Microsoft is set to contest a decision by the United States Internal Revenue Service (IRS) stating that the tech giant owes at least $28.9 billion in taxes related to its income and expense allocation among global subsidiaries from 2004 to 2013. The company confirmed its intention to appeal this decision, asserting its disagreement with the IRS’s “notices of proposed adjustment” to its federal tax filings.
Transfer Pricing and Tax Havens:
The dispute revolves around a 2012 IRS audit that focused on transfer pricing, a method used by companies to transfer profits to tax havens and reduce exposure to the U.S. corporate tax rate. During the audit period, Microsoft was under scrutiny for transferring billions of dollars in profits to jurisdictions like Puerto Rico, a U.S. territory with a considerably lower corporate tax rate.
Microsoft’s Corporate Changes:
Microsoft has made significant changes to its corporate structure and practices since the years covered by the IRS audit. As a result, the company argues that the concerns raised by the IRS are no longer relevant to the way it currently records income. Daniel Goff, a Microsoft vice president, emphasized this point in a blog post, stating that the company has evolved its practices and worked closely with the IRS over nearly a decade to address questions about income and expense allocation for tax purposes.
Potential Tax Cuts:
In addition to the $28.9 billion tax dispute, Microsoft pointed out that this figure doesn’t account for the taxes paid under the Tax Cuts and Jobs Act of 2017. These tax reforms could potentially reduce the final tax liability by as much as $10 billion.
Microsoft’s Stance:
Microsoft maintains that its actions have consistently complied with IRS rules and regulations, and it believes its position is supported by case law. Goff expressed the company’s readiness to resolve the matter through IRS Appeals, a division responsible for addressing tax disputes, following the conclusion of the audit phase.
Market Reaction:
Despite the significant financial implications of this tax dispute, Microsoft’s shares showed minimal change in after-hours trading, following a closing price of $332.42 in New York.
Conclusion:
Microsoft’s decision to appeal the IRS’s determination of a substantial tax liability underscores the complexities of multinational corporate taxation and the evolving regulatory landscape. This dispute serves as a reminder of the ongoing efforts by governments to address tax avoidance and ensure that companies pay their fair share of taxes, even when employing intricate tax strategies. The outcome of Microsoft’s appeal will be closely watched, as it could have far-reaching implications for the tech industry and beyond.
