In a recent filing with the Securities and Exchange Commission (SEC), Microsoft confirmed that the Internal Revenue Service (IRS) has assessed an outstanding tax bill of $28.9 billion, which includes penalties and interest.
This substantial sum results from a comprehensive audit conducted by the IRS spanning the years 2004 to 2013.
The origins of this case trace back a decade when the IRS initiated a crackdown on large corporations engaging in profit-shifting practices to overseas tax havens, with Microsoft being one of its primary targets.
The company allegedly moved approximately $39 billion in profits to Puerto Rico, employing a scheme that involved transferring its intellectual property (IP) to a small factory it owned on the Caribbean island.
Despite years of legal and political battles, a resolution remains elusive.
In January, Microsoft’s attempt to compel the IRS to release thousands of audit-related records ended in a loss.
Now, the tech giant potentially faces a hefty tax bill, although it asserts that the amount could be reduced by as much as $10 billion.
Microsoft argues that the IRS failed to consider the taxes it paid under the Trump-era Tax Cuts and Jobs Act (TCJA), legislation aimed at lowering taxes and incentivizing corporations to repatriate foreign profits at a one-time tax rate.
Microsoft’s journey underscores the evolving corporate landscape.
Over the past two decades, the top companies by market capitalization have shifted from traditional industries to technology giants.
Microsoft, now valued at $2.5 trillion, ranks second, trailing behind Apple, which briefly touched the $3 trillion mark.
It’s worth noting that Microsoft is not the sole tech company to have faced IRS scrutiny.
Amazon successfully defended itself in a $1.5 billion tax dispute with the IRS in 2019, concerning assets it had transferred to its Luxembourg subsidiary more than a decade ago.
Currently, Microsoft has received Notices of Proposed Adjustment (NOPAs) from the IRS, officially closing the audit for the 2004-2013 period.
However, this marks the beginning of a prolonged legal battle as Microsoft and the IRS spar over the final tax liability.
In response, Microsoft expressed its disagreement with the proposed adjustments and revealed plans to pursue an appeal within the IRS, a process expected to span several years.
The company maintains that it has consistently adhered to IRS rules and fulfilled its tax obligations in the U.S. and worldwide.
Should a resolution not be reached through the appeals process, Microsoft is prepared to escalate the matter further through legal interventions, as stated by Daniel Goff, Microsoft’s corporate VP for worldwide tax and customs.
