Implode-o-Meter News - The IRS Decided to Get Tough Against Microsoft. Microsoft Got Tougher

Here's how it would work. Microsoft's Puerto Rican subsidiary would produce all the CDs for the American market. Because it was the sole producer, it would buy the exclusive rights to Microsoft's technology. Those licenses would entitle the Puerto Rican company to a share of Microsoft's American profits.
According to Hoory's calculations, the factory subsidiary would send the parent company about $31 billion over 10 years -- and receive almost $70 billion in profits in return over the same period. Instead of being taxed in the U.S., where the rate was 35%, the $39 billion difference between those figures would be taxed in Puerto Rico at a rate near 0%. It was a long-term plan that could continue indefinitely.

It didn't matter that the transaction was fundamentally absurd. Microsoft would never actually sell its most valuable asset to another company, let alone to a little tropical factory. Still, there were rules for constructing and valuing deals like this, and Microsoft and KPMG set out to prove they were following them.

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The IRS Decided to Get Tough Against Microsoft. Microsoft Got Tougher