What were the benefits to Microsoft’s shareholders of using cases held overseas to purchase Skype?
Cash held overseas to buy Skype was the right option for Microsoft to gain different tax benefits. It has been revealed that Microsoft contains a significant amount in foreign countries, subsidiaries of the company. Thus, using that cash is beneficial to enable shareholder returns. For Instance, if the company pays the tax on these financial or money reserves, according to US tax regulations, the return for shareholders can be reduced. In the United States, the corporate tax rate is 35%, which is comparatively higher than many other operating countries of Microsoft. One of the most significant benefits that Microsoft has gained in the case of acquisition of Skype is tax efficiency. More than $100 billion in the case of foreign subsidiaries strengthens the financial position of the company to buy any firm like Skype. However, the firm pays low tax as compared, as tax regulations are not to be imposed on these cash reserves.
Microsoft’s effective tax rate of foreign earnings retained overseas appears to be only 4 percent. How is this possible given the corporate tax rate in most developed countries where Microsoft earn profits from foreign sales are considerably high?
The tax rate on foreign earning is only 4 percent, and it is an excellent benefit for the corporation Like Microsoft. It is a fact that the tax rate, especially the corporate tax rate in the United States and many other developed countries, is more than many other developing countries. The tax rate can be higher than in developed countries if the company enhances the sales and profits in foreign countries. It has been revealed that Microsoft outsourced operations and kept financial or cash reserves in these markets. If the firm operates in a foreign country and increases its sales volume, then it has to integrate with local corporate tax. However, the possibility is still in jeopardy because developed countries contain higher tax rates as compared tooter operating countries. If the firm outsourced the whole business process instead of focusing or relying on subsidiaries, it might have to pay more tax. However, currently, the tax rate on foreign earnings is still low, and it goes in favor of the company.
Why does Microsoft continue to hold so much cash overseas, rather than retuning it to the United States? What do you think are the opportunity costs of holding tens of billions of dollars in cash in foreign locations? What potential benefits might accrue to Microsoft shareholders if it returned some of that cash to the United State?
Microsoft intends to hold cash in foreign countries. Usually, it has been perceived that the company wants to take tax benefits, as it has to pay low taxes as compared to the United States. However, when it comes to the rationale of keeping the financial reserves in foreign countries, other reasons can also be derived. For Instance, apart from the low tax rate, it seems an obligation of the company to keep the financial reserve in the operating country to contribute to the economy. If the company intends to get its money back to the United States, shareholders will also get benefits. For Instance, the shareholder return will be secured. In foreign countries, Microsoft may have to face possible spikes in tax rates, and it can also create the impact and the shareholder return. Buying Skype and paying tax seems risky for shareholder, and it looks much securer in the United States.
Do you think it is ethical for companies like Microsoft to continue to hold cash overseas in order to avoid paying U.S. corporate income taxes? Is this practice always in the best interest of the company’s shareholders?
Taking the business benefits in global business operations is the right of any organization. Microsoft has kept over $100 billion in foreign countries to avoid the US corporate tax rate, which is 35%, comparatively higher than other operating countries. It seems unethical because the firm is only emphasizing business benefits instead of contributing to the economy of the home country. Captivatingly, the company can keep these cash reserves in the United States with any barrier. Avoiding tax rate by keeping it away is unethical. On the other hand, keeping the money in foreign countries is not always in the best interest of shareholders. Apart from US Tax rates, the return to a shareholder can also be higher, even after the acquisition of Skype. Consequently, the management of the company is trying to take dual benefits such as avoiding tax and reducing the shareholder return.
