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Microsoft has received a demand from the Internal Revenue Service for $28.9 billion in back taxes, marking an escalation in one of the largest corporate tax disputes in history.
The imposition of additional taxes, along with penalties and interest on late payments, is the latest twist in a case that has long been the most prominent challenge to a common form of international tax planning used by many big U.S. technology companies to significantly reduce their profits. tax bill.
The software company said Wednesday it had received a notice from the Internal Revenue Service requiring it to adjust its tax liability from 2004-13. The agency has been investigating Microsoft’s use of transfer pricing, a practice that critics say is used by the company to unfairly shift profits to low-tax countries to minimize its liabilities.
Microsoft revealed more than a decade ago that it produces and distributes its software in regional hubs in Singapore, Dublin and Puerto Rico, allowing it to distribute profits in a way that helps reduce taxes.
Many U.S. technology companies have long positioned their intellectual property rights offshore, using the arrangement to argue that because some of the costs of creating or maintaining some of their most valuable assets are abroad, some of the profits associated with the technology should also be moved offshore. . Recognized there.
“Many large multinational companies use cost sharing because it reflects the global nature of their business,” Microsoft said this week.
Microsoft said it disagrees with the IRS’s latest tax demands and will “strongly challenge” the claims “through the IRS’s Office of Administrative Appeals,” a process that will take “several years.” It added that it would continue to challenge the IRS in court if necessary. It also said it would not set aside any additional reserves to pay tax claims.
Microsoft recently canceled some arrangements that had allowed it to report lower taxes for years, in part due to changes in U.S. tax law designed to encourage technology companies to bring their intellectual property rights back to U.S. shores. For example, the company said it transferred “certain” intellectual property rights from Puerto Rico to the United States in mid-2021, allowing it to receive $3.3 billion in tax benefits to reflect the impact of the so-called GILTI tax implemented during the Trump administration.
In 2019, a U.S. appeals court sided with Amazon in a similar transfer pricing case case Brought to you by the IRS. The case focuses on whether Amazon artificially reduced the value of its intellectual property when it transferred it to a Luxembourg subsidiary in 2005. The appeals court ruled that Amazon’s move was reasonable under the transfer pricing rules in effect at the time, even though those rules violated the latest regulations enacted in 2009.
In addition to investigating its 2004-13 tax status, the IRS is also auditing its 2014-17 tax returns.
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