It looks like Microsoft can’t celebrate just yet despite staring down the potential acquisition of Activision Blizzard. Why? Because it finds itself in a multibillion-dollar showdown against an immovable object in the United States’ Internal Revenue Service.
According a report by CNBC, a recent Securities and Exchange Commission filing details allegations made by the IRS is claiming that Microsoft owes a staggering $28.9 billion in back taxes, plus penalties and interest, for the tax years from 2004 to 2013. The heart of the issue lies in Microsoft’s historical profit allocation among countries and taxing jurisdictions.
The debate pivots on the practice of “transfer pricing,” a legal mechanism that permits companies to allocate its profits and expenses between operations across diverse regions. This cost-sharing approach is employed by large multinational corporations to mirror their global business footprint. In the case of Microsoft, its subsidiaries participated in expenses related to developing some Intellectual Properties. Consequently, these subsidiaries also have a right to the associated profits. Nevertheless, detractors of this system posit that corporations often exploit it to reduce their tax liabilities by declaring reduced profits in nations with higher tax rates.
A core point of contention is Microsoft’s contention that the IRS’s proposed adjustments neglect payments made under the Tax Cuts and Jobs Act. This legislation, enacted in 2017, overhauled the tax code. Microsoft’s Daniel Goff, Corporate VP for Worldwide Tax and Customs, asserts that considering these payments could reduce the ultimate tax liability by up to $10 billion. Goff has been at the forefront of Microsoft’s response, stressing in a blog post that the company’s corporate structure and practices have evolved since the audit years in question, making the IRS’s concerns outdated. He further emphasized Microsoft’s belief in always adhering to IRS guidelines, noting the corporation’s substantial tax payments – over $67 billion since 2004.
The figures are indeed substantial, with Microsoft having paid almost $11 billion in income taxes last year alone. This is an 11.7% increment from the preceding year. As proof of its financial muscle, the company, valued at $2.5 trillion, posted a remarkable $56.2 billion in sales for the quarter ending June 30. This impressive fiscal trajectory is spurred by Microsoft’s continuous involvement in emerging tech and AI initiatives.
In the backdrop of this tax dispute is Microsoft’s aforementioned acquisition of Activision Blizzard, set to be finalized by October 13. The deal, worth $68.7 billion, further brings to light the company’s extensive cash reserves, although these might be significantly impacted if the tax allegations stand.
Both Microsoft and the IRS appear geared for a lengthy battle. Microsoft has explicitly expressed its disagreement with the “proposed adjustments” and is prepared to contest them. The company is looking to start an administrative appeal within the IRS – a process that could span several years. If an amicable resolution remains elusive, Microsoft is willing to take the matter to court.
While the magnitude of the claim has raised eyebrows, some analysts and observers suggest that this is merely the IRS’s initial strategy, following what was likely a prolonged and challenging audit. If Microsoft is ultimately deemed liable after the legal processes, experts believe they will settle their dues.
Ultimately, this situation will boil down to legal prowess and the ability to present a compelling argument. The decision will hinge on the strength of the respective cases and their alignment with existing tax laws and regulations.
Speaking of Microsoft, it appears that it will need to sit down with Activision Blizzard regarding the future of Diablo 4 and Call of Duty on the Game Pass. It’s believed that Microsoft won’t wait to bring its latest purchase’s best-selling titles to the popular subscription service.
