Monday, October 18, 2010
Figure 4 shows that from 2002 through 2007, the profitability (measured as a percentage of sales) of foreign and U.S. operations was about equal. Given the greater value added in the United States, this is not easy to explain. Even more puzzling are the last three years, when the rate of domestic profit dropped sharply while foreign profit rose -- leaving the rate of foreign profitability higher than the domestic rate.
Without more detailed information it is impossible to reach absolute conclusions, but the publicly available information from Microsoft strongly suggests that during the last three years, the company has dramatically stepped up its efforts to take advantage of lax U.S. transfer pricing rules. It is hard to pin down an exact number, but we are talking lost revenue to the treasury of billions of dollars each year.
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