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Tax Authority: Microsoft owes 5.8 billion

The Tax Authority claims Microsoft dumped prices for Navision. One of Denmark’s biggest tax cases ever.

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DR2 is reporting that the Danish Tax Authority is negotiating with Microsoft and the US Internal Revenue Service (IRS) in connection with what is being seen as one of Denmark’s biggest ever tax cases to the tune of DKK 5.8 billion.

The case involves transfer pricing in connection with Microsoft’s acquisition of the Danish company Navision in 2002.

“These sorts of cases are precisely what we want to uncover through the Tax Authority’s checks on multinational companies,” says Socialist People’s Party Tax Spokesman Jesper Petersen.

It was in 2002 that Microsoft acquired Navision for DKK 10.8 billion, changing its name to Microsoft Business Solutions. Navision, which was partially owned by the Danish brothers Erik and Preben Damgaard, had developed a highly successful financial management programme of the same name.

Shortly after the acquisition, Microsoft moved the rights to the programme from its new Danish company to an Irish tax haven, and it is this transaction that the Authority has studied.

According to the reports, the Tax Authority maintains that Microsoft’s Irish subsidiary purchased the valuable rights to the programme too cheaply, allowing Microsoft to move large sums out of the country without them being taxed in Denmark.

Overall, the Tax Authority is said by DR2 to maintain that Microsoft owes national coffers DKK 5 billion in taxes and duties in connection with the Navision acquisition, which with interest is currently up at DKK 5.8 billion.

“This is an unusually big case, certainly one of the biggest we have seen. I can fully understand that the Tax Authority has been puzzled and investigated,” says CBS accounts expert Lars Kiertzner, who along with DR2 has studied Navision’s accounts, Microsoft’s parent company and Danish subsidiaries.

DR2 quotes a source close to the issue as saying the case is a major one that is now a couple of years old. “As a result of its size, Microsoft Corporation in the United States has been handling it from the beginning. Microsoft Denmark has not had much to do with it,” the source is quoted as saying.

Technically the case is one of transfer pricing. Under the rules, companies within the same group who trade with each other across national borders must do so at market prices in order to avoid surpluses being moved to tax havens. The trade must take place at the same price that two companies independent of each other would be able to agree on.

Here, the Tax Authority is said to believe that Microsoft has priced the rights to Navision much lower than its market price.

The Navision programme is currently called Dynamics NAV and is still being developed by Microsoft’s 600 employee division in Vedbæk north of Copenhagen. The various versions of the programme generate an annual income for Microsoft of around DKK 10 billion.

As the rights to the programme reside in Microsoft’s Irish company, the profit from the sale is not taxed in Denmark. According to DR2’s map of the Microsoft group’s structure, earnings end up in the Irish company which in turn is owned by companies in Bermuda and the British Virgin Islands.

Neither the Danish Tax Authority, Microsoft nor the US Internal Revenue Service have been willing to comment on the issue to DR2.

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