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IRD follows IRS lead, audits Microsoft NZ over transfer pricing

Tuesday 17th January 2017

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Microsoft New Zealand, the local unit of the world's biggest software company, is being audited by the Inland Revenue Dept over transfer pricing, a practice that can be used by multinationals to minimise tax.

The transfer pricing audit covers Microsoft NZ's accounts for the years 2013 to 2015 and comes as the IRD widens its net to require all foreign-owned firms with annual turnover of more than $30 million to submit an annual basic compliance package which details group structure, financial statements and tax reconciliations. The threshold was previously $60 million in annual sales, involving 600 taxpayer groups of which half were foreign owned and lowering the bar will add a further 300 foreign-owned companies.

A Microsoft spokesman said the company is "currently working with the IRD to complete the transfer pricing audit of the company as required, there is nothing more we can share about that at this time". He said Microsoft "complies with the law and we pay our taxes in New Zealand. We believe tax is an issue that should be addressed at the global level, but having said that, we abide by the laws in all jurisdictions in which we operate.” Microsoft NZ's immediate parent is based in Luxembourg. 

Last year, the department launched a number of audits of the tax arrangements of global technology firms and the NZ Herald reported at the time that an IRD briefing to Revenue Minister Michael Woodhouse said the audits were triggered by "anomalies" thrown up by close monitoring of multinationals. The briefing was from IRD manager of international revenue strategy John Nash, who told the Herald that such audits could be "fairly intense trench warfare" and would take several years to resolve.

Transfer pricing refers to the prices that divisions of a large company charge each other for goods and services and has been used by multinationals to shift profits to low-tax jurisdictions from countries with higher tax rates. Australia is among nations planning to introduce a diverted profits tax, commonly known as the "Google tax". The Guardian reported today that Australia's coalition government could impose a 40 percent penalty on profits that are artificially diverted from Australia by multinationals.

Executives at Microsoft, Google and Apple were hauled before an Australian Senate inquiry in 2015 to explain why they should be able to divert earnings to lower-cost countries.

Microsoft New Zealand says in its 2016 financial statements, released this week, that its directors and their legal advisers "believe we have adequately assessed and provided for our tax positions. The ultimate outcome of the tax audit cannot be reliably estimated at this time."


IRD's Nash wasn't immediately available. A spokesman said it was widely known that the IRD had focussed on global technology companies in recent years and pointed to the Multinational Enterprise Compliance Focus Document, a guide that sets out the requirements of the nation's tax law.

"Information gathered is closely examined based on a detailed risk assessment and any anomalies are brought up with the taxpayer for an explanation," the department says. "Audits can be triggered when Inland Revenue is not satisfied with the response and believe further investigation is required".

Microsoft NZ had net profit of $8.1 million in 2013 after paying tax of about $3.9 million, on revenue of $78.5 million. That year it got $56 million of revenue from related parties and had deposits with related parties of $28 million. It owed other members of the Microsoft group about $5.6 million. In 2014 the company paid $4.6 million of tax for a profit of $9.3 million on sales of $86.8 million. That year, revenue received from other group members rose to $60.9 million and deposits with related parties had jumped to $40.4 million.

The New Zealand unit of Microsoft chalked up another year of sales and profit growth in 2015. Sales rose to $96 million and after tax of $5.2 million was paid to IRD, profit rose to about $11 million. Some $69.5 million of revenue came from related parties and Microsoft NZ had $41.7 million of deposits with other members of the group. A note to its accounts says that all  debt and advances "are interest bearing and repayable on demand."

The parent Microsoft's 2016 annual report says its effective tax rate was lower than the US federal statutory rate "primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centres in Ireland, Singapore and Puerto Rico". Microsoft is in the process of settling with the US Internal Revenue Service over audits of its tax years back to 2004 and in 2012 the IRS reopened the audit for 2004 to 2006.

"As at June 30, 2016, the primary unresolved issue relates to transfer pricing, which could have a significant impact on our consolidated financial statements if not favourably resolved," the company said.

Outside of the US, "our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2016, some of which are currently under audit by local tax authorities," it said, adding that the outcome wasn't expected to be material.

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