According to an investigation by The Sunday Times, Microsoft has been found to have a secret agreement with the UK tax authority, HMRC. This agreement is known as an Advance Pricing Agreement. The agreement works by allowing Microsoft UK to funnel earnings from the UK through a company known as Microsoft Ireland Operations (MIO) in Ireland, where the tax rate is lower. For comparison reasons, the UK tax rate is at 20%, with Ireland being at 12.5%, making the latter a more interesting place to route earnings through, if you're looking to reduce your tax bill, that is.
The report from the investigation claims that the company routed more than £8bn through its Ireland operations arm since 2011, with parts of its offshore operations being approved by HMRC in 2012. In terms of specifics on the deal, we only know that online purchases can be sent via Ireland and registered there. Accounts for MIO revealed that just over £2.3bn was sent through them, with a mere £16.9m being paid in tax by Microsoft UK.
A statement released by the company read:
[The business] complies with all rules and regulations worldwide, including in Ireland and the UK. Our European business, production and distribution is centralised in Ireland and has been since the 1990s. Microsoft UK earns a commission similar to what a third-party would receive for performing marketing services for Microsoft Ireland and pays tax on income earned in the UK.
HMRC also released a statement on the subject matter:
No company will pay a single penny less in tax because of [advance pricing agreements]. These simply set out how the tax rules will apply on complex transactions ahead of time and we keep them under constant review.
Other large technology companies have also been found to be using tax avoidance tactics; these include big names such as Facebook and Google. After it was found that they were knowingly reducing their tax bill, Facebook changed the way it registers UK revenue, so that sales to large businesses on its advertising platform would no longer be routed through Ireland, and instead pay the full UK tax rate of 20%. Google also said they would increase the amount of tax they paid.
Judging from Microsoft's statement so far, they have no intention of following suit, in terms of adjusting the amount of tax they pay, and instead believe they are in the right, at least legally, although not necessarily ethically.