How Obama's tax reforms could impact Microsoft's bottom line

By Todd Bishop (Tech Flash)

10May, 2009

President Obama's proposal to overhaul U.S. tax policy on international profits, unveiled last week, has raised objections from big companies that would end up paying considerably more in taxes under the plan. One is Microsoft, whose financial statements provide a case study in the benefits and drawbacks of the current system.

Microsoft in its 2008 fiscal year reduced its effective tax rate by 7 percent, or more than $1.6 billion, as a result of foreign earnings taxed at lower rates, according to its latest annual report. That and other factors cut Microsoft's tax bill to $6.1 billion last year, on $23.8 billion in pre-tax income. That's an effective tax rate of less than 26 percent, compared with the U.S. statutory rate of 35 percent.

By comparison, five years earlier, Microsoft trimmed only 1 percent from its tax bill as a result of international earnings. The subsequent increase in tax savings accompanied an overall jump in Microsoft's business overseas. But the company also was among those listed on a recent Government Accountability Office report on large U.S. corporations with subsidiaries in notorious tax havens.

The debate hinges on policies that let companies with international operations avoid higher U.S. tax rates by reinvesting their foreign earnings overseas.

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