Microsoft currently owes the US Treasury $28.9 billion in back taxes, interest, and late payment fees, according to a recent notice from the Internal Revenue Service (IRS).
In what is on track to become the biggest corporate tax dispute on record, the case revolves around Microsoft’s use of ‘transfer pricing’ between 2004 and 2013 – a tax avoidance practice that other big tech companies like Amazon have also been found guilty of.
Microsoft has been fast to dispute these accusations, launching a formal appeal and claiming it would challenge the IRS in court if necessary. Here’s what we know so far.
IRS Demands Microsoft Coughs Up $28.9 in Back Taxes
Microsoft recently revealed the details of an ongoing tax audit by the IRS, which claims the software company owes the statutory body a total of $28.9 billion in unpaid taxes and fees.
According to Microsoft’s 8-K filing, these debts have been accrued over the period of 2004 to 2013 due to how the company chose to allocate its profits among countries and jurisdictions.
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The practice, which is known formally as transfer pricing or ‘cost-sharing’, sees large corporations shift profits to international tax havens to avoid paying the US’s steeper corporate tax rates.
Throughout the years outlined in the filing, Microsoft had been moving billions of dollars in profits to jurisdictions with favorable tax rates, like Puerto Rico, Dublin, and Singapore. However, the company has since restructured its corporate structure to conform to increasingly strict US tax laws implimented during the Trump administration.
Microsoft is Appealing The IRS’s Demands
While Microsoft hasn’t hidden away from its history of cost-sharing – claiming that “many large multinationals” take part in the practice – the software firm flat-out disagrees with the IRS’s latest tax demand.
According to a recent Microsoft blog, the company has “always followed IRS rules” and while issues raised by the IRS are “relevant to the past” they do not reflect their current practices. It also said that $10 billion in taxes that the company has already paid have not been accounted for in the IRS’s proposed adjustments.
“We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings.” – Microsoft’s recent 8-K filing
For these reasons, Microsoft disagrees with the proposed adjustments and is planning to “work through these issues” through a formal appeal with the IRS. The company is even willing to escalate the matter in court if necessary, in a process that will likely take several years to resolve.
Big Tech’s Big Transfer Pricing Problem
Microsoft’s tussle with the IRS marks the biggest corporate tax avoidance dispute in US history. But the software retailer isn’t the only major company accused of shady transfer pricing practices.
In 2018, the global phone network Vodafone revealed that almost 40% of its profits from 2016 to 2017 were allocated to tax havens like Luxembourg, where the company was only required to pay a tax rate of 0.3%. Similarly, in 2019 Amazon was singled out by the IRS for setting the value of its IP artificially low after it was transferred to Luxembourg in 2005.
And the consequences of these frameworks extend beyond US shores. According to ActionAid International, tech companies’ exploitation of global tax loopholes cost developing nations around $2.8 billion in unpaid taxes in 2020 – with Facebook, Google, and Microsoft all found to contribute to the problem.
But while these tax policies are morally questionable, whether they’re illegal is another matter. US tax loopholes mean that massive companies can often avoid paying federal and global corporate tax without much repercussions, a benefit that Microsoft could be depending on.
