A compliance report released by Microsoft this week provided a rare look into how tech giants shift profits out of the countries where they have many employees and significant sales and into low-tax havens that help them cut their tax bills by billions of dollars.
Microsoft was most likely the first major U.S. technology company to make a so-called country by country report of its finances to comply with a new European Union directive. Like other big companies, Microsoft uses transactions between subsidiaries to shift profits around to reduce its tax bill. The report revealed a consistent pattern: high returns in low-tax jurisdictions and slim margins in higher-tax ones.
Microsoft’s report detailed the company’s sales, tax bills and employees in dozens of countries, mostly in Europe, for its fiscal year that ended in June 2025. The report showed the sometimes absurd results.
Microsoft said it had generated almost 40% of its pretax income in tax-friendly Ireland, where it employed about 3% of its global workforce. In higher-tax Germany, the largest economy in Europe, Microsoft earned barely half of 1% of its global profits, it said. Excluding Ireland, the company said, it generated less than 2% of its worldwide pretax earnings in Europe.
Microsoft said in a blog post accompanying the report that it followed all the laws in every jurisdiction where it operated, and that the reporting standards created some inconsistencies among countries.
“Microsoft is committed to a tax structure that reflects where our people work, where we invest, and where functions, assets, and risks occur,” wrote Jeff Bullwinkel, Microsoft’s top lawyer in Europe.
The IRS is challenging profit-shifting transactions used by Microsoft, and is seeking back taxes of nearly $29 billion. The company has said it disagrees with the IRS and said in a securities filing that it “will vigorously contest” the proposed tax bills.
In the wake of the global financial crisis more than a decade ago, European countries slashing basic services trained their sights on tax dodges employed by big companies, such as Google, Apple, Starbucks, Amazon and Facebook.
The European Parliament proposed the country by country reports to increase “the transparency on where they pay their taxes,” said Iban García del Blanco of Spain, one of the directive’s lead negotiators. The reports would give the public insight into companies’ economic activity — which can be quite different from where they claim to earn their income for tax purposes. The European Parliament passed the directive in 2021, and it is now taking effect.
Microsoft’s report showed that, despite the efforts to crack down on tax havens, companies are able to “shift their profits to low-tax jurisdictions with no corresponding shift in real activity,” said Reuven Avi-Yonah, a tax law professor at the University of Michigan.
For years, Microsoft has disclosed that it booked a disproportionate amount of earnings in Ireland, whose porous tax laws have permitted big companies — including Google, Facebook and PepsiCo — to avoid billions of dollars of taxes by transferring income into island havens like Bermuda and Grand Cayman.
For its 2025 fiscal year, Microsoft reported profit margins of 24% in Ireland, where it paid taxes at a rate of just over 14%. In Luxembourg, Microsoft claimed profit margins of 142% and a tax rate of just 3%. The company said it had $283 million in pretax income and only 34 employees in the tiny country.
But in several of Microsoft’s biggest markets — where tax rates exceed 25% — it reported tiny profit margins. In Germany, France and Italy, the company claimed single-digit profit margins, sometimes barely 5%.
The report still gave only a partial picture, because it lumped in the United States with other countries.
Microsoft said it had built its presence in Ireland over more than four decades, and it has grown into the company’s primary hub in the region. It employs roughly 6,600 people there, more than anywhere else in Europe.
For 13 years, international regulators have tried to crack down on how big companies shift earnings into tax havens, and more than 100 countries have passed laws creating a minimum corporate income tax. But the Trump administration struck an agreement this year with the Organization for Economic Cooperation and Development that effectively exempts U.S. companies from much of that crackdown.
As a result, U.S. companies last year avoided at least $40 billion in taxes from parking profits in havens, The New York Times found.
Bullwinkel said Microsoft’s capital expenditures in data centers, its corporate workforces and its work through local partners were also key investments in local economies. “Tax is one important measure of contribution, but it is not the only one,” he wrote.
The comments come amid growing competition among AI companies over model capabilities and safety guardrails. (File Photo) 
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