IRS Wants Microsoft To Pay At Least $29B In Back Taxes

In a regulatory filing, Microsoft says that it and the IRS are in for a long, multi-year negotiation and appeals process over $29.8 billion in additional tax payments plus interest and penalties stemming from how it accounted for transfer of profits and tax liabilities from 2004 to 2013.

Microsoft in a Wednesday regulatory filing said it is disputing a move by the Internal Revenue Service to seek $29.8 billion in back taxes plus penalties and interest.

Microsoft, in a Wednesday U.S. Securities and Exchange Commission filing, said it received Notices of Proposed Adjustment, or NOPAs, from the IRS on Sept. 26 seeking the additional tax payment with penalties and interest stemming from intercompany transfer pricing that happened during the tax years of 2004 to 2013.

Microsoft disputes the IRS move to collect additional tax payments from that period, writing in the SEC filing that the company believes its allowances for income tax contingencies are adequate.

[Related: 5 Facts About The Overseas Tax Rate]

“We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings. We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months,” the company wrote.

Microsoft did not respond to a CRN request for additional information by press time, other than to refer to a blog post.

Daniel Goff, Microsoft’s corporate vice president for worldwide tax and customs, wrote in that blog post that Microsoft has previously disclosed that it has been working with the IRS to address questions about how it allocated its income and expenses as far back as 2004.

The IRS move is not related to current Microsoft practices, Goff wrote. “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,” he wrote.

With the NOPAs, the IRS is sharing for the first time with Microsoft detailed information and explanations of that organization’s views about the issues, Goff wrote, noting that the NOPAs mark the end of the audit of Microsoft’s practices from 2004 to 2013, and instead marks the beginning of a resolution of these long-standing issues.

The $29.8-billion figure is not a final determination, Goff wrote.

“Not reflected in the proposed adjustments are taxes paid by Microsoft under the Tax Cuts and Jobs Act (TCJA), which could decrease the final tax owed under the audit by up to $10 billion,” he wrote.

Negotiations and judicial appeals could take several years, Goff wrote.

He also wrote that Microsoft has always followed IRS rules and paid taxes it owed in the U.S. and worldwide, and since 2004 has paid over $67 billion in U.S. taxes.

At issue is how a company like Microsoft allocates profits, Goff wrote.

“The main disagreement is the way Microsoft allocated profits during this time period among countries and jurisdictions,” he wrote. “This is commonly referred to as transfer pricing and the IRS has established regulations that allow companies to use a specific arrangement for transfer pricing, called cost-sharing. Many large multinationals use cost-sharing because it reflects the global nature of their business. 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 also wrote that Microsoft’s allowances for income tax contingencies are adequate whatever the result of the IRS action is.

The question of how companies handle domestic vs. international taxes and profits has been a long-term issue.

This issue came to a head in 2013 and 2014 when the U.S. government was looking at whether to cut income taxes on profits owed by U.S.-based multinational companies’ from their overseas operations and whether it would encourage them to repatriate, or bring to the U.S., more of their profits from abroad.

Governmental and other officials at the time argued that cutting taxes on profits earned overseas would essentially amount to a public handout to companies that may have moved parts of their operations overseas specifically to escape paying the higher taxes.

Multinational companies, on the other hand, were looking for a tax holiday as a way to repatriate their overseas earnings.

Such companies resisted bringing their overseas earnings home unless the US declared a tax holiday, reduced overall corporate taxes, or adopts a tax system similar to other developed countries. That system, known as a territorial tax rate, taxed income earned in foreign countries at a modest rate of 2 percent or less, and sometimes at 0 percent.

The U.S. shifted to a territorial tax system, which excludes profits earned by multinational companies outside the U.S. in their domestic tax base, as part of the 2017 Tax Cuts and Jobs Act, or TCJA.