(CTN News) – It has been revealed by the Internal Revenue Service that Microsoft owes the U.S. federal government $28.9 billion in back taxes, plus penalties and interest, the company revealed in a filing with the SEC on Wednesday.
The figure, which Microsoft disputes, is the result of an IRS investigation that dates back to 2004 into how Microsoft allocated its profits to countries and jurisdictions between the years 2004 and 2013.
It is commonly argued that companies use this practice, which is known as transfer pricing, to minimize their tax burden as it allows them to report a lower profit in a high-tax country and a higher profit in a low-tax country in order to minimize their tax burden.
According to Microsoft, a software giant based in Redmond, Washington, said it complied with IRS rules and will appeal the decision within the IRS, a process that is expected to take several years to complete. In the aftermarket trading of the company’s shares, the shares dropped by a small amount.
The IRS began an audit of Microsoft in 2007 that it described in court documents last year as “one of the largest in its history”. According to a recent letter from Microsoft, the IRS notified that the audit had ended, resulting in a new process for resolving the dispute.
Among the subjects of the long-running IRS investigation was how Microsoft structured a manufacturing facility in the U.S. territory of Puerto Rico beginning in 2005.
According to the IRS, Microsoft hired the accounting firm KPMG to negotiate a cost-sharing arrangement with its Puerto Rican affiliate that shifted taxable revenue out of the United States into the Puerto Rican affiliate.
According to court documents, the Internal Revenue Service has also investigated other affiliates, including one that was involved in retail sales in Asia, according to the documents.
Microsoft’s corporate vice president for worldwide tax and customs, David Goff, announced in a blog post published on Wednesday that the company has changed its corporate structure and practices since the years covered by the audit.
Despite this, he said it’s not uncommon for large multinational companies to use cost-sharing arrangements, and because Microsoft’s subsidiaries shared in the costs of developing some intellectual property, they were also entitled to share in the profits coming from it.
Aside from that, Goff said that the $28.9 billion sought by the IRS could be reduced by the IRS by up to $10 billion as a result of income tax payments made as a result of a 2017 tax law signed by then-President Donald Trump at the time.