Microsoft Corp. is bracing itself for a lengthy battle with the U.S. Internal Revenue Service over billions of dollars in back taxes that it’s said to owe.
In a securities filing and blog post today, Microsoft revealed it’s planning to contest an IRS request to pay an additional $28.9 billion in additional taxes, plus interest and penalties, that cover a 10-year period from 2004 to 2013.
The IRS reportedly ordered Microsoft to pay the amount after conducting a multiyear audit into its past accounting affairs. It’s said that the agency had issues with how Microsoft allocated its profits among various countries and jurisdictions over the period in question.
Not surprisingly, Microsoft isn’t about to hand over a lump sum that’s larger than the annual budget for the National Aeronautics and Space Administration without a fight. Rather, the company said it will “vigorously contest” the IRS request via administrative appeals and, if necessary, even take the matter to court. As a result, it’s likely that the matter won’t be resolved for several years yet.
Microsoft’s statement and filing came after the IRS sent it a Notices of Proposed Adjustment for the 10-year period, requesting the additional tax due to “intercompany transfer pricing”.
In the blog post, Microsoft’s corporate vice president of worldwide tax and customs, Daniel Goff, pointed out that the company had been working with the IRS for almost a decade to address the way it allocated income and expenses for the period in question. He explained that the company had changed its corporate structure and practices since the years covered by the audit, and so the issues raised by the IRS are not relevant to its current accounting 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,” Goff said. “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 explained that the way Microsoft allocated its profits among different countries and jurisdictions is known as transfer pricing. He said the IRS has long established regulations that allow companies to use a specific arrangement, called cost-sharing, for transfer pricing. “Many large multinationals use cost-sharing because it reflects the global nature of their business,” Goff continued. “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.”
Goff said Microsoft will continue to work with the IRS and expressed hope that they would be able to reach a “mutual resolution” over the issue in the coming years.
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