An Isreali court on Wednesday ruled that Microsoft needs to pay back $28.2 Million in taxes to Israel, mainly due to tax issues connected with Microsoft's 2006 acquisition of the networking and software solution start up, Gteko. The decision could have a significant impact, as it might set precedence and impact the finances and taxation of other tech giants that buy up Israeli startups (via Haretz.com)
The issue at heart is the fact that the Israel Tax Authority questioned part of Microsoft's acquisition of Gteko, and the way Microsoft valued it. Through the original deal was a stock sale of $90 million, Microsoft later ended up paying an additional $26.6 million for the startup's IP. Although Gteko argued that the second transaction was a "premium Microsoft expected from the synergies," that the value of the IP was figured in the price Microsoft paid for the stock, this second move is what Israeli tax authorities had issues with.
Judge Shumel Bronstein presided over the case, and the ruling was in favor of the Israel Tax Authority. The tax authority argued that the second transaction was a sale of business operations. Part of the judge's ruling reads:
“My conclusion is that in a substantive (or ‘functional’ sense) the transaction that the parties conducted was far more extensive than the deal described by them in the IP transaction.”
Just like every other multinational corporation, Microsoft obviously tries to make the most out of every single deal made. Gteko is now a subsidiary of Microsoft, and the original case involved Gteko, and not Microsoft itself, though Microsoft will come home with the tax bill. The presiding judge said that "the value of [a] company does not 'evaporate' when a business ceases operations, and that the tax should fully reflect the value of its assets."