Microsoft (MSFT) May Contest IRS Claim of $28.9B in Back Taxes
Zacks Equity Research
Thu, October 12, 2023
Microsoft MSFT is facing a demand for $28.9 billion in back taxes from the U.S. Internal Revenue Service (IRS), which marks a significant escalation in one of the largest corporate tax disputes in recent times.
Per a recent 8-K filing by the company, along with back taxes, this demand encompassed penalties and interest for late payment. The core of this dispute centers on Microsoft's use of transfer pricing, a practice that has been criticized for allowing companies, particularly in the tech sector, to shift profits to low-tax countries, thereby reducing their tax obligations.
Microsoft disclosed over a decade ago that it conducted its software production and distribution through regional centers in countries like Singapore, Dublin and Puerto Rico. By doing so, it was able to manage its profits in a manner that reduced its overall tax burden. This approach of allocating profits to different locations, based on where a portion of the costs and assets are situated, is commonly employed by multinational tech corporations.
Microsoft has expressed its disagreement with IRS's latest tax demand. It has indicated its intention to contest the claims vigorously through IRS's administrative appeals office, a process that could span several years. If necessary, MSFT is willing to take the matter to court. Additionally, the company stated that it would not set aside any additional reserves to cover the tax claim.
Microsoft Corporation Price and Consensus
Microsoft Corporation Price and Consensus
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Microsoft Among Other Tech Giants Facing Tax Disputes
Governments have accused companies such as Apple AAPL, Amazon AMZN and Microsoft of shifting revenues through low or zero-tax jurisdictions in order to escape taxation in their main markets and maximize profits.
This spurred a major international agreement among 140 countries, brokered by Organization for Economic Cooperation and Development (OECD), that is designed to better share and regulate tax revenues of the giants. Recently, OECD published a draft agreement, implementing a major part of that deal with hopes of having it ratified by the end of 2023.
In 2019, a US appeals court sided with AMZN in a similar transfer pricing case brought by IRS. That case revolved around whether Amazon had undervalued its IP when it transferred it to a subsidiary in Luxembourg in 2005. The appeals court determined that Amazon's actions were consistent with the transfer pricing rules in place at the time. However, it might have been deemed non-compliant with later regulations introduced in 2009.
In the European Union, authorities in 2016 ordered Apple to pay 13 billion euros ($14 billion) in back taxes over similar accounting practices. Yet, Brussels lost an appeal to Apple and is awaiting the outcome of a further appeal.
Apart from the investigation of Microsoft's tax payments between 2004 and 2013, the company is also undergoing an audit by IRS for its tax returns from 2014 to 2017.
In recent years, Microsoft has taken steps to reconfigure some of its tax arrangements, partly due to changes in US tax laws aimed at encouraging tech companies to bring their intellectual property (IP) back to the United States.
In 2021, Microsoft shifted certain IP from Puerto Rico to the United States, which allowed it to claim a $3.3 billion tax benefit. It reflected the impact of Global Intangible Low-Taxed Income tax implemented during the Trump administration.
The disclosure of IRS notices comes just under two weeks before Microsoft plans to announce its financial results for fiscal 2024's first quarter.
The Zacks Consensus Estimate for MSFT’s first-quarter fiscal 2024 revenues is pegged at $54.42 billion, indicating year-over-year growth of 8.57%. The consensus mark for earnings is pegged at $2.65 per share, suggesting a year-over-year increase of 12.77%.
Shares of this Zacks Rank #3 (Hold) company have gained 33.2% year to date compared with the Zacks Computer and Technology sector’s return of 33.7%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Microsoft is on the cusp of buying Activision Blizzard ATVI for $68.7 billion, ending its near two-year pursuit of the maker of Call of Duty, World of Warcraft and Candy Crush. The deal is expected to close on Oct 13.
However, despite the merger, popular titles such as Call of Duty: Modern Warfare 3 and Diablo 4 might not be made immediately available on Xbox Game Pass this year. Activision Blizzard plans to start bringing its games to the subscription service from 2024.
Microsoft says US has asked for $28.9 billion in audit dispute
Stephen Nellis
Wed, October 11, 2023
A man stands inside the Microsoft Experience Center in New York City
By Stephen Nellis
(Reuters) -Microsoft said on Wednesday the U.S. Internal Revenue Service (IRS) in September notified the company that it is seeking an additional tax payment of $28.9 billion, plus penalties and interest for tax years from 2004 to 2013.
Microsoft said the IRS notices relate to an ongoing dispute between the company and the U.S. tax authority, which is auditing how Microsoft allocated its profit among different countries and jurisdictions.
The Redmond, Washington-based company said it has since changed its practices so that "issues raised by the IRS are relevant to the past but not to our current practices," according to a Microsoft blog.
Microsoft said it believes that any taxes owed after the audit would be reduced by up to $10 billion based on tax laws passed by former President Donald Trump.
The company said it disagrees with the IRS's findings and plans to dispute them, first in an internal IRS proceeding and then later, if necessary, in courts.
The IRS told Reuters it is prevented by U.S. law from confirming or denying whether it is auditing any taxpayer.
(Reporting by Samrhitha Arunasalam in Bengaluru and Stephen Nellis in San FranciscoEditing by Deepa Babington and Matthew Lewis)
The IRS says Microsoft may owe about $29 billion in back taxes. Microsoft disagrees
AP Finance
Wed, October 11, 2023
The Microsoft logo is pictured at the Mobile World Congress 2023 in Barcelona, Spain, on March 2, 2023. The Internal Revenue Service says Microsoft owes the U.S. Treasury $28.9 billion in back taxes, plus penalties and interest, the company revealed Wednesday, Oct. 11, in a securities filing.
(AP Photo/Joan Mateu Parra, File)
SAN FRANCISCO (AP) — The Internal Revenue Service says Microsoft owes the U.S. Treasury $28.9 billion in back taxes, plus penalties and interest, the company revealed Wednesday in a securities filing.
That figure, which Microsoft disputes, stems from a long-running IRS probe into how Microsoft allocated its profits among countries and jurisdictions in the years 2004 to 2013. Critics of that practice, known as transfer pricing, argue that companies frequently use it to minimize their tax burden by reporting lower profits in high-tax countries and higher profits in lower-tax jurisdictions.
Microsoft, which is based in Redmond, Washington, said it followed IRS rules and will appeal the decision within the agency, a process expected to take several years. The company’s shares dropped slightly in aftermarket trading.
The IRS began an audit of Microsoft in 2007 that the agency described in federal court documents last year as “one of the largest in the Service’s history." Microsoft says it was recently notified by the IRS that the audit has ended, starting a new process to resolve a dispute over how much is owed.
Part of the long-running IRS investigation centered on how Microsoft structured a manufacturing facility starting in 2005 in the U.S. territory of Puerto Rico. The IRS has said Microsoft hired accounting firm KPMG to set up a cost-sharing arrangement with the Puerto Rican affiliate that shifted taxable revenue out of the U.S.
The IRS has also looked at other affiliates, including one that involved retail sales in Asia, according to court documents.
A blog post Wednesday from David Goff, Microsoft's corporate vice president for worldwide tax and customs, said the company has changed its corporate structure and practices since the years covered by the audit. But he said it's not uncommon for large multinationals to use cost-sharing arrangements, and that because Microsoft's subsidiaries shared in the costs of developing some intellectual property, they were also entitled to related profits.
Goff also said that the $28.9 billion sought by the IRS could be reduced by up to $10 billion because of taxes paid as a result of a 2017 tax law signed by then-President Donald Trump.
That figure, which Microsoft disputes, stems from a long-running IRS probe into how Microsoft allocated its profits among countries and jurisdictions in the years 2004 to 2013. Critics of that practice, known as transfer pricing, argue that companies frequently use it to minimize their tax burden by reporting lower profits in high-tax countries and higher profits in lower-tax jurisdictions.
Microsoft, which is based in Redmond, Washington, said it followed IRS rules and will appeal the decision within the agency, a process expected to take several years. The company’s shares dropped slightly in aftermarket trading.
The IRS began an audit of Microsoft in 2007 that the agency described in federal court documents last year as “one of the largest in the Service’s history." Microsoft says it was recently notified by the IRS that the audit has ended, starting a new process to resolve a dispute over how much is owed.
Part of the long-running IRS investigation centered on how Microsoft structured a manufacturing facility starting in 2005 in the U.S. territory of Puerto Rico. The IRS has said Microsoft hired accounting firm KPMG to set up a cost-sharing arrangement with the Puerto Rican affiliate that shifted taxable revenue out of the U.S.
The IRS has also looked at other affiliates, including one that involved retail sales in Asia, according to court documents.
A blog post Wednesday from David Goff, Microsoft's corporate vice president for worldwide tax and customs, said the company has changed its corporate structure and practices since the years covered by the audit. But he said it's not uncommon for large multinationals to use cost-sharing arrangements, and that because Microsoft's subsidiaries shared in the costs of developing some intellectual property, they were also entitled to related profits.
Goff also said that the $28.9 billion sought by the IRS could be reduced by up to $10 billion because of taxes paid as a result of a 2017 tax law signed by then-President Donald Trump.
Microsoft Plans to Contest IRS Claim It Owes $28.9 Billion in Back Taxes
Jackie Davalos
Wed, October 11, 2023
(Bloomberg) -- Microsoft Corp. will appeal a decision by the US Internal Revenue Service that the software maker owes at least $28.9 billion in taxes related to how it allocated income and expenses among global subsidiaries from 2004 to 2013.
The company said Wednesday in a regulatory filing that it disagreed with the “notices of proposed adjustment” to its federal tax filings and will appeal the decision.
The dispute centers on a 2012 IRS audit into transfer pricing, a method used by companies to shift profits to tax havens and avoid the US corporate tax rate. At the time, Microsoft had been moving billions of dollars in profits to such jurisdictions as Puerto Rico, a US territory that levies a much lower corporate rate.
The company has changed its corporate structure and practices since the years covered by the audit, so the issues raised by the IRS aren’t relevant to the way income is recorded currently, Daniel Goff, a Microsoft vice president, said in a blog post.
Goff wrote that Microsoft has been working with the IRS for almost a decade to address questions about how the company allocates income and expenses for tax purposes. The Redmond, Washington-based company said the proposed additional tax bill of $28.9 billion doesn’t include taxes paid under the Tax Cuts and Jobs Act of 2017, which could reduce the tally by as much as $10 billion.
“We strongly believe we have acted in accordance with IRS rules and regulations and that our position is supported by case law,” Goff said in the post. “We welcome the IRS’s conclusion of its audit phase which will provide us with the opportunity to work through these issues at IRS Appeals, a separate division of the IRS charged with resolving tax disputes.”
Microsoft shares were little changed in extended trading after closing at $332.42 in New York.
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