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How MS tax policy saves Gates millions – Nader

Manipulating the money pile

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US consumer activist Ralph Nader has opened a new front in his war on Microsoft - tax fiddling. In a letter sent to Bill Gates on Friday, Nader and James Love, the director of Nader's Consumer Project on Technology, describe Microsoft's failure to pay shareholder dividends as "an inappropriate and we believe unlawful device."

They argue that by not paying dividends Microsoft is providing substantial tax advantages to its largest shareholders, the largest of these being His Billness himself. If Microsoft paid dividends, then shareholders would be taxed on the benefit at the top US rate of 39.6 per cent. But as Microsoft does not pay dividends, the only way shareholders can realise their assets is via stock sales, where the maximum tax rate is 20 per cent.

Ramming the point home, they note that SEC records show Gates himself sold $2.9 billion worth of Microsoft stock last year. He therefore saved himself a tax bill of something in the region of $580 million. According to Microsoft's 2001 proxy statement, 17.3 per cent of the company's stock is held by executive officers and directors. Gates holds around two thirds of that, and in addition co-founder Paul Allen still retains a significant stake.

This small group of amazingly rich people clearly do very nicely out of the company policy, but Nader and Love question whether this is in the interests of shareholders in general: "This also raises questions about whether or not these persons, including yourself, are accumulating these staggering sums of cash to advance other agendas, rather than to advance the interests of shareholders."

What these other agendas might be, they do not say. Becoming even more drippingly rich than would otherwise be the case seems a likely one, but apart from that...

They argue that Microsoft may be breaking the law by not paying dividends on the basis of US accumulated earnings legislation, which states that company cash piles "beyond the reasonable needs of the business" should be subject to the 39.6 per cent rate. Microsoft is currently sitting on something in the region of $36 billion, a sum analysts reckon far in excess of what it might 'reasonably need,' so they may have a point.

This is "twice the cash held by GM, a corporation that reported sales about seven times larger than Microsoft's. Moreover, the cash holdings by Microsoft are growing at an astonishing rate - about $1.5 billion per month over the last quarter. It is difficult to imagine how Microsoft, which has never paid a dividend, is not subject to the accumulated earnings tax." Whether the US will listen to Nader and impose the tax is of course another matter. ®

Related links:
Nader letter

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