(Source: EPA)
Meanwhile Chinese officials continue to probe Microsoft over alleged violations of Chinese antitrust laws

Fallout and repercussions over the Obama administrations bickering with China's ruling party continues to reverberate in the world's largest electronics market, producing painful consequences for American tech companies.

In recent months Apple, Inc. (AAPL) saw its iPad and iPhone blacklisted from certain government acquisition lists.  And China's government "banned" Microsoft Corp.'s (MSFT) Windows 8 from official use, saying it was a security risk.  The Chinese government has previously snubbed Windows 8 on a different basis, claiming it was too expensive.  Most Chinese government computers are today still running Microsoft Windows XP.

Now Chinese officials have gone a step further.

A post by China’s state-owned Xinhua news agency reported on a tax crackdown against Microsoft.  The report indicates that Chinese officials have accused Microsoft of tax evasion and have fined it CN¥840M (CN¥ = Chinese Yuan) in back taxes and interest.  That's no paltry sum; it totals roughly $137M USD.  What's more, Microsoft must also make an early payment of CN¥100M ($16.3M USD) to cover its next year of taxes.

Humorously, the Xinhua press relase does not name Microsoft, insisting on calling it an "unnamed" multination company whose name "stars with 'M'".  Aside from than alphabetic hint, there's plenty of other details Xinhua drops to erase any ambiguity about who it is talking about and to make it perfectly clear that it's Microsoft.

Most importantly, it reports that the "unnamed" company is a Fortune 500 firm who established a wholly owned subsidiary in Beijing in 1995.  There's only one company in the Fortune 500 who fits that description -- Microsoft.

Microsoft headquarters
So much for unnamed -- Microsoft is the only Fortune 500 multinational to open a headquarters in Beijing in 1995. [Image Source: The Next Web]

Microsoft, based out of Redmond, Washington would not confirm or deny the report.  A spokesperson wrote to Reuters:

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

The Xinhua report points out that Microsoft's Chinese subsidiary posted CN¥2B (~$326M USD) in losses over the last six years.  Chinese officials were credible of Microsoft's ledger given that rivals with similar revenue were posting profits.

The root cause, they state, was that (Microsoft) was funneling money through “foreign regional operations centers” in Ireland, Singapore, and Puerto Rico -- regions from which it can shuffle money to further wipe out its taxes.  Chinese regulators note that globally Microsoft paid a 21 percent effective tax rate last year, versus its much higher tax rate of 35 percent in the U.S.

Microsoft Irish strategy
Microsoft reportedly wipes out taxable revenue in China with the familiar Double Irish with a Dutch Sandwich evasion scheme. [Image Source: The New York Times]

Apple is facing similar claims in Europe, where it has been charged with an antitrust offense for tax evasion.  Apple has vigorously denied that claim.  Apple, Google Inc. (GOOG), and Microsoft have even been probed and grilled back home in the U.S., but have not been formerly investigated over accusations of tax evasion.

Interestingly, Chinese officials claim Microsoft (the U.S. parent company) admitted that its Chinese subsidiary had committed tax evasion, apologizing and agreeing to pay the central government.  That sounds like a pretty forced apology, but Chinese regulators don't seem to mind.

With the settlement Microsoft gets a bit more breathing room, but it's hardly out of the woods yet.  It currently is under investigation for possible antitrust offenses, in part due to the patent licensing fees Microsoft charges Android OEMs, including top Chinese devicemakers like Xiaomi and the Lenovo Group, Ltd. (HKG:0992).  Microsoft reportedly pulls in more cash from licensing to firms using Google Inc.'s (GOOG) Android OS than it does off the Windows smartphone platform.

Sources: Xinhua, via Reuters

"It's okay. The scenarios aren't that clear. But it's good looking. [Steve Jobs] does good design, and [the iPad] is absolutely a good example of that." -- Bill Gates on the Apple iPad

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