helping Microsoft shave a half-billion dollars off its tax bill.
Dolliver and Orndorff likewise have an Irish connection, serving on the boards of more than a half-dozen Dublin-based companies with names like Microsoft Ireland Capital, Microsoft Research Ireland and Microsoft Ireland Operations. They also both served on the board of Skype Ireland Technologies Holdings, a Dublin-based subsidiary created following the Microsoft-Skype deal.
Despite Microsoft’s status as one of the world’s most visible companies, Dolliver and Orndorff have taken steps to remain in the background, judging from news reports and SEC filings. In 2005, just days before The Wall Street Journal exposed Microsoft’s tax avoidance strategy in Ireland, Dolliver resigned from two of the Irish subsidiaries. A few months later, Orndorff resigned from the board of an Ireland-based Microsoft holding company.
Within four days of Orndorff’s Feb. 9, 2006, resignation, he and Dolliver were focusing on Bermuda, where they incorporated a new company, RI Holdings, on Feb. 13, according to Bermuda court documents. Another four days after that, on Feb. 17, the two men created yet another Microsoft corporate entity, dubbed MBH Ltd.
The rotating cast of companies that Microsoft lawyers created and then departed from offers a window into the whack-a-mole game that tax authorities are forced to play in order to collect revenue from multinational companies. Many of these companies, especially those based in the U.S., benefit from America’s infrastructure, rule of law and, perhaps most importantly, aggressive defense of intellectual property rights abroad, but they still seek alternatives to paying U.S. taxes.
In September 2012, William Sample, Microsoft’s worldwide tax vice president, testified before the Senate Permanent Subcommittee on Investigations, chaired by Sen. Carl Levin (D-Mich.). He argued that if lawmakers thought the way Microsoft structured its companies to minimize its tax burden was wrong, they ought to change the law. “In conducting our business at home and abroad, we abide by U.S. and foreign tax laws as written,” Sample said. “That is not to say that the rules cannot be improved — to the contrary, we believe they can and should be. In our view, the U.S. international tax rules are outdated and are not competitive with the tax systems of our major trading partners. These rules all too often provide a disincentive for U.S. investment.”
The latest investigation into Microsoft’s subsidiaries only became public as a result of what appears to have been an oversight at the Bermuda Supreme Court, either by attorneys or clerks, where close to a dozen TIEA applications were briefly made public in the court’s handwritten registry — a highly unusual event.
A lawyer working for OffshoreAlert recorded the TIEA requests as part of a routine scan of the court record. “I’ve gotten details on thousands and thousands of Bermuda court cases. I’ve never seen anything related to a TIEA,” OffshoreAlert’s David Marchant said. “I’d never seen a single one before.”
Tax havens benefit by charging fees to the legions of companies that pretend to set up shop there. While the fees add up to real money for Bermuda, they don’t make a dent in a company like Microsoft’s bottom line. To register Flat Island Co. in 2002, for instance, Microsoft paid an $890 registration fee, a $67 filing fee and $139 worth of stamps to accompany a letter requesting tax exemption, according to the subsidiary’s registration papers.
In order to force such a subsidiary to produce documents, a foreign government must make a TIEA request to the Bermuda Ministry of Finance. The Ministry of Finance then files the order with the court. Typically, those orders are kept secret. But not this time, at least for a short while.
Credit: Huffington Post