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Does Microsoft Owe Denmark $1 Billion in Unpaid Taxes?

  • Mar 5, 2013 | Gail Cole

 Will Microsoft Pay Denmark $1 Billion in Back Taxes, Interest, and Penalties?

Denmark's Treasury is claiming that Microsoft owes the country approximately $1 billion in unpaid taxes. The money owed reportedly stems from Microsoft's 2002 acquisition of Navision, a Danish software company, and its subsequent sale to an Irish subdivision. (TNW, reporting news from DR).

Navision was acquired for about $1.3 billion in cash and stock. Soon after, Microsoft reportedly "sold the rights to Navision's ERP and accounting software to Microsoft's Irish subsidiary at a price which the Danish tax authorities think was far too low." As a result,  Danish tax authorities claim that Microsoft has been able to "transfer valuable assets out of Denmark … without coughing up sufficient dues for the government."

Denmark has high taxes, even by European standards. For instance, it does not allow the reduced VAT rate for books common to other European Union members.

The Register reports that Microsoft's sale to its Irish subsidiary "allowed Redmond [Microsoft headquarters] to redirect revenues back into its corporate coffers, diverting nearly $11 [billion] in local revenues out of the country and paying a pittance to the Danish authorities."

If done properly, what Microsoft did is legal. However, the Danish government reportedly "thinks it can prove Microsoft sold the rights to its Irish branch at significantly below market value." Thus the bill for nearly $1 billion (5.6 billion Danish kroner) for lost taxes and interest.

Microsoft may want to prepare for battle, for, as The Register notes, "[t]he case certainly has the potential to be massive."

Yet Forbes points out that the European Union and its tax laws stand in the way of a potential battle. To wit:

"[W]ithholding taxes on royalty payments arising in a Member State, and withholding taxes on interest payments arising in a Member State …shall be exempt from any taxes in that State provided that the beneficial owner of the payment is a company or permanent establishment in another Member State."

In other words, the Forbes article claims, "It is actually, under EU law, illegal for Denmark to try and tax those royalties."

Similar battles are raging elsewhere in the EU. Last fall, France asked Amazon for $252 million in back corporation taxes, interest and penalties. And last month, French tax authorities reportedly asked Microsoft for $70 million for a "tax adjustment."

How does your business keep track of global tax changes?

photo credit: Robert Scoble via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.