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Microsoft, like many companies, allegedly uses a complex web of overseas subsidiaries to shield itself from U.S. taxes. This is accomplished through "transfer pricing," which allows subsidiaries of the same company to buy and sell with each other in a way that maximizes profit for the parent company.
The IRS is none too pleased with all this and has begun to audit companies' transfer prices. Well, Microsoft is none too pleased with that, and filed a complaint in federal court yesterday to get the IRS to disclose transfer pricing documents.
Open Your Books
Specifically, Microsoft's complaint deals with the IRS' retention of the private law firm Quinn Emanuel, which assisted the IRS in its transfer pricing audits. Microsoft claims that it filed Freedom of Information Act requests, but the IRS failed to respond within the 20-day time limit mandated by FOIA. (Well, sort of. The IRS did respond, but only to say it wouldn't be able to meet the 20-day deadline.)
Microsoft wants all the documents that pertain to Quinn Emanuel's examination of Microsoft 2004-2009 taxes, including its service agreements with the IRS. It's not clear why Microsoft wants this information, other than that it can demand it. Keith Fogg of Forbes' Procedurally Taxing blog notes that "the IRS has not previously hired an expert to participate in the examination of a return but rather has hired experts to assist with discreet issues which turned up during the audit."
The Double Irish
Transfer pricing is one way corporations lower their tax liability. Through colorfully named schemes like "the Double Irish" or "the Dutch Sandwich," corporations route their revenue through subsidiaries in countries like Ireland or the Netherlands, which have extremely low corporate taxes and allow foreign subsidiaries to operate there. The corporations' U.S. alter-egos show relatively little revenue, resulting in a low tax bill. Bloomberg reports that this allowed Microsoft, for example, to save $29.6 billion in U.S. taxes last year.
Thanks to increased media attention focused on transfer pricing arrangements, the IRS taken more interest in companies like Microsoft, Apple, and Google, all of which take advantage of these tax loopholes. "Google credited its Irish office with the majority of its non-U.S. sales revenue -- and then shuttled that money through various subsidiaries located in Ireland and other countries to save billions in taxes," reported NPR's Planet Money.
It could be the case that corporations engaged in complex tax strategies hoped that the IRS lacked the expertise or personnel to audit them if an audit ever became necessary. Retaining experts like those found at a business litigation firm could be the IRS' response, especially when the company being audited is as huge as Microsoft.