The latest annual report from tech giant Microsoft underscores problems with how the U.S. taxes the foreign profits of our largest companies and raises questions about the implications of the artificial intelligence (AI) boom for federal revenues.

Reinforcing FACT’s analysis of recently-released Irish disclosures, Microsoft’s annual report showed that the company saved almost $3.5 billion in taxes by booking substantial profits in Ireland, a low-tax European jurisdiction favored by American multinationals. Microsoft’s report directly attributes these tax savings to Ireland’s lower corporate tax rate. The revenue ramifications become clear when we contrast where Microsoft actually pays its taxes to where it actually earns its income: despite reporting substantially more income in the U.S. than in the rest of the world combined, Microsoft paid more cash tax to Ireland than to the U.S. federal government during its most recent fiscal year.¹

These country-level disclosures are the result of new U.S. accounting standards that entered into effect at the end of 2025. Analysis of these new disclosures by FACT and others reveals how major American companies continue to generate substantial tax savings by stashing profits in tax havens. In total, more than $23.3 billion in tax haven savings was reported by 55 major U.S. corporations, according to FACT’s ongoing analysis.² Of those, by far the single largest observed foreign tax effect is Microsoft’s $3.5 billion in Irish savings.³

Microsoft’s disclosure also offers a window into the tax implications of the company’s enormous investment in AI infrastructure, sharpening questions about whether the current complex, loophole-ridden U.S. tax code can effectively tax the profits of this new technology. Microsoft reduced the tax it expects to immediately pay on this year’s income (“current tax expense”) by as much as $12 billion through investments in tangible assets in FY2026. The ability of companies to immediately deduct the full cost of most tangible investments from their tax bills was expanded and made permanent in the 2025 tax package, with the same treatment being temporarily extended to certain commercial structures as well.

Microsoft is hardly alone. Other huge multinational technology companies including Meta, Google, and Amazon – sometimes collectively called the AI “hyperscalers” – are pouring money into data centers and related AI infrastructure in order to capture the anticipated benefits of a technology that has so far largely failed to generate meaningful profits. When those profits do eventually materialize, however, the intangible nature of AI services makes them especially easy to shift to offshore tax havens, potentially depriving the Treasury of needed revenue even after these companies have already received tens of billions in tax benefits tied to their AI investments.

Therein lies the catch-22 facing tax policymakers on AI: the sheer scale of these companies’ investments in both research and development and the raw capital required to build data centers means that some of the largest, most successful corporations in the world will keep paying extremely low levels of tax for years to come. This past year, Microsoft owed only around 2.5 percent in federal tax on more than $100 billion of domestic income.⁴ Meta, Google, and Amazon reported domestic tax rates of 3.5, 8.0, and 1.4 percent, respectively. Even if tax-preferenced investment slows, however, there is no guarantee that the Treasury will be able to capture the subsequent profits derived from AI if our international tax rules meant to stop profit shifting remain as weak as they are.

Several recent proposals attempt to address the issue of effectively taxing AI, including by targeting novel tax bases like energy consumption and AI processing, or “compute”. While these policies may be valuable, working to reform the tax code we currently have is a prerequisite for any resilient approach to taxing AI.

Footnotes

1.  Note that cash taxes are distinct from the accounting concept of tax expense relied upon elsewhere in this blog. Cash taxes paid include all income tax payments made within a given reporting period, regardless of whether those payments are related to activities from prior periods. ↩︎
2.  FACT’s initial analysis showed roughly $11 billion in net tax haven savings from 40 U.S. companies, each with more than $1 billion in global profit in FY 2025. An updated analysis demonstrating the revised figure quoted above will be released on FACT’s website in the coming days. ↩︎
3.  Nominally topping Microsoft’s $3.5 billion in Irish tax savings, Uber reported nearly $5 billion in reduced tax expense in 2025 related to its operations in the Netherlands, but nearly all of that effect stems from the release of a substantial portion of the company’s valuation allowance in the country. Valuation allowances are non-cash accounting entries that are meant to offset tax assets that are unlikely to be realized in the near term, and as such do not immediately modify cash or current tax expense, unlike tax haven savings attributable to “statutory tax rate difference.” ↩︎
4.  All figures in this paragraph are based on current federal tax expense. Current tax expense only pertains to taxes owed on continuing operations for a given year, and is distinct from cash taxes paid, as explained in footnote 1. ↩︎