Sen.
Warren’s letter, addressed to KPMG Global Chair and Chief Executive William Thomas, asks for details about the firm’s tax advice to Microsoft after the IRS claimed the tech company owes $28.9 billion in unpaid taxes for 2004-2013. The letter also was signed by Sens.
Tax fairness advocates welcomed the letter, telling Bloomberg Tax it signaled a need and an opportunity for officials to hold accounting firms—not just companies—accountable for corporate tax structures and strategies. But other tax experts say that KPMG was coloring inside the lines of public policy during the 10-year audit period, before the international tax community began draft rules on the transfer pricing of intellectual property.
Transfer pricing involves the valuation of transactions between related companies.
“I think it’s clear that there’s a big problem and the Microsoft case is another example. I hope it is a wake-up call for the profession,” Zorka Milin, policy director at the FACT Coalition, said of Warren’s letter and large accounting firms. “They’re more than just tax advisers, they’re more than just passive. They’re the ones coming up with these tax structures and convincing the corporate executive clients to go along.”
Regardless of the IRS claim or Warren’s letter, observers said, these developments are just the latest in a long history of scrutiny the Big Four accounting firms—
“There’s almost nothing that the Big Four firms can do that would generate reputational risk that would be existentially harmful to them,” said Jim Peterson, a lawyer and author of “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms.”
KPMG and Microsoft declined to comment for this story.
Valuation Fight
The IRS’s claim against Microsoft stems from a conflict about the company’s transfer pricing method for its intellectual property.
“The main disagreement is the way Microsoft allocated profits during this time period among countries and jurisdictions,” Daniel Goff, Microsoft’s corporate vice president of worldwide tax and customs, said in a company blog post in October.
Microsoft has vowed to challenge the IRS’s tax claim.
Warren’s letter cited a report from ProPublica finding the company sold valuable intellectual property to a small factory in Puerto Rico for a price well below the IP’s value.
“As a result, Microsoft reported extraordinary profits in Puerto Rico, where KPMG had secured the company a near-zero percent tax rate,” the senator wrote. Warren called the firm’s alleged actions “deeply disturbing” and argued KPMG aided Microsoft in rewarding “shareholders and executives” while keeping revenue out of the hands of the government that could be used to fund key programs.
Steven Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, said that KPMG’s actions “seem aggressive and potentially over-the-line,” but not surprising, given the histories of large, global accounting firms. .
“I guess the thing that I find troubling about Warren’s letter is how it echoes the aggressiveness of KPMG from the ‘90s,” Rosenthal, said.
In 2005, KPMG paid out $456 million in fines, restitution, and penalties to the US government in connection with the design and marketing of fraudulent tax shelters.
Almost 10 years later, Ernst & Young reached a $123 million settlement with the federal government after admitting “wrongful conduct” by some of its partners and employees in connection with a tax shelter fraud investigation.
Rosenthal said the Big Four have a global reach and are “ideally situated” to provide advantageous tax services to their clients.
“And the question in my mind is how can the government stop this kind of activity?” he said.
A Point in Time
But other tax specialists argue that KPMG’s advisers were working within the confines of the laws and the standards that existed during the decade the IRS said Microsoft owes money.
“Back to 2004 and even earlier, this is just normal planning, and they’re taking advantage of public policy,” William Byrnes, professor of law at Texas A&M University, said by email.
Byrnes said that guidelines to value intangible property in transfer pricing—such as a vaccine formula or a segment of computer coding—didn’t yet exist. Later guidelines include the OECD-G20 work on base erosion and profit shifting that began in 2013, the 2021 OECD-led international tax deal, and the global intangible low-taxed income, or GILTI, regime passed as part of Republicans’ 2017 tax law.
Multinational companies use base erosion and profit shifting, or BEPS, to take advantage of countries’ different rules and minimize tax bills. About 10 years ago, the OECD, and delegates from over 100 countries came together to limit profit shifting, coming up with 15 action items, or tools that governments can use to combat tax avoidance strategies. Most recently, the fight against BEPS has resulted in a two-part global tax deal: a reallocation of large multinational companies’ profits, known as Pillar One, and a 15% global minimum tax, known as Pillar Two.
The GILTI tax included in the 2017 Tax Cuts and Jobs Act imposed a global minimum tax on foreign earnings.
Applying these standards to a period where BEPS and GILTI didn’t exist is like writing a law stating a “signal blinker must be switched on 10 seconds before turning or making lane changes, and then retroactively holding drivers accountable to it via traffic video camera searches,” Byrnes said.
The author Peterson added that a tax consulting firm’s main job is to minimize a company’s tax obligations.
“Any consulting practice that is given the opportunity to look at areas of judgment will exercise that judgment. And, in the interest of your client, they’ll press it,” he said.
But Warren was adamant in her quest for answers from KPMG.
“Let’s be clear: the largest IRS audit ever found that Microsoft owes $28.9 billion in unpaid taxes because it engaged in an egregious KPMG-designed tax evasion scheme,” Warren said in a separate emailed statement to Bloomberg Tax. “I want answers from KPMG about its work helping billionaire corporations skirt our tax laws and avoid paying their fair share.”
Sanders didn’t immediately respond to a request for comment. A Whitehouse spokesperson referred questions on the letter to Warren.
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