Microsoft NZ settles tax dispute with $25m payment

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Microsoft New Zealand appears to have squared a long-running transfer-pricing dispute with Inland Revenue by paying $24.7m in back-taxes.

The company's recently-filed accounts for the year to June 30, 2019, say it paid a $24.7m "tax adjustment," related to pre-FY2019 business.

Last year, Microsoft NZ said IRD had begun an international transfer pricing audit relating to its financial years from June 2013 through to June 2017.

A note with company's 2019 accounts says the settlement with IRD is confidential and that further details will not be disclosed. It says there are no more transfer pricings that remain to be resolved.

Transfer pricing involves payments between one wing of a company and another for goods and services. These in-house charges can be high-balled or low-balled if a multinational is seeking to shift revenue between countries in a bid to evade or minimise tax.

Microsoft NZ's latest accounts include a note on the complexities of billing in an age when many customers have a mix of locally-installed software and cloud services often served from offshore.

There are signs that the settlement could have included Microsoft NZ booking more business NZ customers' business locally.

Microsoft NZ revenue ballooned from $182.7m in 2018 to $462.3m in 2019 (and largely due to the one-off settlement, it reported a $3.7m loss vs a $16.2m profit in 2018).

The settlement appears to mirror a A$39 million back-tax deal that Microsoft Australia reached in 2018, which was also followed by a jump in revenue reported locally to A$1.48 billion from the prior year's A$719m.

Microsoft NZ was part of a tech-heavy list of 16 multinationals targeted by IRD's transfer-pricing crackdown. The local arm of Oracle was the only other tech company to publicly acknowledge it was part of the probe. Oracle has yet to file its FY2019 statements.

In a June 2017 Companies Office filing, Microsoft revealed it had transferred ownership of its New Zealand business from Luxembourg to Bermuda, where it remains incorporated. The company pitched the move as part of a standard corporate restructure.

IRD refused to comment.

"Section 18 of the Tax Administration Act prevents us from divulging or discussing the tax affairs of individuals, and that includes large multinationals," a spokeswoman said.

Microsoft New Zealand did not immediately respond to specific questions, but a spokeswoman offered the general comment that, "Microsoft is fully compliant with all local laws and regulations in every country in which we operate."