China Charges Microsoft $137 Million in Back Taxes

Microsoft’s testy relationship with China just got a bit tougher.

The Chinese government has levied $137 million in back taxes and interest against the company, according to a report by China’s Xinhua state news service.

The report doesn’t identify Microsoft by name, labeling the target of the fine as “M,” described as a world-renowned U.S.-based company that started its Chinese subsidiary in 1995. Microsoft launched Microsoft (China) Co Ltd. in Beijing in 1995.

Xinhua’s report said that the company’s Chinese unit was losing money on paper, even as the Chinese subsidiaries of other firms in the industry were profitable. The investigation, Xinhua said, found the company was shipping its profits overseas in avoidance of domestic taxes.

Microsoft didn’t confirm or deny that it is the company in Xinhua’s report.

A company spokesman said in a statement that Microsoft’s tax bill for transferring goods and services between its Chinese and other subsidiaries had been ironed out ahead of time by a 2012 agreement between U.S. and Chinese tax authorities.

“The agreement is an acknowledgment by both countries that Microsoft’s profits are subject to the appropriate tax in China,” Microsoft’s statement said. “China receives tax revenue from Microsoft consistent with the terms of the agreed advanced pricing agreement.”

China isn’t the only country scrutinizing Microsoft’s transfer of profits between subsidiaries. The Internal Revenue Service is taking a look at how Microsoft accounted for sales between its subsidiaries between 2004 and 2009.

China has been a challenging market for Microsoft. The fast-growing economy, now the world’s second-largest, is a huge potential market for Microsoft hardware and software. But government censorship, weak intellectual-property protection and widespread software piracy have limited the success of Microsoft and other Western technology firms in the country.

Microsoft is also caught up in Beijing’s crackdown on international technology firms, including Qualcomm and InterDigital. A Chinese regulator said it began investigating Microsoft for potential monopolistic practices in June.

This article appeared in print in the November 27th, 2014 edition of Hamodia.