In a revelation that has sent shockwaves through the tech industry, the Internal Revenue Service (IRS) disclosed that Microsoft may owe up to $29 billion in back taxes to the U.S. Treasury. The potential tax bill stems from a years-long IRS audit into Microsoft’s transfer pricing practices from 2004-2013 – specifically, how the company allocated profits between the U.S. and overseas affiliates in order to minimize its total tax liability.
Microsoft, which is headquartered in Redmond, Washington, firmly rejects the IRS’s findings and plans to appeal, setting the stage for a prolonged legal battle that could take several years to resolve. The news triggered a slight decline in Microsoft’s share price in after-hours trading.
The IRS audit, described in court documents as “one of the largest in the agency’s history,” began in 2007 and recently concluded. A key focus was on Microsoft’s establishment of a manufacturing facility in Puerto Rico in 2005 and the complex cost-sharing arrangement with accounting firm KPMG that the IRS claims improperly shifted revenue out of the U.S. to avoid taxes. The investigation also extended to other Microsoft affiliates, including one tied to retail sales in Asia.
In a recent blog post, Microsoft’s head of worldwide tax David Goff asserted that the company has since changed its tax practices and structure. He also noted that up to $10 billion could be reduced from the potential $29 billion bill due to taxes already paid as a result of the 2017 tax overhaul under the Trump administration.
This high-stakes tax dispute underscores the challenges multinational corporations face in navigating diverse global tax systems and regulations. The case is poised to set a major precedent that may shape future discussions around international tax reform and the fiscal obligations of global technology giants.
