The taxman is coming for
Microsoft,
and he isn’t kidding around.
Following a multiyear audit, the Internal Revenue Service has ordered Microsoft to pay $28.9 billion in additional tax, plus interest and penalties, covering the period from 2004 to 2013.
As you might imagine, the company intends to contest the finding.
The $28.9 billion figure is astonishing—larger than the annual budget for NASA. However, it seems unlikely the software company will be writing an 11-figure check to Uncle Sam soon. Investors seem only mildly perturbed, with the stock about 0.6% lower in late trading Wednesday.
Microsoft (ticker: MSFT) disclosed the IRS request in a filing with the Securities and Exchange Commission and in an accompanying blog post. The company said the IRS sent “Notices of Proposed Adjustment” for the 10-year period, requesting additional tax related to “intercompany transfer pricing.”
Microsoft said in the filing that it disagrees with the proposed adjustments, and will “vigorously contest” the IRS request through administrative appeals, and if necessary, in court. Microsoft said resolution is likely to take several years.
In the blog post, Microsoft noted that for nearly a decade it has been working with the IRS to address how it allocated income and expenses for the 10-year period that began in 2004. The company noted that it has changed its corporate structure and practices since the years covered by the audit, and that as a result, the issues the IRS raised are relevant to the past and not to current practices.
“We believe we have always followed the IRS’s rules and paid the taxes we owe in the U.S. and around the world,” the company said in the blog post, attributed to Daniel Goff, corporate vice president, worldwide tax and customs. “Microsoft historically has been one of the top U.S. corporate income taxpayers. Since 2004, we have paid over $67 billion in taxes to the U.S.”
Goff said in the post that the primary dispute involves the way Microsoft allocated profits during this time period among countries and jurisdictions. “This is commonly referred to as transfer pricing and the IRS has established regulations that allow companies to use a specific arrangement for transfer pricing, called cost-sharing,” he wrote. “Many large multinationals use cost-sharing because it reflects the global nature of their business. Because our subsidiaries shared in the costs of developing certain intellectual property, under those IRS cost-sharing regulations, the subsidiaries were also entitled to the related profits.”
Added Goff: “We will continue to work with the IRS and hope to reach a mutual resolution to this issue over the coming years.”
Write to Eric J. Savitz at eric.savitz@barrons.com
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