Microsoft Corp (MSFT)

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Analysts see little impact on finances as IRS says Microsoft owes $28.9B in back taxes
By: Investing | October 12, 2023

Microsoft (NASDAQ:MSFT) has revealed in an 8-K filing that the IRS (Internal Revenue Service) has notified the company of a $28.9 billion back tax claim, along with penalties and interest, for the tax years 2004 to 2013.

This dispute revolves around how Microsoft allocated profits across various countries and jurisdictions during that period. Microsoft also notes that the proposed adjustments are taxes paid under the Tax Cuts and Jobs Act (TCJA), which could potentially reduce the final tax liability under the audit by up to $10B.

The company intends to appeal the IRS's claim, and the company does not anticipate any immediate changes in its tax liabilities, as the IRS Appeals process is expected to take several years to complete.

“Microsoft disagrees with these proposed adjustments and will pursue an appeal within the IRS, a process expected to take several years. We believe we have always followed the IRS’ rules and paid the taxes we owe in the U.S. and around the world,” the company said in an update.

“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.”

MSFT shares fell 0.5% on the news.

Analysts at BofA don’t expect to see material impact on FY24/25 EPS or FCF.

“The $28.9 billion represents 111% of Microsoft’s deferred income tax liabilities and 45% of the company’s net cash balance… We do not expect a material impact to near FY24 or FY25 GAAP EPS or FCF,” the analysts wrote.

Analysts at KeyBanc added:

“In terms of financial impact to Microsoft assuming the IRS's stance is held up, timing of payment is uncertain along with the final calculated amount, but if we assume the full $28.9B tax payment is made in FY25, this would imply lost interest income of $800M-$1,200M (assuming a 3-4% interest rate) or 1% reduction in annual net income.”

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