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April 22 — Microsoft Corp. reported a $600 million increase in “tax contingencies and other income tax liabilities” during its 2016 fiscal year—an increase mainly due to transfer pricing adjustments, according to a filing with the Securities and Exchange Commission.
The software giant's tax contingencies and liabilities were $12.7 billion as of March 31, 2016, compared with $12.1 billion on June 30, 2015. The company said the increase was due “primarily to current period quarterly growth relating to intercompany transfer pricing adjustments.”
That growth was offset by a previously announced partial settlement with the IRS over its 2007-09 tax years. The company said transfer pricing is the primary unresolved issue over audits from its 2004-09 tax years.
Microsoft is currently involved in litigation with the Internal Revenue Service, over the company's Freedom of Information Act requests for documents relating to its audit (59 DTR K-3, 3/28/16).
New Accounting Standard
Microsoft said its 24 percent effective tax rate for the three-month quarter ending March 31 was due in part to the adoption of a new accounting standard that treats excess tax benefits from stock-based compensation as part of income tax expense, rather than additional paid-in capital.
Microsoft chose to adopt Financial Accounting Standards Board guidance early, requiring the company to reflect any adjustments prior to July 1 and causing it to revise earnings results from the previous two quarters, according to the filing.
The standard, which is part of FASB's effort to simplify accounting, requires companies to record excess tax benefits and tax deficiencies in the reporting period that the award vests.
Multinationals including Google Inc., Apple Inc. and Goldman Sachs Group Inc. criticized the change. Some opponents of the rule said recording the stock compensation and associated taxes as income could lead to unnecessary earnings swings (63 DTR G-2, 4/1/16).
Microsoft Chief Financial Officer Amy E. Hood told investors April 21 she expects the company's full-year tax rate—for the fiscal year ending in June 2016—will be between 20 percent and 21 percent.
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