The Internal Revenue Service (IRS) claims Microsoft owes $28.9 billion in back taxes between 2004 and 2013, plus penalties and interest. The software giant disagrees.
Microsoft, rejecting Notices of Proposed Adjustment (“NOPAs”) it received from the tax authority last month, believes its “allowances for income tax contingencies are adequate” as of Sept. 30, it said in an Oct. 11 regulatory filing.
For starters, the back tax calculation is off by at least $10 billion, Daniel Goff, corporate vice president of worldwide tax and customs, wrote in a blog post the same day, explaining that the proposed adjustments fail to include taxes paid by Microsoft under the Tax Cuts and Jobs Act (TCJA) of 2017.
The biggest point of contention is “transfer pricing,” or the way Microsoft allocated profits among countries and jurisdictions. The IRS audit, which began over a decade ago in 2012, is probing whether there have been instances where Microsoft has unlawfully circumvented the US tax rate and moved profits to tax havens.
As a global business, Microsoft says it has acted in line with legally permissible cost-sharing arrangements. “Because our subsidiaries shared in the costs of developing certain intellectual property, under those IRS cost-sharing regulations, the subsidiaries were also entitled to the related profits,” Goff explained.
The Redmond, Washington-based behemoth plans to contest the adjustments through the IRS’s administrative appeals office and even in court if need be. A resolution could take several years, the company said.
Quotable: Microsoft says IRS tax calculations are outdated
“We have changed our corporate structure and practices since the years covered by the audit, and as a result, the issues raised by the IRS are relevant to the past but not to our current practices.”
—Daniel Goff’s Oct. 11 blog post
Microsoft’s US profits and taxes, by the digits
$67 billion: Taxes Microsoft claims to have paid the US since 2004.
$198.7 billion: Microsoft’s total net income from fiscal year 2004 to fiscal year 2013.
$39 billion: US profits Microsoft shifted to US territory Puerto Rico, where the firm’s consultancy, KPMG, had persuaded the government to award Microsoft a nearly 0% tax rate.
Company of interest: Amazon
In 2019, a federal appeals court sided with Amazon in a similar case in a $1.5 billion tax dispute for 2005-06 with the IRS. The e-commerce behemoth’s cost-sharing arrangement that shifted assets from the US to subsidiaries in Europe held up. Amazon successfully argued that the IRS overestimated the value of “intangible” assets, such as software and trademarks, that it had transferred to a Luxembourg unit.