The Danish government says Microsoft (NASDAQ:MSFT) owes it $1 billion in back taxes and interest, the largest such penalty in Denmark's history, according to Danish news source DR2 (translation here).
The Skatteministeriet, Denmark's Ministry of Taxation, is currently negotiating with Microsoft and the U.S. government to have that money returned to Denmark, says DR2.
Microsoft's alleged underpayment stems from its purchase of Danish financial software company Navision in 2002 for $1.9 billion. After renaming it "Microsoft Business Solutions," Microsoft then sold the rights to the Navision software to its Irish subsidiary.
That sale, Denmark says, was made so Microsoft could reap the benefits of Ireland's lower tax rates from sales of what the Danes contend is a Danish product. Navision continues to be developed in Denmark within Microsoft's Danish division, an entity with 600 employees.
Even though the Navision software, now called Dynamics NAV, has sales of around $2 billion a year, any earnings go to Microsoft's Irish company, not to its Danish division. Hence, Denmark sees no tax revenue from it.
And Microsoft will have to face more financial penalties, according Reuters, which last week reported European Commission plans to fine the company before the end of March.
Reuters spoke to three people close to the matter who said the penalty would be tied to a Microsoft antitrust case more than 10 years old. That case was supposed to have been settled in 2009 after Microsoft promised to give European buyers of its Windows operating system a choice of browsers that rival its Internet Explorer.
Microsoft made that pledge to avoid a EU penalty that could have gone as high as 10% of its worldwide sales.
We're No. 3
Since 2008, Internet Explorer has fallen from a 48% share of the European browser market to 24%. Google's Chrome has 35%,Firefox has 29%, Apple's Safari has 9%, and Opera has 2%, according to StatCounter, an Internet traffic analysis company.
Microsoft has already been fined $2.1 billion by the European Commission for other offenses, including designing its media player to only work on Windows. The browser offense occurred between February 2011 and July 2012, according to Reuters. Microsoft blamed it on a technical error.
If Denmark prevails in its tax case, according to DR2, it would use the windfall tax revenue to either build a new hospital, a new highway, or hire 15,000 more primary school teachers.
Fool contributor Dan Radovsky has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.