In 2011 Samsung signed the contract with Microsoft for use of software-patent in Android-based smartphone and tablets, and for the years 2012-2015 Samsung paid royalties to a Microsoft subsidiary, MS Licensing GP, while saving 15 percent for withholding tax. The royalties paid by Samsung to Microsoft during these years amounted to 4.35 trillion won, of which 15%, or 653.7 billion won, was paid as withholding tax. In June 2016, Microsoft filed a claim for a tax refund in a amount of 634 billion won with the Tax Office. According to Microsoft royalty paid for patent rights not registered in Korea is not domestic source income, and should not be subject to withholding tax. The request was refused by the tax authorities. Microsoft then filed a lawsuit against the tax authorities in 2017. Microsoft argued that the withholding tax imposed on income from a patent unregistered in Korea resulted in double taxation. The Trail court issued a decision in favour of Microsoft. The decision of the Trail court was brought before the Court of Appeal by the tax authorities. The authorities argued that royalties paid by Samsung also included payments for Microsoft technologies whose legal status was not clear and thus subject to withholding tax. In 2019 the appellate court rejected the tax authorities appeal. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court allowed the appeal and remanded the case to the appeals court, ordering additional proceedings to re-calculate the tax refund amount. According to the court royalties paid by Samsung for patent rights not registered in Korea by Microsoft do not correspond to domestic source income subject to withholding tax. However, the calculations should have been revised in accordance with facts of the case. Excerpts “Tax Office argued in the lower court that ‘the royalties in this case include consideration for the use of copyright, know-how, and trade secrets, which are subject to withholding tax as domestic source income’. Since it can be considered that they have been added or changed, the trial court should have considered and judged these claims.” “Considering the context of the Korea-US tax treaty and the ordinary meaning of its words, Articles 6 (3) and 14 (4) of the Korea-U.S. Tax Convention According to the principle of territoriality, the patentee’s right to use the patent exclusively for the production, use, transfer, rental, import, or display of the patented product is only effective in the territory of the country in which the patent right is registered. In the case of obtaining a patent license in Korea by registering a patent right, only the income paid in exchange for the use of the patent license is defined as domestic sourced income, and the patent right cannot be infringed outside the country where the patent right is registered, so the use or consideration for the use of the patent right cannot occur. “Therefore, if a US corporation has registered a patent right abroad but not in Korea, the income received by the US corporation in connection with it cannot be considered for its use, so It cannot be viewed as source income.” “On a different premise, in the lower court’s judgment that the claim of the Dongsuwon Tax Office was not subject to the court’s examination, there was an error that affected the judgment by misunderstanding the jurisprudence regarding the subject of the court’s examination”. Click here for translation ...

The Danish tax authorities were of the opinion that Microsoft Denmark had not been properly remunerated for performing marketing activities due to the fact that OEM sales to Danish customers via MNE OEM’s had not been included in the calculation of local commissions. According to the Market Development Agreement (MDA agreement) concluded between Microsoft Denmark and MIOL with effect from 1 July 2003, Microsoft Denmark received the largest amount of either a commission based on sales invoiced in Denmark or a markup on it’s costs. Microsoft Denmark’s commission did not take into account the sale of Microsoft products that occurred through the sale of computers by multinational computer manufacturers with pre-installed Microsoft software to end users in Denmark – (OEM sales). In court, Microsoft required a dismissal. In a narrow 3:2 decision the Danish Supreme Court found in favor of Microsoft. “…Microsoft Denmark’s marketing may have had some derivative effect, especially in the period around the launch in 2007 of the Windows Vista operating system, which made higher demands on the computers. On the other hand, it must be assumed that also the recommendations of Microsoft products made by the multinational computer manufacturers under agreements between, among others, Dell and Microsoft Denmark’s American parent company, which, in return, gave discounts to computer manufacturers, may have had an effect on, among other things. sales of Package licenses in Denmark, whereby Microsoft Denmark, in its remuneration, benefited from this marketing effort. The significance of the various companies’ marketing efforts and the interaction between them has not been elucidated during the case, and we find it unlikely that Microsoft Denmark’s marketing had an effect on the sale of MNA OEM licenses in the US and other countries outside Denmark, which exceeded the importance of computer manufacturers marketing for the sale of package licenses, which were included in the basis for the remuneration of Microsoft Denmark. … Based on the above, we do not find that Microsoft Denmark’s remuneration for the company’s marketing efforts was not in accordance with the arm’s length principle.” Click here for translation ...

In May 2018 the final report on corporate tax avoidance in Australia was published by the Australian Senate. The report contains the findings, conclusions and recommendations based on 4 years of hearings and investigations into tax avoidance practices by multinationals in Australia ...

The Danish Tax Ministry and Microsoft meet in Court in a case where the Danish tax authorities had issued an assessment of DKK 308 million. The Danish tax authorities were of the opinion that Microsoft had not been properly remunerated for performing marketing activities due to the fact that OEM sales to Danish customers via MNE OEM’s had not been included in the calculation of local commissions. In court, Microsoft required a dismissal with reference to the fact that Sweden, Norway and Finland had either lost or resigned similar tax cases against Micorosoft. The National Court ruled in favor of Microsoft. The decision was later confirmed by the Supreme Court. Click here for translation ...

Microsoft Ibérica S.R.L is responsible for distribution and marketing of Microsoft products in Spain. According to an agreement concluded between Microsoft Ibérica and MIOL (Microsoft’s Irish sales and marketing hub) with effect from 1 July 2003, Microsoft Ibérica would received the largest amount of either a commission based on sales invoiced in Spain or a markup on it’s costs. In support of the remuneration according to the agreement, Microsoft had provided a benchmark study. The Spanish tax authorities found that Microsoft Ibérica had not been properly remunerated due to the fact that goodwill amortisations had been eliminated by in the transfer pricing analysis. By including the goodwill amortisations in the analysis, the result of the local company was below the interquartile rang. The authorities further held that the selected comparables in the benchmark study suffered from comparability defects, in that they had less functions and risk than Microsoft Ibérica. An assessment was issued where the results were adjusted to the upper quartile of the benchmark results. The Court of first instance held in favor of Microsoft and set aside the assessment. This decision was appealed to the High Court by the authorities. The High Court overturned the decision and decided in favour of the tax authorities. Excerpts from the Judgement: “We understand that the appellant’s conduct was deliberate, seeking to make the inspection proceedings time-barred. For a year, the Inspectorate was unable to carry out its work normally; in fact, what the Inspectorate did was to waste many hours of work examining the various incomplete accounts which did not comply with the Spanish accounting plan, which the appellant was handing in, wasting hours of work paid for out of the State’s general budget. The appellant, with only two days left, submitted a copy of the accounts which replaced “the computer copies of the accounts on CDs submitted to the inspection on 21/05/20 10, 9/09/2010 and 26/11/2010 which contained errors in the conversion of the accounts from the American chart of accounts to the Spanish chart of accounts”. The Chamber cannot support this conduct of the party by declaring the inspection procedure time-barred, as the delay is attributable to the taxpayer’s conduct. In finding that there is a delay attributable to the taxpayer for 344 days, it is unnecessary to examine the rest of the delays. The Inspector procedure took 705 days, discounting 344 days, the procedure finalised in 361 days, therefore, even if the other delays that are questioned are not attributable to the taxpayer, which in many cases overlap with the delay for not handing over the accounts, the Inspector procedure would have concluded before one year had elapsed.” “The Inspectorate indicated that there was another compelling reason to weigh in support of the application of a value located in the upper interquartile range of the study carried out by the Inspectorate, since within the sample of companies considered comparable there are some, five in particular that carry out service activities (CNAE activity codes 7221-7222), which are more similar than the rest to the activity formally assumed by MICROSOFT IBÉRICA – the provision of marketing services – and whose net margins were higher. The Inspectorate considered this sample of entities to be the most appropriate in terms of comparability, as it would yield a margin with a median of 6.15% (weighted average for the period). The reasoning of the Inspectorate, which was complemented by everything else it argued in the agreement, is considered to be correct, but it should also be considered that this reasoning is complementary to the criteria of the Chamber, which has considered that the contract signed by Microsoft fixed a commission that had to be settled monthly.” “The Chamber cannot share the criteria of the report for the following reasons. The expert assumes an interpretation of the contract signed in 2003 that is contrary to the one we have set out in the corresponding legal basis of this Judgment. It is the function of the Chamber to interpret contracts. The increase in the taxable bases derives directly from those agreed by Microsoft and MIOL, any other consideration being unnecessary. Furthermore, the expert considers that companies with losses have been eliminated without reasonable criteria, when this Chamber has endorsed that this criterion was in accordance with the law. Furthermore, the expert assumes that the appellant does not perform strategic functions, whereas the Chamber has concluded otherwise.” “WE RULE 1) That we DISMISS AND REVERSE the present contentious-administrative appeal number 337/2014, brought by the Solicitor Ms. Sonsoles Díaz-Varela Arrese, on behalf of MICROSOFT IBÉRICA, S.R.L, assisted by the Lawyer Ms. Cristina Fernández Rodríguez against the decision dated 8 May 2014 issued by the Central Economic Administrative Court, and we CONFIRM AND CONFIRM the said decisions as being in accordance with the legal system. 2) The plaintiff is ordered to pay the costs incurred in these legal proceedings.” Click here for English translation Click here for other translation ...

In a public hearing held 22 August 2017 in Sydney Australia by the Economics References Committee, tech companies IBM, Microsoft, and Apple were called to the witnesses stand to explain about tax avoidance schemes – use of “regional headquarters” in low tax jurisdictions (Singapore, Ireland and the Netherlands) to avoid or reduce taxes. Follow the ongoing Australian hearings into corporate tax avoidance on this site: http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporatetax45th Transcript from the hearing: ...

In November 2006 Microsoft Corp. purchased 100% of the shares of Gteko Ltd. (IT Support technology), for USD 90 million. The purchase was made with the intention of integrating Gteko’s technology into Microsoft’s own products. Following this purchase of Gteko Ltd., the employees were transferred to the local Microsoft subsidiary and a few months later another agreement was entered transferring Gteko’s intellectual property/intangibles to Microsoft. This transfer was priced at USD 26 million based on the purchase price allocation (PPA). The tax authorities of Israel found that the price of 26 mio USD used in the transaction was not at arm’s length. It was further argued, that the transaction was not only a transfer of some intangibles but rather a transfer of all assets owned by Gteko as a going concern to Microsoft Corp. The arm’s length price for the transfer was set at USD 80 million. The District Court agreed with the assessment and held that “value does not disappear or evaporate” and that Gteko had not succeeded in arguing why the total values in Gteko should not be equal to the $90 million share price paid ...

In an ongoing transfer pricing battle between Microsoft and the IRS related to Microsofts’ use of a IP subsidiary in Puerto Rico to shift income and reduce taxes, the District Court of Washington has now ordered Microsoft to provide a number of documents as requested by the IRS. In a prior decision from November 2015 the District Court ruled, that the IRS’ use of an external representative was not in conflict with US regulations. Microsoft argued that the IRS’ use of an outside law firm, Quinn Emanuel Urquhart & Sullivan, to assist in the audit was an improper delegation of its authority to examine taxpayer books. The Court ruled that the government had a legitimate purpose in continuing to pursue the audit, and that the use of Quinn Emanuel was not a breach of IRS authority that would invalidate the summonses. “The court’s role in this matter is not to pass judgment on the IRS’ contracting practices, but to enforce or not enforce the summonses,” Martinez wrote. The law allows the IRS some flexibility in its use of outside contractors, he said, and Microsoft’s characterization of the role of Quinn Emanuel “greatly exceeds what is evident in the record.” ...

See the documents from the US Senate hearings on offshore profit shifting and abusive tax schemes Offshore Profit Shifting and the U.S. Tax Code – Part 1 (Microsoft & Hewlett-Packard) and Part 2 (Apple Inc.), Carl Levin’s opening statements ...

In the Microsoft case, the distribution activity of a French subsidiary of an American group was transferred to its Irish sister company. The French subsidiary was then converted into a sales agent of the Irish subsidiary. The Commission rate earned by the French subsidiary was reduced from 25% to 18%. The French tax authorities, taking into account the previous 25% commission rate, considered that it should not have been reduced and reinstated the corresponding income into the French company’s taxable income. To support their position, the French tax authorities conducted a benchmarking study. However, the Court of Appeals ruled that the mere fact that the commission rate has been reduced does not demonstrate the transfer of profits abroad. Moreover, the Court confirmed that the transfer of profits abroad was not proved due to the irrelevance of the methods used and of the comparables found by the French tax authorities. The companies were not suitable for comparison because they were not in the same market as Microsoft France and that some of them were not independent companies. Click here for translation ...