IT spin throws profit figures off balance

By PETER GRIFFIN

It's a ritual I've played out more times than I can remember in the few years I've been covering the seesawing IT industry.

The quarterly coffee catch-up with the local head of some IT giant, headquartered in a far away place and listed on the Nasdaq or some other huge exchange.

The generic discussion about industry trends, the post "9-11" uncertainty, the feeling that things are looking up for the next couple of quarters and that growth should go "double-digit".

There's rarely any mention of local figures, revenue numbers, profitability, growth rates - not on the record anyway.

Most of the executives - a mix of good Kiwis who have impressed head office or foreign stand-ins doing their stint in the colonies - are tight-lipped about the local numbers, hoping we've never heard of the Companies Office and the bundles of paper multinationals are obliged to file there and do - usually late.

First there's the reconciling reported figures and company spin.

Journalist: But the papers filed at the Companies Office show you've lost money three years in a row now, millions of dollars. Is it even worth hanging around in New Zealand?

IT executive (a thin smile and a gulp of coffee): Oh yes, believe me, we're fully committed to the New Zealand market.

Journalist: So when do you expect to make a profit in New Zealand?

IT executive: I couldn't comment. We're more than happy with the progress of the business here ...

There are a number of IT heavyweights who at the end of the day are losing money or making an insignificant profit in New Zealand - according to the annual reports.

Dive into the Companies Office website and take a look for yourself. It's the best stab at e-government that's been made in this country so far.

For free you can electronically browse financial documents of companies. For $2 you can find out details of shareholders and directors.

A browse of the multinational IT and telecoms players shows that while they may turn over hefty sums, few are making (or rather reporting) serious profits here.

There's EDS, the biggest IT company operating in New Zealand, which in the year to December 31, 2000, had turnover of more than $405 million, but ended up with a loss of more than $4 million.

Take the Swedish mobile phone company Nokia. In the year to December 31, 2000, Nokia had turnover exceeding $120 million. But the company paid the New Zealand Government only $1.6 million in tax, ending the year with an after-tax profit of just $1.4 million.

Does it really cost so much to shift a load of phones?

German software company SAP generated around €8 million ($16.12 million) in New Zealand last year selling enterprise software and consulting. SAP posted a loss of €858,000.

Computer Associates has reported local losses of more than $3 million in the past two years. In the year to March 31 last year, CA had revenue of $14.2 million but made payments to its parent company of $14.3 million, driving local operations into the red.

Try Sun Microsystems. The IT heavyweight has clients dotting the corporate and Government landscapes.

In the year to last June 30, Sun reported to the Companies Office revenue of $77,931,601.

The net profit after tax was just over $1 million.

Microsoft reported revenue in the year to June 30 of nearly $36 million, a net profit of $6.4 million, numbers that seem too small.

Microsoft New Zealand explains that it merely makes a commission on each software licence it sells - that's the figure it reports.

It could be easy to assume our IT industry is shuffling the figures to reduce the tax it pays, and in some cases that would be the case.

Every foreign entity that has planted its flag on New Zealand soil has accountants beavering away trying to reduce their clients' tax burden - and justify their own fees. You could argue that in the interests of shareholder value that is exactly what they should do.

But unfortunately the picture is a lot more complicated.

With the unfamiliar feel of a calculator in my hand, I tried totting up some of the figures.

Randomly, I selected six IT and telecoms multinationals trading in New Zealand and filing their financials with the Companies Office in the year ended December 31, 2000.

The six were Alcatel, Compaq, Dialogic (Intel), Ericsson, IBM and Nortel - and they had combined revenue of more than $948 million for the year.

While the six racked up turnover approaching $1 billion, at the end of the day their combined pre-tax profit was just under $30 million.

That shouldn't necessarily raise any eyebrows, as some of these companies operate high-turnover, low-margin businesses.

On that combined profit they contributed just $9 million in tax to the Government's coffers, or 30.3 per cent, slightly less than the corporate tax rate of 33 per cent but still nothing to get excited about.

It's when you look at the individual figures that you begin to wonder what's going on.

Telecom's equipment vendor and mobile phone manufacturer Alcatel, for example, had revenue of nearly $51 million for the period, but delivered an operating loss of $94,000. Nortel had revenue of $76 million, but an after-tax loss of $6.4 million.

Many of the companies make payments to "related parties" - things like software royalties, consulting or marketing fees. Those payments are counted as revenue for the related company in another territory - and taxed.

Alan Robb, a senior accounting lecturer at the University of Canterbury, says many international companies have related companies in tax havens such as the Cook Islands, Hong Kong, Bermuda, the Bahamas, Luxembourg and the Channel Islands.

"There can be a distinct financial advantage for a company if it can shift its profit from one country to another lower-tax country," Robb says.

"Paying for royalties, knowhow, management services makes this happen."

Robb says such inter-company transactions have been made much easier with the advent of new technology - e-mail, for example. But if the tax rate is less in that other territory it might be in a company's interest to inflate the cost of providing services in New Zealand so the money goes overseas.

But the picture remains clouded, due in part to accounting practices that recognise deferred tax.

"It's a nonsense item because it doesn't exist except in an accountant's imagination," says Robb.

"You will never be able to get the tax department to confirm the figure in any balance sheet labelled 'Deferred Tax' - it's just what might have to be paid in future if a whole lot of assumptions are correct."

The current tax regime also allows foreign investors to finance their New Zealand operations largely through debt, which reduces their tax burden.

Which leaves things just a tad murky for us Companies Office surfers who want the figures to do the talking, not the slick corporate PR machines.

NZ Companies Office

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