In a recent filing with the Securities and Exchange Commission, Microsoft disclosed that it has received a series of Notices of Proposed Adjustment (NOPAs) from the Internal Revenue Service (IRS), indicating that it owes $28.9 billion in back taxes, excluding penalties and interest. This significant demand from the IRS comes following a lengthy investigation into Microsoft’s profit distribution among various countries and jurisdictions for the tax years 2004 to 2013.
The IRS audit primarily focused on a practice known as “transfer pricing,” which legally allows multinational corporations to allocate profits and expenses among their operations in different regions. Microsoft clarified that the audit concerns the years specified and is related to its practice of sharing costs among subsidiaries for the development of certain intellectual properties. This cost-sharing scheme was utilized by numerous large corporations to reflect the global nature of their businesses.
Critics argue that some companies misuse transfer pricing to reduce their tax liability by reporting lower profits in high-tax countries and higher profits in low-tax countries. Microsoft emphasized that it has since modified its corporate structure and practices.
While Microsoft disagrees with the IRS’s assessment, the company believes that newer tax laws could potentially reduce the back taxes owed by $10 billion. The tech giant outlined its course of action in the filing, stating its intention to initiate an appeal within the IRS, a process that often takes years to complete. Furthermore, Microsoft is prepared to challenge any unresolved issues through the legal system if necessary.