The company announced the IRS’s claims Wednesday and said it will appeal them.
It’s the latest tech company the IRS has gone after for additional tax dollars it believes were left unpaid due to improper transfer pricing—the pricing of goods and services exchanged within a multinational group. Governments seek to have these transactions priced as if they were taking place between unrelated companies, at arm’s length, to reduce tax avoidance.
The IRS’s track record on collecting the full amounts from these tech giants hasn’t been good—particularly when they center around issues of valuing intellectual property over a series of years.
“The IRS keeps losing these cases,” said Andrew Silverman, a Bloomberg Intelligence tax policy analyst. “It’s hard to figure out what the value of IP is now. It’s hard to value the IP then. Who is the IRS to say they know the value of the IP better than the company that created it?”
1. What is Microsoft alleged to have done?
At issue is the company’s transfer pricing. In a blog post, Microsoft said the IRS disagreed with the way Microsoft priced its transactions and sent proposed adjustments that tally up to the $28.9 billion. The claims stem from an audit the agency conducted from 2004 to 2013.
The company denies owing the money and said it will appeal the IRS claims, a process that could take years. Microsoft also said the IRS failed to factor in taxes the company paid as part of the Tax Cuts and Jobs Act, which would lower that amount by approximately $10 billion.
Companies have used transfer pricing for years, moving assets to other countries and jurisdictions—at times for better tax treatment. It’s unclear where exactly the IRS is taking issue with Microsoft’s transfer pricing activities, and the company did not go into details in filings or in the blog post responding to the notice.
2. How are the company’s chances in fighting these IRS claims?
Pretty good. Initial reactions from Bloomberg Intelligence analysts is that the company could pay much less than the full amount, as has often happened when tech companies have challenged IRS transfer pricing claims in the past—and any payments it could have to make are years away, after the case works its way through court cases and appeals.
The IRS claims against Microsoft come after tech companies continue wracking up wins against IRS transfer pricing claims, successfully defending valuations of intangible assets against attempted adjustments by auditors.
Tech firms frequently have flexibility moving around intangible or hard-to-value assets such as intellectual property.
Much of the case likely will fall under older regulations concerning intangible property that gave companies such as Microsoft more leeway. In 2009, Treasury released temporary regulations, and 2017 tax law changes tightened those rules.
3. Didn’t Facebook get dinged for the same thing?
Yes. Meta, the parent company of Facebook, wrapped up its first trial with the IRS in August over a $9 billion claim from the agency. A ruling on the case is expected next year, and BI analysts expect Meta largely will prevail in this round, though it may have to pay a smaller amount. They also expect years of appeals before any money is paid out.
And it’s not just Meta.
Silverman traces the agency’s losing streak back to tech and semiconductor company Xilinx, Inc.'s 2010 win against a transfer pricing claim.
4. Why are companies beating the transfer pricing rap?
Tech companies often deal in intangibles, such as IP, which can be hard to put a precise dollar figure on.
Manufacturers or companies dealing in more traditional or tangible assets, meanwhile, are easier for the IRS to nail down in court.
“In Meta, Amazon, and now in Microsoft, the IRS faces the nearly impossible task of proving something vastly different: that the IP transferred away from the US was known to be valuable when it was sent offshore,” Silverman said. “Unless the IRS has a smoking gun email, which is unlikely, the government is facing an impossible task.”
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