Skype deal: A lesson in offshore accounting

With all the hoopla over the big price Microsoft is paying in its $8.5 billion all-cash deal to buy the Internet calling service Skype, it looks like one loser might be the US government.

For one thing, Skype itself is based in Luxembourg, which is known for its low corporate tax rate. Microsoft plans to use some of its growing overseas cash pile, rather than move it over to the US, where its cash would also be subject to an additional repatriation tax. “That money was just sitting on their balance sheet earning very low returns,” said Kevin Buttigieg, a Collins Stewart analyst. “The price they paid for Skype was very high but it wouldn't surprise me that the fact that they could use their international cash played a role. The opportunity cost was less than if it was U.S. cash.” In its last quarter ended March 31, Microsoft noted that $42 billion of its $50.2 billion in cash and short term investments was held by its foreign subsidiaries and was subject to “material repatriation tax effects.” Additionally, a look through Skype’s 280-page prospectus filed in April (plus a mass of attachments for an IPO that never happened) shows a dizzying array of offshore entities and holding companies associated with its biggest investors. They may have set up these entities to avoid paying some US taxes from a potential IPO windfall. With the sale to Microsoft, their profits appear to be larger than if they had sold shares in an IPO.