COMPUTERS: Microsoft Under New Assault For Tax Evasion
Bottom line: A tax evasion probe against Microsoft is likely to end in a settlement with Beijing, and will be followed by similar probes against other major multinationals that use their complex structures to avoid taxes.
After a period of relative quiet, a recent Chinese wave of probes against major multinationals is jumping back into the headlines with news of yet another investigation against beleaguered software giant Microsoft (Nasdaq: MSFT). This time the world’s largest software company is being investigated for tax evasion, as Beijing looks set to open a new front in its recent series of probes against major multinationals. Whereas the early investigations focused on anti-competitive behavior, this new wave is more likely to be less controversial since it involves tax evasion and dovetails with similar campaigns in the west.
Microsoft is already under investigation in China for anti-competitive behavior, as part of a broader campaign that began in the summer and has mostly targeted major multinationals like leading cellphone chip maker Qualcomm (Nasdaq: QCOM) and most of the world’s top luxury car makers. The fact that Microsoft is quickly becoming the focus of so much negative publicity is just slightly ironic, since the company has been one of China’s biggest cheerleaders among major multinationals.
The US software giant is constantly launching new China initiatives, and is currently involved in a wide range of areas in the country, ranging from its core software, to various Internet businesses, gaming consoles and even a cloud computing initiative. What’s more, the company has been quite happy to comply with China’s strict self-censorship policies, in contrast to more defiant companies like Google (Nasdaq: GOOG) and Twitter (NYSE: TWTR).
Despite all the goodwill it should have earned, Microsoft became the subject of an anti-monopoly probe earlier this year, paralleling similar past probes in the US and Europe. Now there’s this new probe, which first emerged earlier this week in a report from the official Xinhua news agency. That report said a major Fortune 500 multinational was being accused by Beijing of owing 840 million yuan ($137 million) in unpaid taxes. (English article; Chinese article)
The Xinhua story didn’t identify the company, saying only that the first letter of its name was M, and that it established a Beijing subsidiary in 1995. Other media did some checking and determined that Microsoft was the only company that fit that description. A Chinese media report says that Microsoft is working to remedy the situation, though it isn’t confessing to actual tax evasion. (Chinese article)
According to the Xinhua report, the tax-evading company reported losses in China for 6 years totaling more than 2 billion yuan, even as many of its peers reported profits. There’s no additional detail in the media reports, though I expect Microsoft probably engaged in aggressive accounting that included big self-awarded losses for the billions of dollars it probably lost in China due to rampant piracy.
It’s unclear if the US was working with Chinese tax authorities in this particular instance. The US has embarked on its own big effort to hunt down tax evaders over the last few years, targeting both wealthy individuals and companies that often shift assets overseas to hide their profits and wealth from tax authorities. For that reason, I suspect that the US probably at least provided some useful advice for the Beijing investigation, even if there was no formal exchange of information.
All that said, the bigger question is whether this new investigation marks the start of a new chapter in China’s pursuit of major multinationals that do business in its market. The answer to that question is almost certainly yes, and I expect we could see a steady trickle of new names join Microsoft on the list of companies under investigation in the next year. These new allegations will deal yet another black eye to foreign companies in China, though most cases will probably be quickly resolved with multinationals agreeing to pay most or all of the taxes they’ve evaded over the years.
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