MSFT up 5% on the day due to new tax avoidance angle
from
(snip)"""Sept. 13 (Bloomberg) -- Microsoft Corp. is planning to sell debt this year to pay for dividends and share repurchases because too much of its cash is held overseas, according to a person familiar with the matter."(snip)
(snip)"what is this crap about issuing debt to buy back stock secured by the firm's net worth, which includes offshore cash?
You know, we ordinary people have to pay taxes on our money no matter where we earn it if we're Americans. So how come Microsoft can have all this cash offshore but then can game the system by issuing debt against that instead of actually spending the cash, and pay no taxes on the money?
This sort of crap is ridiculous and points out exactly how we've turned into a nation "by the corporation, for the corporation, and of the corporation."
What we should do is either force corporations to live under the rules of people, or give people the ability to live under the rules of corporations! That is, if Microsoft can "earn" money overseas and not pay US taxes on it, we should be able to as well.
The problem with the existing structure is that it both encourages off-shoring and also leads to hinky accounting where you try to shift as much of the "profit" overseas as possible in order to avoid taxation - but then you avail yourself of the US corporate legal framework, which you obviously find advantageous.
Abusive? You bet.
Legal? Yep.
Should it be? Hell no."(snip)
If this goes unchallenged, it will undoubtedly result in copycat action by every other US corporation that earns a significant amount of it's income from overseas markets !!!
Re: MSFT up 5% on the day due to new tax avoidance angle
I don't quite understand what thee article is suggesting. Are they saying
1) Have cash in an offshore account
2) lend that money out at interest
2b) don't pay tax on the interest earned?
3) Use the interest to do something?
If that's all they're saying, isn't that just a carry trade?
Re: MSFT up 5% on the day due to new tax avoidance angle
here's the new 'trick'. Microsoft would like to repurchase some of their own stock shares and pay dividends to owners of existing stock shares using their surplus cash. But to do this, they must 'repatriate' the untaxed ( by the US ) cash they have accumulated in Ireland from European sales, or accumulated in Hong Kong from Asian sales, into the USA. The minute that happens, this cash suddenly becomes subject to US taxation as ( realized ) US corporate income. As long as this cash stayed out of the USA any US corporate taxes would be indefinitely deferred. So if they're talking about say $100 million, that would mean paying perhaps an additional $30 million in US corporate income taxes for a total of $130 million being drawn from their offshore cash reserves being 'spent' for a $100 million stock dividend payments plus stock repurchase via repatriation of foreign earnings.
So instead they pledge this untaxed ( by the US ) offshore cash as de-facto collateral against which they will sell newly printed corporate bonds via US financial houses. Cash received from the bond sale is not considered to be corporate income. However, bond interest might cost them 10% at the outside. So if this were a one year bond term deal, they could achieve the same $100 million stock dividend payment and stock repurchase via the issuance of $100 million worth of bonds plus $10 million in bond interest payments. And in reality the net cost would be less than that because $100 + $10 million of next year's US earnings that will go towards repaying these newly issued corporate bonds with interest is deductible from the US corporate taxes otherwise due on next year's other US corporate earnings.
Where the US taxpayer is concerned, not only will the US treasury miss out on $30 million in tax revenues on non-'repatriated' foreign earnings cash, but the US treasury will also miss out on $32 million ( $110 million times perhaps a 30% US corporate tax rate ) in tax revenues on next year's US corporate earnings because of the business expense tax deduction created by the bond principal repayments and bond interest payments. Net tax revenue swing is thus something like a negative $ 62 million ... which will have to be made up for by other US taxpayers !
Hopefully you can now see how this could go viral in a hurry where other US based international corporations are concerned. In essence, Microsoft is investing $10 million in bond interest payments but saving $30 million in US corporate taxes ... PLUS whatever additional tax savings that wind up being realized as a result of the bond principal and interest payments tax deduction against US corporate taxes due on next year's other US corporate earnings. Meanwhile, the original $100 million still sits in Ireland or Hong Kong still free of US corporate taxes.
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Re: MSFT up 5% on the day due to new tax avoidance angle
Quote:
Originally Posted by
Melonie
So instead they pledge this untaxed ( by the US ) offshore cash as de-facto collateral against which they will sell newly printed corporate bonds via US financial houses. Cash received from the bond sale is not considered to be corporate income.... interest is deductible from the US corporate taxes~
Ah, gotcha. I'm not a bonds guys, so I wasn't aware of the tax implications there. Well, that's the classic tax arb, hey? Show the tax man the losing leg of your trade and keep the hedge somewhere else. They dun goofed letting people get wind of this one }:D
Re: MSFT up 5% on the day due to new tax avoidance angle
well, it looks like Microsoft went ahead with this legal tax dodge ...
(snip)SEPTEMBER 22, 2010, 11:55 A.M. ET.
Microsoft Bond Price Guidance Tsys +30,+45,+60,+87.5BPs -
By Katy Burne
NEW YORK (Dow Jones)--The four-part bond offering from Microsoft Corp. (MSFT), expected to price Wednesday afternoon, will smash the lowest borrowing rates on record for three-, five-, 10- and 30-year unsecured corporate bonds, according to a source familiar with the sale.
Price talk on the notes is in the range of 30 basis points over Treasurys for the three-year tranche; 45 basis points for the five-year bucket; 60 for the 10-year and 87.5 for the 30-year bonds. "(snip)