The $28.9bn (£23.5bn) tax bill covers a nine-year period from 2004 to 2013 and is likely to increase once penalties and interest are added.

The tax dispute centres around the treatment of intercompany transfer pricing, which sets the price charged for goods or services transferred between companies within the same group.

Daniel Goff, corporate vice president, worldwide tax and customs at Microsoft said that ‘the main disagreement is the way Microsoft allocated profits during this time period among countries and jurisdictions. This is commonly referred to as transfer pricing and the IRS has established regulations that allow companies to use a specific arrangement for transfer pricing, called cost-sharing.

‘Because our subsidiaries shared in the costs of developing certain intellectual property, under those IRS cost-sharing regulations, the subsidiaries were also entitled to the related profits.’

Microsoft said it had been working with the IRS to address questions about how the multinational allocated income and expenses for tax years beginning as far back as 2004.

‘We have changed our corporate structure and practices since the years covered by the audit, and as a result, the issues raised by the IRS are relevant to the past but not to our current practices,’ Goff said.

‘We believe we have always followed the IRS’s rules and paid the taxes we owe in the US and around the world. Microsoft historically has been one of the top US corporate income taxpayers. Since 2004, we have paid over $67bn in taxes to the US.’

In a notice on the US Securities and Exchange Commission (SEC), Microsoft stated that ‘as of September 30, 2023, we believe our allowances for income tax contingencies are adequate. We disagree with the proposed adjustments and will vigorously contest the notices of proposed adjustments (NOPAs) through the IRS’s administrative appeals office and, if necessary, judicial proceedings.

‘We do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months.’

The next step will see Microsoft take the issue to the IRS Appeals system, a separate division of the US tax authority responsible for resolving tax disputes. It usually takes several years to go through the appeals process. If a settlement is not agreed, Microsoft said it would ‘contest any unresolved issues through the courts’.