The software giant paid the money in the past 15 months as part of a “bilateral contract”.
Microsoft paid HMRC £136m for back taxes as part of a deal reached with authorities regarding how the company shifts its revenues abroad, while it fights an untold billion-dollar US tax bill.
In its latest UK accounts, the software giant disclosed that it made the payment within the last 15 month under a “bilateral contract” with HMRC.
The US Internal Revenue Service has demanded $28.9bn from the company (£23.6bn), for accounting practices dating back nearly two decades.
Microsoft announced on Wednesday that IRS demanded payment by the end of September. This sparked one of the largest corporate tax disputes in history. It said that it would contest the claim.
The HMRC payment as well as the IRS dispute revolves around transfer pricing. A process that is used by multinational companies to make payments among subsidiaries in different countries for services rendered between units.
HMRC, according to critics, has recovered billions of dollars by scrutinising these arrangements.
Microsoft’s latest UK accounts stated that it had reached agreement with HMRC over the calculation of transfer pricing and agreed to pay a sum to bring past years’ payments into line with the agreement.
It said that “a bilateral agreement has been reached regarding the transfer pricing methodologies used by the company to purchase products and services, and in providing marketing and sales support for the Microsoft Corporation Group.”
As a result, an additional £136m tax was paid to the United Kingdom in relation to previous years.
Microsoft’s spokesperson said: “Microsoft fully complies with all local laws in each country where we operate.” Our tax structure reflects our global footprint, as we serve customers all over the globe. “The recent bi-lateral agreement on advance pricing is reflected in the additional one-off charge that was made to UK accounts this year.”
A bilateral advance pricing agreement is an agreement between two tax authorities. Typically, the agency in the company’s home country and the authority that receives the funds.
HMRC claims that such agreements are in place to give multinationals operating in Britain certainty and do not constitute special treatment.
Microsoft allegedly demanded $28,9bn in accounting between 2004-2013, in which it located its intellectual property in tax-free jurisdictions. This allowed it to lower its bill.
The company claimed that it had followed all tax laws and that, due to tax breaks implemented by Donald Trump, any taxes owed could be reduced by $10bn. It stated that it would “vigorously” contest the IRS demand. This could be done through courts.
HMRC stated that it was unable to comment on specific businesses. “We are committed to ensuring everyone pays their fair tax share under UK law and that companies pay tax on all of their economic activity within the UK,” said a spokesman.
“We continue to challenge multinationals very actively on tax due. We will bring in more than £6bn in transfer pricing yield over the next four years, up to the end March 2022.”
In the fiscal year 2021-22, the agency resolved 175 inquiries and collected £1.5bn.
The OECD published a treaty this week that codifies a minimum corporate tax rate of 15pc across all countries.