Inland Revenue audits Microsoft NZ over transfer pricing practices

Microsoft New Zealand is bracing for possible action from the taxman.

The company said in its annual accounts that Inland Revenue was auditing payments charged to it by Microsoft companies overseas over the two years to June 2015.

Microsoft NZ listed the Inland Revenue audit as a “contingent liability” for which it might have to fork out.

It said its directors and its lawyers believed its tax practices were adequate.

But it said the “ultimate outcome of the tax audit cannot be reliably estimated at this time”.

The transfer pricing audit was revealed against the backdrop of growing public and political concern over the tax practices of multinationals.

Those concerns have prompted New Zealand to participate in a global drive led by the Organisation for Economic Cooperation and Development to stamp out common rorts, with transfer pricing one area of concern.

Microsoft transferred the ownership of its New Zealand subsidiary from the United States to the tiny European state of Luxembourg in 2014, denying at the time that was for tax reasons.

Spokesman Brendan Boughen said Microsoft could not comment further on the audit, which it was working with Inland Revenue to complete.

Microsoft’s approach to tax rules was to comply with the law and pay its taxes in New Zealand, Boughen said.

“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.”

Transfer pricing rules commonly apply when subsidiaries pay their parents for back-office services such as accounting and marketing support.

It can be in the interests of multinationals to make subsidiaries overpay for such services, if that helps them shift profits to lower tax jurisdictions.

Because of the non-traded nature of such services it can be difficult to establish what constitutes a reasonable price.

Commenting generally on the tax practices of multinationals in New Zealand, Inland Revenue’s top lawyer, Graham Tubb, agreed in November that games were being played at the margins, as might be expected.

“That is my experience,” he said.

Ernst & Young tax partner Andy Archer said decisions on what companies should list as contingent liabilities were quite subjective.

They usually only tended to disclose risks if there was more than a 50 per cent chance of a pay-out, but could choose to be more conservative, he said.

Inland Revenue would usually conduct a transfer pricing audit if a more general look into a company’s tax affairs had thrown up something that it wanted to take a closer look at, he said.

Microsoft NZ has historically paid more company tax in New Zealand than many other household names in the tech sector, such as Google and Facebook, which have smaller operations here.

In the year to June, it paid $5.8m tax on a profit of $18m and revenues of $107m.

The value of Microsoft products and services sold into New Zealand is far higher, but as is also common with foreign technology firms, the not all sales are booked by the local subsidiary.