The US technology group is understood to be channelling online payments for its Windows 8 operating system and other downloads of software through Luxembourg and Ireland (Xetra: A0Q8L3 - news) , where corporation tax is lower than the UK.
This means that Microsoft’s Irish registered company, Microsoft Ireland Operations Ltd, has reported £1.7bn of revenues from the UK on which the company has paid no UK corporation tax.
Microsoft said on Sunday night: “Microsoft pays all due taxes, as required by law, worldwide. Microsoft subsidiaries are fully subject to tax in the jurisdictions in which we operate.
“We are regularly audited by major tax jurisdictions, which ensure the company is complying with all rules and regulations.”
Microsoft pays corporation tax in the UK on other parts of its business, including marketing.
The US company has been lambasted by politicians for paying just £8.5m in corporation tax in the UK over the last 14 years.
The small amount of tax paid was despite Starbucks UK recording sales of £3bn during the same period.
Kris Engskov, managing director of Starbucks UK, said that the company had been shocked by the “emotional” reaction of its customers to the tax row. Mr Engskov said that Starbucks will no longer claim tax deductions for royalties to its Amsterdam office, inter-company loans, capital allowances and coffee purchases.
However, despite the unprecedented payment, Starbucks was targeted by protesters over the weekend who called for the company to overhaul its accounting measures and tax arrangements.
UK Uncut targeted more than 40 Starbucks sites in the UK and is thought to have attracted up to 1,000 campaigners.
The head of the organisation reviewing global tax rules, the OECD, said on Sunday that the behaviour of multinational companies regarding tax is getting worse.
Pascal Saint-Amans, the director of the OECD’s centre for tax policy and administration, said there is a “large and growing gap” between where companies conduct their business and record their profits.
However, Mr Saint-Amans, who is drawing up a set of tax proposals for G20 countries to consider next year, said that the issue has now been recognised as a “political concern”.
Microsoft has already been criticised for the amount of tax it pays in the US.
A Congressional investigation earlier this year designed to highlight the loopholes in America’s tax code claimed that Microsoft, the world’s largest software company, shielded its profits from at least $6.5bn (£4.1bn) of taxes through a series of transactions with foreign subsidiaries in countries with low tax rates, such as Ireland, Singapore and Puerto Rico.
Carl Levin, the senator who chairs the committee, said: “These loopholes and abuses exact a tremendous cost. What these gimmicks do is shift the burden of taxes on to citizens and businesses who don’t use armies of lawyers and accountants.”
Microsoft has denied any wrongdoing in the US and said that it complies with tax laws.