KPMG's Response to US Senators' Queries on Microsoft's Transfer Pricing Tactics Remains Uncertain

US Senators seeking clarification from KPMG regarding its alleged role in aiding large corporations, including Microsoft, in offshoring profits and evading taxes may face challenges in obtaining the desired information, warns tax expert Leonard Wagenaar. The senators—Elizabeth Warren, Bernie Sanders, and Sheldon Whitehouse—previously sent a letter dated November 29 to KPMG's chairman and CEO, William Thomas, inquiring about the company's involvement in Microsoft's historical transfer pricing (TP) tactics. The inquiry stems from the IRS's probe into Microsoft's unpaid taxes amounting to $28.9 billion, related to the alleged illegal allocation of profits to a foreign subsidiary in Puerto Rico from 2004 to 2013.

The senators raised concerns about KPMG's role in designing a 'pure tax play' for Microsoft, citing a ProPublica report that detailed a tax restructuring scheme involving the sale of intellectual property rights to a Puerto Rican subsidiary at an illegal discount. Microsoft then reportedly paid substantial amounts to use these intellectual property rights, resulting in significant profits in Puerto Rico with a near-zero percent tax rate, facilitated by KPMG.

In the letter, the senators requested an explanation from KPMG on its actions and posed specific questions, including when KPMG began providing tax advice to Microsoft and whether the tech giant implemented all TP recommendations by KPMG during the specified period. The senators also sought information on any ongoing relationship between Microsoft and KPMG for consulting services on tax practices.

However, according to Wagenaar, there is no obligation on KPMG to respond to the senators' queries. He said, “Usually, these letters are sent to companies rather than advisers, but Warren wanted to shift [the] debate to the advisers as the responsible party. I understand that there is no obligation to respond, but those who receive these letters usually do – in part to prevent Senators moving to a subpoena. Advisers are bound by client confidentiality, putting them in an awkward position. Parliamentary requests for investigations are unusual territory, in part because anything disclosed becomes a matter of public record immediately."

Mimi Song, chief economist at Exactera, commented on the potential impact on Microsoft's public perception following the IRS's financial demand, defending the company's TP practices. She said, “Microsoft’s tax professionals will be saying ‘we have a fiduciary responsibility to make sure we are not overpaying taxes, what should we be paying?’ Understanding the legal landscape of tax on a global basis doesn’t mean that a company is trying to evade tax. Before, companies were more concerned about opportunities. They would ask: how can we turn tax into a profit centre? But now they have to be really careful. They have to manage risk as well as public perception. How do we narrate our own story, and how does that play into our overall strategy?”

By fLEXI tEAM