Tech giant Microsoft (NASDAQ:MSFT) has opposed the U.S. Internal Revenue Service (IRS) demand for payment of $28.9 billion in back taxes. The IRS has issued a notice stating that Microsoft owes $28.9 billion in back taxes, including interest and penalties for late payment, for the period 2004-2013. The amount marks one of the biggest corporate tax penalties, and the case would also be one of the largest corporate tax conflicts to date.
Microsoft stated that it is prepared to “vigorously contest” the claims in the IRS Appeals Office. Should matters get worse, MSFT is also ready to challenge the IRS decision in court. Moreover, Microsoft added that it does not plan to shell out any extra reserves to cover the tax claims. Furthermore, MSFT noted that the proposed additional taxes of $28.9 billion did not include taxes paid under the Tax Cuts and Jobs Act of 2017. The inclusion could reduce the sum by roughly $10 billion.
The Debate on Transfer Pricing Mechanisms
Larger American tech companies with a global footprint often resort to transfer pricing mechanisms to save taxes. The mechanism helps pass on some of the profits to tax-haven countries to minimize effective taxes. The IRS has been investigating Microsoft’s transfer pricing practices for the said period and alleges that the company unfairly passed on its profits to Puerto Rico during the period.
In its defense, Microsoft noted that during the decade from 2004 to 2013, it produced and distributed its software in regional hubs such as Singapore, Dublin, and Puerto Rico. Thus, it could rightly transfer its profits to these nations and save its tax liabilities. Several U.S. companies follow the same technique. They argue that since the costs associated with building and marketing the technology were undertaken in different regions, they could also transfer the profits there.
Even so, owing to changes in U.S. tax laws, Microsoft recently changed its transfer pricing techniques. In mid-2021, it transferred certain intellectual property (IP) assets from Puerto Rico back to the U.S. This also means that the issues raised by the IRS are not relevant to its current tax planning practices. The IRS is also separately auditing Microsoft’s tax returns for the period 2014-2017.
Is It Good to Invest in Microsoft Stock?
Wall Street is indeed bullish about Microsoft’s stock trajectory. On TipRanks, MSFT earns a Strong Buy consensus rating. This is based on a sweeping 30 Buys and four Hold ratings received during the last three months. Also, the average Microsoft price target of $397.19 implies 19.5% upside potential from current levels. MSFT stock has gained 39.7% so far this year.
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