Will Microsoft’s $8.5 billion purchase of Skype be a wake up call for lawmakers on the need for corporate tax reform?

Skype can thank a large part of its big payday on the country’s corporate tax code and being organized outside of the U.S.

Here is the issue: U.S. companies with world-wide operations like Microsoft do not immediately pay U.S. corporate tax on the earnings of their foreign subsidiaries. They pay that tax only when the funds are repatriated into the U.S. Since the corporate tax rate here is 35%, they have to pay a toll of as much as a third to get the money back in the U.S. To avoid this toll, they leave the profits overseas in what is sometimes referred to as “foreign trapped cash.” And trapped cash is exactly what Microsoft is using to buy Skype.

Skype had a huge advantage in being a Luxembourg corporation. If it had been a Delaware corporation run out of Silicon Valley, and Microsoft had used that same $8.5 billion of offshore cash, it would only have been able to pay around $5.5 billion after paying the tax.

Venture capital and private equity players are certain to heed the message: Organize a development stage company in the U.S. and risk leaving big money on the table. This incentive is not news to the private equity players. And it is not just at the exit when a foreign holding company is treated more favorably from a tax perspective.