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Microsoft, the world’s largest software company, is facing a massive tax bill from the Internal Revenue Service (IRS) for allegedly underreporting its profits in different countries and jurisdictions.
According to a securities filing on Wednesday, the IRS has issued Notices of Proposed Adjustment to Microsoft for an additional tax payment of $28.9 billion, plus penalties and interest, for the years 2004 to 2013.
The IRS claims that Microsoft did not allocate its profits properly among various regions where it operates, and instead shifted them to lower-tax jurisdictions to avoid paying higher taxes in the US and other countries.
A long-running dispute
This is not the first time that Microsoft and the IRS have clashed over the company’s tax practices. The dispute has been going on for years, and involves complex issues of transfer pricing, which is how multinational corporations value transactions between their subsidiaries in different countries.
Transfer pricing is a common and legal practice, but it can also be abused to manipulate profits and evade taxes. The IRS has been cracking down on such practices, especially among tech giants like Microsoft, Apple, Google, and Facebook, which have large overseas operations and intellectual property assets.
Microsoft has maintained that it has always followed the IRS’s rules and paid the taxes it owes in the US and around the world. The company also said that it has changed its practices since 2013, so that the issues raised by the IRS are relevant to the past but not to its current operations.
A potential impact on Microsoft’s finances
The $28.9 billion tax bill is a significant amount for Microsoft, which reported a net income of $61.3 billion for its fiscal year 2023. However, the company said that it believes its allowances for income tax contingencies are adequate as of Sept. 30, 2023.
Microsoft also said that it expects that any taxes owed after the audit would be reduced by up to $10 billion based on the Tax Cuts and Jobs Act of 2017, which lowered the corporate tax rate in the US and allowed companies to repatriate their foreign earnings at a lower rate.
The final outcome of the dispute is uncertain and could take years to resolve. Microsoft said it will pursue an appeal within the IRS, which could last several years, and then seek judicial review if necessary. The company also said it will continue to cooperate with the IRS and provide information as requested.
Microsoft’s shares dropped slightly in aftermarket trading on Wednesday, falling $1.42 to $331. Analysts said that the tax issue is unlikely to have a major impact on Microsoft’s stock performance or growth prospects, as the company has a strong balance sheet and cash flow.
A broader issue for tech companies
Microsoft is not the only tech company that has faced scrutiny from tax authorities around the world. In recent years, several tech giants have been accused of using aggressive tax strategies to minimize their tax liabilities in various markets.
For example, Apple was ordered by the European Commission in 2016 to pay $14.5 billion in back taxes to Ireland, where it had a low-tax arrangement with the government. Google agreed to pay $1 billion in back taxes and fines to France in 2019, after a four-year investigation into its tax practices. Facebook settled a $2 billion tax dispute with the IRS in 2020, over how it valued its intellectual property transferred to Ireland in 2010.
These cases have raised questions about how tech companies should be taxed in an increasingly digitalized and globalized economy. Some countries have proposed or implemented digital taxes on tech companies’ revenues or profits generated in their jurisdictions, while others have called for a global minimum tax or a unified approach to taxing digital services.
The issue of fair taxation of tech companies is likely to remain a hot topic for policymakers, regulators, and investors in the coming years. As for Microsoft, it will have to deal with its own tax challenge from the IRS, which could have implications for its financial results and reputation.
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