Microsoft's $24.7 million settlement with the Inland Revenue Department was a "really good deal" for New Zealand in what's becoming a global tussle for multinational tax receipts.
Tax expert Robin Oliver – a former deputy commissioner at IRD – said the settlement was a sign that multinationals had accepted a global change in attitude towards profit shifting from one country to another, a strategy used by multinational companies to pay as little tax as lawfully possible.
"New Zealand has traditionally been accommodating to multinationals, which has made New Zealand attractive to investment, but I think that is changing," Oliver told BusinessDesk.
IRD has been hardening its stance on profit-shifting and multinationals are recognising there has been a "change in climate" on the issue, he said.
That was part of a global move led by the OECD to clamp down on these strategies in an effort to encourage firms to pay tax in jurisdictions where they operate.
In late 2017, IRD signalled it was auditing 16 multinationals over their use of transfer pricing, which the tax department estimated was trimming their collective tax bill by more than $100m a year. Most of those audits have since been resolved, a spokesperson said.
The latest to emerge is Microsoft New Zealand, which acknowledged a $24.7m tax payment as part of a settlement deed with IRD in its June 2019 accounts lodged with the Companies Office.
Previous accounts showed that IRD had been auditing the tech giant's use of transfer pricing across the June 2013 to June 2017 financial years.
During that period Microsoft NZ's tax expenses had totalled $25.6m - the new tax adjustment almost doubled that number.
Oliver described the settlement as a "really good deal" for New Zealand because that money stayed in the country rather than being collected in another nation.
"This is IRD doing its job," he said. "We are fighting other countries more than we are fighting Microsoft. They are just pawns between two different tax authorities. Who they pay their tax to is the issue, rather than if they pay it at all."
Microsoft has also started voluntarily recognising more revenue in New Zealand to show they've adapted to the new 'norms' of tax law and IRD's expectations. Last year, Google and Facebook said they were adopting similar accounting practices.
Before 2018, Microsoft New Zealand only accounted for revenue generated from the marketing of its products, letting them book actual sales of those products in other low-tax jurisdictions.
Still, Oliver warned that voluntary cooperation with revenue recognition may not be enough to stave off more radical approaches such as a revenue tax on digital services, which has been proposed locally and in other jurisdictions.
"Attacking big tech giants like Google and Apple will always have populist appeal," he said.
But he warned that overly aggressive tax collection risked triggering competition from other nations in grabbing more tax from New Zealand multinational businesses.