Microsoft transfers ownership of NZ business to Bermuda

A case of bad timing.
Revenue Minister Judith Collins

Microsoft has transferred the ownership of its New Zealand business from Luxembourg to Bermuda, according to a June 2 Companies Office filing.

Tom Pullar-Strecker, who broke the story for Stuff, notes the change was notified on the same day Revenue Minister Judith Collins was travelling to Paris to mark the government's support for an OECD's (slow-moving) effort to clamp down on multinational revenue and profit-shifting.

Luxembourg has recently been under pressure from the EU over its role as a tax haven, opening opportunities for Bermuda, which charges no corporate tax.

Microsoft moved its NZ operation under the control of a subsidiary in Luxembourg in 2014.

At the time, in something of a Tui moment, the company said the switch had nothing to do with tax. Microsoft says the latest change is part of a corporate restructuring.

Pullar-Strecker quotes John Prebble, QC, a law professor and tax expert at Victoria University saying "All Microsoft NZ's income is taxed in New Zealand." These days, in the weightless cloud economy, it's common for online software and services billed to customers in New Zealand to be invoiced to a subsidiary in a lower tax country, reducing the amount of income booked locally.

Prof Prebble adds that it could influence how much tax Microsoft paid overseas on revenue streams such as royalty payments that the local subsidiary paid to its parent company.

Royalty payments often loom large on the financial result of the New Zealand subsidiaries of multinational tech and telco companies.

Bouncing around: a new sole shareholder for Microsoft NZ.

Ms Collins talked tough when first appointed revenue minister, but more recently has been toeing the let's-wait-for-the-OECD line. Meanwhile, Australia's unilateral crackdown on profit-shifting continues apace.

However, the  IRD has been more assertive in enforcing the current rules.

Inland Revenue declined comment on Microsoft's corporate structure but did recently announce that it has initiated an audit of the company's transfer pricing (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).

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You might expect Spark's Simon Moutter to have a ping at Microsoft on Twitter. 

After all, on June 2 he tweeted "Google, you should be ashamed of yourselves" after NBR revealed the company had made yet another loss on its New Zealand business, with consciously low revenue.

In this instance, he might be muted by the fact that in its new Bermudan corporate home, Microsoft NZ will rub shoulders with the 50% Spark-owned Southern Cross Cable Network.

Mr Moutter has previously groused about NBR mentioning the Bermuda incorporation, saying Spark pays full tax on its profits from the venture when they are returned to New Zealand as dividends.

But by the same token, could it not be said Apple, Microsoft, Google and co do pay tax on revenue earned in New Zealand, just often not here?

“The difference is that Southern Cross is a carrier-to-carrier cable,” Mr Moutter says.

The company operates a fibre optic cable between Australia, New Zealand and the US, wholesaling broadband capacity to telcos and ISPs.

“It’s a linking service,” he continues. “We don’t actually earn revenues by selling things to customers in America or the other countries. It earns its revenue by selling linking services to carriers in each country. So it is effectively counting the revenue where it’s earned. So that is the right construct."

He says Bermuda is a neutral location given there are investors from three countries (the minority investors are US company Verizon and Singapore's Singtel).

One NBR commenter noted:

Customers pay Southern Cross a large amount of money in advance for multiple years of bandwidth. However accounting rules mean that you can only record the income as it is earned over those years; any "unearned income" is recorded as a liability. Southern Cross therefore has large cash balances as assets, an offsetting large liability of unearned revenue and small retained earnings. In most jurisdictions this would mean that the cash was trapped as it would be hard to get out of the business.

Bermuda, however, allows you to distribute income as dividends even if your retained earnings are negative - provided that at some point they will become positive and that you can pay your debts.

Having Southern registered in Bermuda therefore allows you to turn unearned income into earned dividends; and bring the cash back into NZ as early profits.

And readers thought Bermuda was only good for yachting.

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