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IRS claims Microsoft owes nearly $29 billion in back taxes; Microsoft will appeal

Microsoft has filed a new notice with the US Securities and Exchange Commission. The notice offers an alert that the company has been informed by the US Internal Revenue Service of what it called Notices of Proposed Adjustment (“NOPAs”). According to that agency, Microsoft owes back taxes that total $28.9 billion for the years between 2004 to 2013.

In the filing, Microsoft states:

As of September 30, 2023, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the NOPAs through the IRS’s administrative appeals office and, if necessary, judicial proceedings.

Daniel Goff, Microsoft's Corporate Vice President for Worldwide Tax and Customs, offered some more info about its dispute with the IRS in a new blog post. He stated:

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.

Goff claims that Microsoft has made changes to both its practices and its corporate structure in the years since the time period of the IRS's audit. However, he claims that the agency has not taken into account taxes that Microsoft says were paid under the Tax Cuts and Jobs Act (TCJA). He says that the amount would cut the IRS's estimate of taxes owed by Microsoft by as much as $10 billion.

Goff says that Microsoft hopes to work with the IRS "to reach a mutual resolution to this issue". However, he does say that this dispute could take years to conclude through the appeals process.

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