IRD watches tech profit transfers

By PETER GRIFFIN IT writer

Tech-sector companies making sizable payments to associates overseas are coming under increasing scrutiny from the Inland Revenue Department.

It wants to stop profits being funnelled out of the country in the form of inter-company payments.

John Nash, chief adviser of international audit at the IRD, said a project had been set up to focus on poor performers and loss makers to ensure they were paying their fair share in tax.

The local arms of large IT companies such as Microsoft, Hewlett-Packard, IBM and Sun Microsystems pay tax on the profits they report locally.

But there is concern that transfer pricing methods and creative accounting are being used to chip away at local tax bills.

This month, IT giant EDS posted a $2 million loss in its local operation for last year, after an operating profit of $30 million had been swallowed up by $15.2 million in goodwill and royalty payments and $14.3 million in interest payments to its parent.

Most multinationals make regular payments to their parent companies which ultimately affect their regional profitability.

Payments can be made up of such things as marketing or management fees, software royalties, consultancy fees and interest charges.

"The industry has caught our eye and we've been asking lots of questions," Nash said.

A wide range of legitimate reasons were offered by companies for channelling sizable sums of money overseas, he said.

"If New Zealand is merely an end seller carrying no research and development risks, then the super profits will not generally belong here," said Nash.

The IRD had found a "general absence" of related-party transactions to associates based in known tax havens.

"Most related-party transactions are with comparable tax jurisdictions such as the United States."

Although a lot of the multinationals appeared to pay little or no tax, the IRD was collecting considerable sums through non-resident withholding tax, which applied to interest payments to overseas parties at a rate of 10 per cent and to overseas royalty payments at 15 per cent.

Tax was also collected from the thousands of employees who worked for multinationals with operations in New Zealand.

Nash said New Zealand's IT multinationals were operating in a tough commercial environment and poor bottom line results did not always point to tax avoidance.

"There's no doubt some are struggling," he said. "You only have to look at Gateway pulling out."

Nash said rates of return examined by the IRD ranged from large losses to exceptional profits.

The latter is something a weather-beaten IT sector in general has grown unaccustomed to.

The world's third-largest software maker, Oracle, last month reported an $8.3 million profit in New Zealand on sales of $54.4 million in the year to May 31 last year. Inter-company payables totalled nearly $9 million.

The company's outgoing New Zealand managing director, Leigh Warren, said the result, up from a profit of $1.2 million in the previous period, was the result of Oracle improving its relations with its customers.



Jim O'Neill, executive director of the Information Technology Association, said he was advising members, many of whom were IT multinationals, to make sure their transfer pricing activities were entirely transparent because IRD audits could be expensive and time-consuming.

The association was a strong advocate of the Government offering tax incentives to lure foreign investment, something which O'Neill said the country was seriously lacking.

"It's very difficult for us to attract investment when we provide very little in the way of incentives."