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- Microsoft recently revealed that the IRS said it owes nearly $29 billion in back taxes.
- It's a glimpse into how much companies might be moving profits around to avoid paying taxes.
- It also comes as the IRS is newly resourced to crack down on enforcement.
The IRS says Microsoft owes nearly $29 billion in back taxes — and it might signal a greater spotlight on how much tech titans are paying in taxes.
Microsoft's case hinges on whether it funneled profits through a factory in Puerto Rico that manufactured CD's of the company's famed software, by selling its intellectual property to that small factory. Under a deal with Puerto Rico, those profits were taxed at an almost 0% rate, as ProPublica reported; the IRS says that's a form of tax dodging since it avoided mainland US taxes.
Microsoft's case is not new — the $28.9 billion figure is the end result of an historic, years-long audit of the software giant's taxes from 2004 to 2013. As Microsoft notes, it also likely kicks off more years of appeals and hashing out what, exactly, Microsoft should pay. Microsoft has said that it "disagrees with these proposed adjustments" and that the ultimate bill could be $10 billion less, when accounting for taxes paid under Trump's 2017 Tax Cuts and Jobs Act.
"We believe we have always followed the IRS' rules and paid the taxes we owe in the U.S. and around the world," Daniel Goff, Microsoft's corporate vice president for worldwide tax and customs, wrote in a blog post. "Microsoft historically has been one of the top U.S. corporate income taxpayers. Since 2004, we have paid over $67 billion in taxes to the U.S."
What it means for other tech giants
Microsoft isn't alone. While it's impossible to know with precision just how prevalent the practice of profit shifting, where companies move revenues and profits to lower-tax regions, is, "what the IRS is signaling is that they're more common than not," Natasha Sarin, an associate professor of law at Yale Law School and former counselor to Treasury Secretary Janet Yellen, told Insider.
"They're not sort of particularly small or unknown types of corporations engaged in this behavior," Sarin, whose work at the Treasury Department focused on narrowing gaps between taxes paid and owed, said. "These are the behemoths of the American economy."
A working paper from Ludvig Wier, an economist and Head of Secretariat the Danish Ministry of Finance, and UC Berkeley economist Gabriel Zucman found that the share of corporate profits recorded in a country that doesn't contain the company's headquarters more than quadrupled since 1975. According to the paper, foreign firms registered 16 times as much value in profits in Puerto Rico as wages paid to employees there.
In 2019 alone, the authors estimate that, globally, $969 billion in profits were shifted to tax havens. In the US, around $165 billion in profits were shifted, and the US saw a 16% loss in corporate tax revenue.
Rich and large corporations are "evasion advantaged" in the economy, according to Sarin. "That has to be something that we care about, not just again from a revenue perspective, but also from an equity perspective."
Sarin said that the corporate tax gap — the gap between how much companies should be paying and actually are — is around $40 billion annually.
"The line between avoidance and evasion is pretty blurry, but it's hard to know until the IRS starts to be able to undertake activities like this," she said.
A newly resourced IRS has started to crack down on tax evasion more broadly after years of underfunding, with funds from the Inflation Reduction Act specifically allocated towards increased enforcement efforts.
"A real impediment to the kind of equity I think we all would like to see —or many of us would like to see in the functioning of the economy — is tax administration. It's not like we don't know the size or shape of the problem, and it's not like we don't know the solution to the problem," Sarin said. "The solution to the problem is resourcing the tax administrator so they can make sure that those types of inequities are not perpetuated by the behavior of an elite few."