Tech giant Microsoft revealed that it received a notice from the U.S. Internal Revenue Service (IRS) in September, demanding an additional tax payment of $28.9 billion, along with penalties and interest. These demands pertain to tax years spanning from 2004 to 2013, reported Reuters.
The conflict between Microsoft and the IRS revolves around the allocation of profits across various countries and jurisdictions, an aspect that the IRS is scrutinizing in its audit. Microsoft, headquartered in Redmond, Washington, stated that it has modified its practices since the IRS investigation began, ensuring that the concerns raised by the IRS are now obsolete and do not apply to its current operations.
Microsoft’s position on the matter is that the taxes owed following the audit could be significantly reduced, potentially by up to $10 billion. The basis for this anticipated reduction lies in tax legislation enacted during the tenure of former President Donald Trump.
Despite the IRS’s findings, Microsoft expressed its disagreement and outlined its plans for further action. The company intends to initiate a dispute process, starting with an internal IRS proceeding, and if necessary, escalating the matter to the courts.
The ongoing dispute with the IRS stems from a 2012 audit, which primarily focuses on transfer pricing. This practice involves companies moving profits to tax-friendly havens to lower their tax obligations, avoiding the higher US corporate tax rate. During the audit, it was discovered that Microsoft had shifted substantial profits to locations like Puerto Rico, a US territory with a significantly lower corporate tax rate.
Microsoft has made significant changes to its corporate structure and practices since the audit period, Daniel Goff, a Microsoft Vice President, said in a blog post.
Goff also highlighted that Microsoft has been working closely with the IRS for nearly a decade to address questions of income and expense allocation for tax purposes. It’s worth noting that the proposed additional tax liability of $28.9 billion doesn’t factor in taxes already paid under the Tax Cuts and Jobs Act of 2017, which could potentially reduce the overall amount by up to $10 billion.