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.