Last Wednesday, Microsoft disclosed, through a securities filing, a new legal contention over back taxes, along with interest and penalties, by the U.S. Internal Revenue Service (IRS) worth $28.900 million.
Background
In October 2022, the CICTAR (Center for International Corporate Tax Accountability and Research) released a comprehensive report criticizing Microsoft’s global tax strategy. The report argued that Microsoft employs a complex web of subsidiaries to avoid taxes and highlighted Irish subsidiaries, which accumulate profits from global transactions but do not pay corporate taxes, as well as the company’s Singapore-based subsidiaries.
Whereas Microsoft has a declared operating profit margin exceeding 30%, profit margins in countries such as the U.K., Australia, and New Zealand are only 3-5%. Therefore, the IRS notified the software company to adjust its tax liability for the decade between 2004 and 2013.
Microsoft’s Response
Microsoft affirmed its disagreement with the IRS’s latest tax demand and that it will appeal the decision with the agency, a process expected for several years. In addition to the investigation into its 2004-13 tax payments, Microsoft has also been audited by the IRS over its 2014-17 tax returns.
Similar Cases
In 2019, a U.S. appeals court supported Amazon in a similar Transfer Pricing case brought by the IRS. The case turned on whether Amazon had artificially set, based on the value of its intellectual property, when the former transferred it to a subsidiary in Luxembourg in 2005. The appeals court ruled that Amazon’s action was justified by the Transfer Pricing rules currently in force, although they had not infringed subsequent regulations implemented in 2009.
