The problem with transfer pricing is that there is no correct amount. We maintain this conceit that there is a sufficiently exact "fair market value" for transfers between subsidiaries in different jurisdictions and therefore we can calculate how much of a company's profits are attributable to each one for tax purposes.
Meanwhile the bulk of Microsoft's profits in the years in question were attributable to global market power downstream of anti-competitive practices.
If they had engaged their US workers through a staffing firm instead of employing them directly, would the staffing firm have made billions of dollars? No way. If they engaged an external marketing firm to handle enterprise sales in Europe, would the marketing firm have ended up with the lion's share of their profits? Not bloody likely. The factory in Puerto Rico where they stamp the CDs is just as valid (i.e. just as farfetched) as any of the others because it obviously wasn't any of them. It was the fact that zillions of companies and individuals were locked into Windows and Office, which isn't something that exists in a specific jurisdiction.
Microsoft is presumably going to argue that the small operation in Puerto Rico was the entity that held ownership of their copyrights, which really is (via the anti-competitive practices) the thing responsible for nearly all of their profits. That aggravates the IRS because it's easy to move into any jurisdiction you want, which would make them want to argue that it's ridiculous for a small CD factory to be responsible for billions in profits, and it is ridiculous, but that's the end result of taxing "profit" when the thing that generates the profit is so easy to move. The ridiculous outcome is the result of a tax code that imposes a method of taxation which is inherently subject to such arbitrary manipulation.
I mean, serious question: Suppose assigning that much to Puerto Rico is nonsensical. Microsoft has offices on six continents. What's the IRS case that the profit should then be assigned to the US in the alternative rather than anywhere else in the world?
If you take that into court, the judge then has to maintain the facade that people are being asked to do something serious instead of something capricious and incoherent. Then someone will win based on a justification that will have been made up after the fact and either the IRS will have wasted a lot of taxpayer money in order to lose, or they'll have wasted a lot of taxpayer money they still shouldn't have had to spend because the law shouldn't be this ambiguous, in order to extract a small minority of the money that multinational companies didn't pay when purely domestic ones did.
IRS enforcement is a hopeless tool for that. "Net additional revenue" is not only not guaranteed, it's a false dichotomy. The real way you get them to pay the same amount as other companies is by changing to a method of taxation that isn't subject to transfer pricing.
Meanwhile the bulk of Microsoft's profits in the years in question were attributable to global market power downstream of anti-competitive practices.
If they had engaged their US workers through a staffing firm instead of employing them directly, would the staffing firm have made billions of dollars? No way. If they engaged an external marketing firm to handle enterprise sales in Europe, would the marketing firm have ended up with the lion's share of their profits? Not bloody likely. The factory in Puerto Rico where they stamp the CDs is just as valid (i.e. just as farfetched) as any of the others because it obviously wasn't any of them. It was the fact that zillions of companies and individuals were locked into Windows and Office, which isn't something that exists in a specific jurisdiction.
Microsoft is presumably going to argue that the small operation in Puerto Rico was the entity that held ownership of their copyrights, which really is (via the anti-competitive practices) the thing responsible for nearly all of their profits. That aggravates the IRS because it's easy to move into any jurisdiction you want, which would make them want to argue that it's ridiculous for a small CD factory to be responsible for billions in profits, and it is ridiculous, but that's the end result of taxing "profit" when the thing that generates the profit is so easy to move. The ridiculous outcome is the result of a tax code that imposes a method of taxation which is inherently subject to such arbitrary manipulation.
I mean, serious question: Suppose assigning that much to Puerto Rico is nonsensical. Microsoft has offices on six continents. What's the IRS case that the profit should then be assigned to the US in the alternative rather than anywhere else in the world?
If you take that into court, the judge then has to maintain the facade that people are being asked to do something serious instead of something capricious and incoherent. Then someone will win based on a justification that will have been made up after the fact and either the IRS will have wasted a lot of taxpayer money in order to lose, or they'll have wasted a lot of taxpayer money they still shouldn't have had to spend because the law shouldn't be this ambiguous, in order to extract a small minority of the money that multinational companies didn't pay when purely domestic ones did.
IRS enforcement is a hopeless tool for that. "Net additional revenue" is not only not guaranteed, it's a false dichotomy. The real way you get them to pay the same amount as other companies is by changing to a method of taxation that isn't subject to transfer pricing.