US Senators Question KPMG Role in Microsoft Profit-Shifting Scheme
Paul Kiel (ProPublica) 01 December 2023
This story was originally published by ProPublica.
The giant consulting firm proposed that Microsoft transfer billions in profits to a small factory in Puerto Rico. The step initially saved the software company billions — then led to an IRS audit and a bill for US$28.9bn (billion) in back taxes.
Last month, Microsoft disclosed that the IRS had sent the company a bill for $28.9 billion in back taxes as part of an audit. The examination, which began more than a decade ago, is the largest in the agency’s history, and it’s far from over, as Microsoft has vowed to appeal the findings.
The centerpiece of the audit, as ProPublica detailed in an investigation nearly four years ago, is a 2005 transaction that moved tens of billions of Microsoft’s U.S. profits to Puerto Rico to help the software giant save billions in taxes. In a letter sent Wednesday, three senators, citing ProPublica’s reporting, focused attention on the company that helped Microsoft cook up that scheme: the mega-consultancy KPMG.
“KPMG’s role in Microsoft’s tax evasion is deeply disturbing, indicating that KPMG helped Microsoft reward shareholders and executives, while depriving the federal government of billions in tax revenue needed to pay for health care, environmental protection, infrastructure, and more,” says the letter, which was signed by Democratic Sens. Elizabeth Warren, Bernie Sanders and Sheldon Whitehouse and sent to KPMG’s CEO. “You owe Congress an explanation for your firm’s actions.”
In 2004, Microsoft was considering closing a small factory in Puerto Rico where some 85 workers burned Windows and Office software onto CDs. The tax break that had led Microsoft to open the factory was expiring. But KPMG pitched Microsoft on an idea for a break that would be far more valuable.
Boasting about the firm’s experience in setting up similar deals for other huge companies, KPMG said it could help Microsoft save billions in taxes by transferring profits to the island. The little factory would buy the exclusive rights to Microsoft’s technology. Meanwhile, KPMG assured Microsoft that its San Juan partner had a long track record of negotiating “significant tax holidays for U.S. companies with the Puerto Rican government.”
At the time, as ProPublica’s reporting showed, KPMG took great pains to make Microsoft’s moves — which effectively increased the valuation of the Puerto Rican subsidiary from $0 to $30.4 billion over the space of 24 hours, according to the IRS — seem bona fide. “What can we do to make this thing real?” read the notes from one KPMG meeting.
After Microsoft agreed to the arrangement, KPMG helped the company complete the deal. Its economists generated complex models that justified the price the factory paid for Microsoft’s intellectual property rights.
Over a decade later, when the IRS fought to obtain KPMG documents as part of its audit, Microsoft objected that the material was protected by a privilege for tax advice. The IRS eventually won access to the documents when a federal judge agreed that KPMG had been promoting a tax shelter. “The Court finds itself unable to escape the conclusion that a significant purpose, if not the sole purpose, of Microsoft’s transactions was to avoid or evade federal income tax,” U.S. District Judge Ricardo Martinez wrote in his opinion. Martinez added that documents in the case showed KPMG had “promoted” the transactions. 
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