Microsoft to Pay China $140 Million for 'Tax Evasion'

China has levied about $140 million (roughly Rs. 866 crores) in back taxes from Microsoft Corp in the first major case concerning cross-border tax evasion in the country, as regulators ramp up pressure on U.S. corporations doing business there.

According to an article published by China's Xinhua official news agency on Sunday, an unnamed U.S. multinational must pay the Chinese government 840 million CNY ($137 million, roughly Rs. 847 crores) in back taxes and interest, as well as more than 100 million CNY in additional taxes a year in the future.

The article refers only to a company whose name starts with "M," is one of the world's biggest 500 firms and which established a wholly-owned foreign subsidiary in Beijing in 1995. Microsoft is the only company that fits that description.

The Redmond, Washington-based company did not confirm the report, but also did not deny that it was the company involved.

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

An advanced pricing agreement sets 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 U.S. 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 CNY while peers enjoyed profits and so the tax authorities concluded its behavior was unreasonable. It said the U.S. company 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 anti-trust regulators.

© Thomson Reuters 2014