Microsoft owes $29bn in tax, US authorities say

Microsoft says it disagrees with the IRS' latest tax demand

Microsoft says it will challenge the demand from the US Internal Revenue Service (IRS) to pay an extra $28.9 billion, along with associated penalties and interest, in unpaid taxes.

In a securities filing made on Wednesday, the company disclosed it had received notices from the IRS, aimed at adjusting its tax obligations for the period spanning from 2004 to 2013.

The contested $28.9 billion amount originates from an ongoing IRS investigation into how Microsoft distributed its profits across various countries and regions during the years 2004 to 2013.

There has been persistent concern that the big companies are not paying an adequate amount of taxes in developed countries.

Tech giants have faced criticism for their frequent use of the "transfer pricing" strategy, which they use to reduce their tax obligations. The strategy involves reporting lower profits in high-tax countries and higher profits in jurisdictions with lower tax rates.

Over a decade ago, Microsoft disclosed its strategy of manufacturing and distributing its software through regional centres located in Singapore, Dublin and Puerto Rico.

This approach allowed the company to channel its profits in a way that minimised the tax it paid.

In 2007, the IRS launched an audit of Microsoft, which the agency described in federal court documents last year as "one of the largest in the Service's history."

A significant part of this audit centred around the way Microsoft structured a manufacturing facility, launched in 2005 and situated in the US territory of Puerto Rico, a tax haven.

The IRS has said that Microsoft enlisted the services of the accounting firm KPMG to establish a cost-sharing arrangement with the Puerto Rican affiliate, a move that redirected taxable revenue away from the US.

The IRS also examined other Microsoft affiliates, including one related to retail sales in Asia, as indicated in court documents.

Microsoft has vowed to "vigorously contest" these claims through the IRS' administrative appeals office. It said it is prepared to take the matter to court, and does not plan to allocate additional funds to cover the tax claim.

The company claimed it has consistently adhered to the IRS' regulations and fulfilled its tax obligations both in the US and globally.

In a blog post, Daniel Goff, Microsoft's corporate vice president for worldwide tax and customs, mentioned that the company has made alterations to its corporate structure and operational practices since the time period under scrutiny in the audit.

Goff said that Microsoft has been working with the IRS for nearly a decade, and had addressed enquiries regarding the allocation of income and expenses for tax purposes.

He added that Microsoft had recently ended some of the arrangements that had previously allowed the company to report reduced tax liabilities, partly influenced by changes in US tax legislation.

In 2021 Microsoft onshored some IP from Puerto Rico to the US, allowing it to record a tax benefit of $3.3 billion to account for the impacts of the GILTI tax, which was introduced during the Trump administration to discourage multinational companies from shifting their profits to low-tax jurisdictions.

Goff also claimed that the suggested additional tax liability of $28.9 billion does not take into account taxes paid under the Tax Cuts and Jobs Act of 2017, which he said could potentially reduce the total amount by as much as $10 billion.