For the Shareholders
The purchase of Skype created a fresh investment opportunity for the shareholders. Microsoft believed that by purchasing Skype, it would produce high income and prevent a portion of their money from being lowered by the 35% corporate income tax (Rosoff). Profits and dividends increased for stockholders as a result. Moreover, buying the business allowed investors to assess Skype's position in the industry and potential future growth because demand for the service was high due to rivals like Facebook and Google (Rosoff). It appears that Microsoft is finding it harder to control the industry than in the past due to fierce competition in the information technology sector. Therefore, it was necessary to acquire Skype as a new investment that could boost the morale of shareholders. Thus, all investors in the company experienced an increase in capital growth.
Why Does Microsoft have a Tax of 4% on its Foreign Earnings in Overseas?
Apparently, Microsoft benefits from the foreign tax credit, which leads to a tax of 4% on its foreign earnings. In the US, the government allows companies or individuals to file for foreign tax credits on any foreign earnings. The tax credit protects companies from double taxation, which has a significant financial burden to most of the multinational corporations. Repatriating the cash could cost the company 31%, which amounts to $9.2 billion. However, a foreign tax credit reduces the amount taxed. Hence, unlike the 35% of the corporate tax in the US, Microsoft will only have to incur 4% (35% - 31%). Thus, the company can file form 1116, under the US Internal Revenue Service to request for a credit on its foreign income hoarded in the overseas.
Why Does Microsoft Hold Much Money Overseas?
Microsoft, similar to other companies such as Apple, holds much of its cash in foreign countries due to a high corporate income tax of 35% in the US (Cox). Repatriating the cash to the US could cause the company to incur heavy losses on the foreign income. Besides, profits and dividends of shareholders would reduce, thereby limiting investments. The main opportunity cost of holding much money in foreign locations is the ability to invest in foreign currencies. For instance, it was easy and cost effective for Microsoft to use its foreign income to purchase Skype unlike if the money was in the local currency (the US). Besides, some of the countries have friendly tax policies that encourage business growth. Thus, any company can enter into a business partnership with other foreign companies, a method that can reduce costs of operations while increasing profits. If Microsoft decided to repatriate some of its cash to the US, shareholders would benefit mainly from increased payouts such as dividends and profits.
Is it Ethical for Microsoft to Continue Holding Cash Overseas?
Hoarding cash overseas is ethical because the company is protecting its foreign investment. Despite the fact that returning the money to the US could help in developing the economy and creating jobs, Microsoft could incur high losses. From the information provided by executives of several multinational corporations, the decision to stock cash in foreign countries is not one of the methods for evading corporate income tax. Certainly, the high taxation rate in the US forces the companies to consider hoarding as a useful measure for evading losses (Rubin). In fact, Microsoft is ready to repatriate most of its money if the US government reduces the corporate income tax.
Works Cited
Cox, Jeff. “US Companies Are Hoarding $2.5 Trillion In Cash Overseas.” CNBC, 2016, https://www.cnbc.com/2016/09/20/us-companies-are-hoarding-2-and-a-half-trillion-dollars-in-cash-overseas.html.
Rosoff, Matt. “Microsoft Insider: Here’s Why We Bought Skype.” Business Insider, 2011, http://www.businessinsider.com/why-microsoft-bought-skype-an-insider-explains-2011-5?IR=T.
Rubin, Richard. “Offshore cash hoard expands by $183 billion at companies.” Bloomberg (8 March 2013) online: Bloomberg (2013).
