The IRS in Action on Transfer Pricing
On October 11, 2023, Microsoft Corporation (Microsoft) announced that it received a series of Notices of Proposed Adjustment (NOPAs) from the United States Internal Revenue Service (IRS) related to a decade-long transfer pricing tax audit for the tax years 2004 to 2013. Throughout the audit, the IRS focused on Microsoft's intercompany transfer pricing, particularly the cost-sharing arrangement with its Puerto Rican affiliate, which Microsoft and its subsidiary shared the costs of developing certain intellectual property. In the NOPAs, the IRS stated it disagrees with Microsoft’s transfer pricing structure related to the cost-sharing arrangement and argues Microsoft shifted taxable profits outside the United States, thus owing an additional $28.9 billion in tax for 2004 to 2013, plus penalties and interest.
Microsoft confidently believes it has acted in accordance with the IRS rules and regulations over the audit period and stated it strongly disagrees with the proposed adjustments of $28.9 billion. Microsoft further believes the proposed tax adjustments could be reduced up to $10 billion based on the taxes paid by Microsoft under the Tax Cuts and Jobs Act, which was further explained by Microsoft’s corporate vice president, worldwide tax and customs, Daniel Goff, in the Microsoft on the Issues Blog. Microsoft stated it will pursue an appeal with the IRS, which is expected to take several years to complete.
Weaver will continue to monitor Microsoft’s IRS appeals process in the upcoming years and how the outcome will impact the transfer pricing environment.
IRS New Initiatives Update
On October 23, 2023, the IRS announced new initiatives to support and strengthen the Inflation Reduction Act (IRA) resources and investments. The new initiatives comprise improving taxpayer customer service by opening additional Taxpayer Assistance Centers and Community Assistance Visits and modernizing the technology infrastructure to digitalize and improve the filing process for the taxpayer. More notably, the IRS is prioritizing its efforts on cross-border compliance to ensure large corporations, high-income, high-wealth individuals and complex partnerships pay taxes owed. Utilizing artificial intelligence and data analytics, the IRS is now taking aggressive actions to identify non-compliant taxpayers that have abused tax breaks, failed to pay recognized tax debt or have not filed their taxes.
The IRS is increasing compliance efforts related to cross-border transactions and transfer pricing to ensure foreign companies are paying their fair share of tax in the U.S. The IRS recently sent compliance alerts to 150 U.S. subsidiaries of large foreign corporations that distribute goods into the U.S. and do not generate appropriate profits from their U.S. activities. This initiative will increase the number of transfer pricing audits for corporate taxpayers and follow the IRS trend of focusing on loss making inbound distributors as an area of compliance risk for the government.
Weaver anticipates this focus on inbound cross-border transactions will drive more awareness or compliance efforts for foreign corporations that have been complacent in the past in relation to their transfer pricing.
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