Microsoft to pay China $160m for tax evasion

China has levied about 840 million (A$160 million) in back taxes from Microsoft in the first major case concerning cross-border tax evasion in the country, as regulators ramp up pressure on US corporations doing business there.

China's Xinhua official news agency on Sunday reported an unnamed US multinational must pay the Chinese government 840 million yuan in back taxes and interest, as well as more than 100 million yuan in additional taxes a year in the future.

The article refers only to a company whose name starts with "M," is one of the world's biggest 500 firms and which established a wholly-owned foreign subsidiary in Beijing in 1995. Microsoft is the only company that fits that description.

Microsoft did not confirm or deny the report.

"In 2012 the tax authorities of China and the United States agreed to a bilateral advanced pricing agreement with regards to Microsoft’s operations in China," a Microsoft spokesman said in a statement.

"China receives tax revenue from Microsoft consistent with the terms of the agreed advanced pricing agreement."

An advanced pricing agreement sets the tax treatment of transfer pricing, or methods of booking prices and sales between subsidiaries, which Microsoft uses across the globe.

According to its fiscal 2014 annual report, Microsoft's overall effective tax rate was 21 percent - well below the standard US corporate rate of 35 percent - primarily because it channels earnings through "foreign regional operations centres" in Ireland , Singapore, and Puerto Rico.

According to Xinhua, “M” reported losses for six years in China of more than 2 billion yuan while peers enjoyed profits, and so the tax authorities concluded its behavior was unreasonable.

It said the US company admitted to tax evasion and its mainland subsidiary had agreed to pay the central government.

The tax payment is only the latest headache for Microsoft in China, where it is already under investigation by anti-trust regulators.