Microsoft claims it will have to pay a substantial tax bill due to past accounting methods that date back over twenty years. The Internal Revenue Service (IRS) has estimated that Microsoft owes $28.9 billion in unpaid taxes, plus interest and penalties, according to a report the company made with the Securities and Exchange Commission (SEC) yesterday. This comes after a thorough audit conducted by the IRS covering 2004 to 2013.
The IRS case dates back nearly ten years, when the tax authority began to get tough with big businesses hiding earnings in foreign tax havens, with Microsoft squarely in its sights. The main takeaway from ProPublica’s excellent summary is that Microsoft allegedly transferred “at least” $39 billion in earnings to Puerto Rico through a plan in which its intellectual property (IP) was shifted to a tiny business controlled on the Caribbean island.
After many years of legal and political struggle, the situation is still not entirely settled. Microsoft lost a lawsuit in January in which it sought to compel the IRS to turn over thousands of documents connected to its audit. Finally, we’ve reached the point where Microsoft may have to pay close to $29 billion in taxes, even though corporations claim that this amount might decrease by as much as $10 billion. This, it claims, is because the IRS failed to take into account taxes it had already paid under the Tax Cuts and Jobs Act (TCJA) of the Trump administration, which was passed to lower taxes and encourage firms to repatriate their international earnings home at a lower one-time tax rate.
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The last 20 years have seen significant changes in the business environment. Microsoft and Intel were noticeable outliers on the list of the world’s top 10 most valuable corporations in 2004 (based on market capitalization), which included more “traditional” businesses like energy monopolies, banks, pharmaceutical companies, and supermarket chains.
Today’s top 10 businesses are primarily in the technology sector, with Microsoft now a $2.5 trillion behemoth that ranks second behind Apple after briefly flirting with being a $3 trillion business a few months ago.
It might be difficult to estimate how much of Microsoft’s growth can be attributed to previous accounting methods, but $29 billion is certainly nothing to sneeze at. It’s also important to note that the IRS has not just pursued Microsoft in the IT sector; in a $1.5 billion tax battle with the IRS back in 2019, Amazon prevailed on assets it had moved to its Luxembourg company more than ten years earlier.
Currently, the IRS mailed Microsoft Notices of Proposed Adjustment (NOPA) letters towards the end of September, thereby concluding the 2004–2013 period audit. But now that this has happened, Microsoft and the IRS will begin a protracted legal battle over how much to pay.
Microsoft stated in its SEC filing that it “disagrees with these proposed adjustments and will pursue an appeal within the IRS, a process expected to take several years.” We think we’ve always complied with IRS regulations and paid the taxes we owe domestically and abroad.
And Daniel Goff, Microsoft’s corporate VP for worldwide tax and customs, warns that they will be ready to seek other legal interventions if an agreement cannot be reached after this appeals process.
Goff said in a blog post, “Microsoft will have a chance to fight any remaining matters through the courts if we cannot make a straight arrangement with the IRS.
