Microsoft receives $29B IRS tax notices for decade-old transactions

Microsoft is planning to appeal a claim of $28.9 billion in back taxes that it has received from the US Internal Revenue Service (IRS), the company said on Wednesday.

The Notices of Proposed Adjustment were received on September 26, related to intercompany pricing or transfer pricing, Microsoft said in a regulatory filing. The IRS is seeking an additional tax payment of $28.9 billion, plus penalties and interest for the period between 2004 and 2013.

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

Intercompany pricing or transfer pricing is a way for companies to allocate their profits between their operations in different countries and jurisdictions.

The IRS claims that Microsoft may have breached its prescribed regulations for transfer pricing.

“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,” Daniel Goff, Microsoft’s corporate vice president of worldwide tax and customs, wrote in a blog post, which was attached to the SEC filing.

The notices are the first detailed information that Microsoft has received from the IRS about the agency’s explanations of their views about the issues in question, Goff said.

“The IRS’s proposed adjustments do not represent a final determination. Not reflected in the proposed adjustments are taxes paid by Microsoft under the Tax Cuts and Jobs Act (TCJA), which could decrease the final tax owed under the audit by up to $10 billion,” Goff wrote.

Microsoft, which claims to have followed all the IRS’ rules and paid the taxes it owed in the US and around the world, is planning to move the IRS’ Appeals division.

The company claims to have paid over $67 billion in taxes in the US since 2024.

The IRS Appeals process is expected to take several years to complete, Goff wrote, adding that if the parties are unable to come to an agreement, Microsoft would be looking to move courts over the issue.

In the regulatory filing, Microsoft said that presently it doesn’t see any impact on its tax contingencies arising from these issues within the next 12 months.