It seems that Microsoft is in hot waters with the Internal Revenue Service (IRS). According to a new 8-K filing, the tech giant is bracing for a lengthy battle over back taxes amounting to a staggering $28.9Bn, along with penalties and interest for tax years from 2004 to 2013. This development marks one of the most significant tax disputes in recent corporate history.
Microsoft has already received Notices of Proposed Adjustment from the IRS for the payment of the same, and says that it disagrees with the IRS’s “proposed adjustments,” and intends to “vigorously contest” them. In a blog post, the company announced that the adjustments did not reflect the amounts that Microsoft had paid under the Tax Cuts and Jobs Act – a pivotal piece of tax legislation signed into law by former President Donald Trump – something that could decrease the final back-tax owed by up to $10 billion.
“For nearly a decade, as we have previously disclosed in our financial statements, Microsoft has been working with the IRS to address questions about how we allocated our income and expenses for tax years beginning as far back as 2004. 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, Corporate VP of worldwide tax and customs at Microsoft, commented on the matter in an official blog post. He added that the company intends to pursue an appeal within the IRS on the same.
Given the immense magnitude of the tax dispute and the considerable financial stakes involved, it’s highly improbable that this matter will find a swift resolution. Microsoft foresees a lengthy and protracted process, which encompasses an appeal within the IRS, taking several years. Should this administrative route fail to produce a resolution, the dispute is poised to escalate into protracted legal proceedings.
At the heart of this colossal tax dispute is the practice of transfer pricing, which pertains to how a multinational corporation allocates profits between different countries and jurisdictions. In this case, the IRS conducted a painstaking, multiyear audit that scrutinized how Microsoft distributed its income and expenses during the years from 2004 to 2013.
The crux of the IRS’s contention lies in its objections to Microsoft’s transfer pricing arrangements during this specific timeframe. Another noteworthy point of contention concerns the application of “cost-sharing,” a method often employed by large multinational corporations for transfer pricing. Microsoft argues that the company has undergone substantial transformation in its corporate structure and practices since the years covered by the IRS audit, and that the issues raised by the IRS are pertinent to the past but are no longer applicable to the company’s current business practices.