It's a bit confusing that folks who consider Taiwan a province and not a country wouldn't take issue (or at least see it as a minor issue relative to the presence of a flag) with it being included among ISO country codes. In other words, if Microsoft were to be walking on eggshells enough to omit flags wholesale, I'm surprised they don't also omit all things that enumerate ISO country codes.
I see your point that flags elicit a different reaction out of people than territorial classifications, but simultaneously it seems to be the classification which elicits disagreement. "You can call it a country so long as you don't assign a flag" seems like the wrong place to draw a line in the sand.
Presumably, provinces can have flags!!