Microsoft may face $137m bill for back taxes

China has levied about $137 million in back taxes on Microsoft Corp in the first major case concerning cross-border tax evasion in the country.

Xinhua News Agency reported on Sunday that a US-based multinational that it did not identify would have to pay the Chinese government 840 million yuan ($137 million) in back taxes and interest, as well as more than 100 million yuan in additional taxes for the coming year.

The article referred only to a company with a name starting with "M", which Xinhua said was one of the world's biggest 500 companies. The article said the company established a wholly owned subsidiary in Beijing in 1995. Microsoft is the only company that fits that description.

Microsoft would neither confirm nor deny the report.

"In 2012, the tax authorities of China and the United States agreed to a bilateral advanced pricing agreement with regards to Microsoft's operations in China," said a Microsoft spokesman in an e-mailed statement.

"China receives tax revenue from Microsoft consistent with the terms of the agreed advanced pricing agreement."

Microsoft paid the Chinese authorities 840 million yuan in tax was in 2012 after the bilateral advanced pricing agreement was signed. The US government subsequently refunded the same amount to Microsoft in line with the agreement, a high-level Microsoft employee told China Daily on Wednesday. The source asked to remain anonymous because of company policy.

"The agreement was designed to avoid double taxation," the source said.

Yang Decai, director of the information disclosure office at the State Administration of Taxation, said the details of the Xinhua report were accurate. "Xinhua's report correctly reflects our attitude toward cross-border tax evasion. Everything it says was true," Yang said.

But he declined to confirm that "M" referred to Microsoft, saying that disclosing such information would violate the administration's protocols.

An advanced pricing agreement establishes the tax treatment of transfer pricing, or methods of booking prices and sales between subsidiaries, which Microsoft uses across the globe.

According to its fiscal 2014 annual report, Microsoft's overall effective tax rate was 21 percent (well below the standard US corporate rate of 35 percent) primarily because it channels earnings through "foreign regional operations centers" in Ireland, Singapore and Puerto Rico.

According to Xinhua, "M" reported losses for six years in China of more than 2 billion yuan while its peers reported profits, so the tax authorities concluded its behavior was unreasonable. It said the US company had admitted to tax evasion and its mainland subsidiary had agreed to pay the central government.

The tax payment is only the latest headache for Microsoft in China, where it is already under investigation by antitrust regulators.