US IRS says Microsoft owes $29 bn in back taxes, company disagrees

Washington, Oct 12

The US Internal Revenue Service (IRS) has informed tech giant Microsoft that it owes back taxes of $28.9 billion along with "penalties and interest" for the tax years 2004 through 2013.

The IRS sent Microsoft a series of Notices of Proposed Adjustment (NOPAs), sharing for the first time detailed information and explanations of their views about the issues in question.

The IRS said Microsoft owes an additional $28.9 billion in tax for 2004 to 2013, plus penalties and interest. The company said in a blog post late on Wednesday that the IRS's proposed adjustments do not represent a final determination and it will "vigorously contest" the numbers.

"Microsoft disagrees with these proposed adjustments and will pursue an appeal within the IRS, a process expected to take several years. We believe we have always followed the IRS’ rules and paid the taxes we owe in the US and around the world," said the company.

Microsoft said it 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. "We have changed our corporate structure and practices since the years covered by the audit, and as a result, the issues raised by the IRS are relevant to the past but not to our current practices," said the company.

The main disagreement is 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.

"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," the company argued.

Microsoft said it welcomes 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".

"We will continue to work with the IRS and hope to reach a mutual resolution to this issue over the coming years," the company added.