Microsoft settles Aussie tax audit

Microsoft has reached a confidential settlement in a long-running audit by the Australian Taxation Office and adjusted the way it books revenue from its local subsidiary.

Corporate vice president of worldwide taxes Daniel Goff told a senate inquiry in Sydney that an “in principle” agreement had been reached in May and signed hours before his appearance yesterday.

Goff initially said the ATO audit had “ended this year”, before clarifying it was “this month” and - under further questioning - conceding it had been “as of this morning I believe when we signed the documents”.

“But the agreement’s been in place since May,” he said.

“We’ve been working on the deed of settlement over the last few months.”

Goff declined to detail the “confidential” settlement with the ATO publicly, but offered to provide details in a private setting to the committee examining tax avoidance by multinationals.

“I’m happy to tell you about the settlement. I’d rather do it in-camera or through a written submission as it is a confidential agreement and I’m not really comfortable talking about a settlement where most of my competitors are here or listening to this broadcast,” he said.

Goff also revealed that earlier this year, the company had made a change to the way it booked revenue from Australian customers, “with local revenue expenses now reported in-country”.

Prior to this year, the company’s regional headquarters in Singapore sold product directly to Australian customers and sent “a commission for the sales and marketing support from Australia”. This arrangement remains in place for “legacy contracts”.

But this year there had been “a fundamental shift in terms of how we go to market in Australia,” Goff said.

“It’s [now] a ‘buy-sell’ model where Microsoft Australia will actually purchase the Microsoft products that they’re selling, and then sell to the customer.”

That would change the split of Australian revenue that was booked in Australia versus in Singapore, he said.

“Under the old model for every dollar of Australian profit, about 15 percent of that was subject to Australian tax,” Goff said.

“Under the new model, every dollar of Australian profit, about 20 percent of that will be subject to Australian tax.

“So there’s about a 30 percent increase that will be subject to Australian tax.”

Goff said there were other elements in the makeup of Microsoft products that were still performed outside Australia, and therefore Australian revenues were remitted to those locations to cover those costs.

That included R&D costs which are remitted to Ireland, and regional support costs, which go to Singapore.

Microsoft was just one of a number of multinationals that flew out top tax executives to front the Australian inquiry.

Facebook’s vice president of tax and treasury Ted Price also appeared, noting his company had been under audit by the ATO for the past two years.

However, he said “it was not a case of on day one there was a particular issue” with its taxes.

“A significant part of the process is us simply explaining our business,” Price said.

“It’s important before you can apply the tax law to understand what we do.”

Facebook recorded $326.9 million in Australian revenue in 2016; it had reported $33.6 million the year before. The major jump in reported revenue was attributed to a restructure in response to federal anti-avoidance laws, but experts still argue it is too low.

Price denied suggestions that the company had previously improperly reported its Australian revenues. He also suggested he could not reconcile the higher estimates.

He said the $326.9 million “is very credible and it reflects … on the metric of revenue that our sales teams in Sydney and Melbourne support and contribute to for advertisers.”

“When Facebook Australia books revenue, it will have expenses against that revenue, some of which will be incurred in Australia in the local subsidiaries, some of which will be incurred outside of Australia,” he said.

Apple and Google also had representatives at the hearing. Apple revealed it had emerged largely unscathed from a five-year ATO audit.

Local representatives for IBM were also present.

Managing director Kerry Purcell said IBM’s structure meant it was not as heavily impacted by the tax crackdown as other large technology firms might be.

“IBM operates a local business model, which means that when Australian customers procure services, software and technology solutions from IBM, they transact locally with an Australian IBM company,” Purcell said.

“Australian-sourced revenue is recorded in our Australian books, and is subject to tax in Australia.

“Legislation such as the multinational anti-avoidance legislation and diverted profits tax do not really affect localised companies such as IBM. This legislation is naturally more applicable to companies that sell into Australia from offshore entities, and as a result are not subject to Australian corporate tax.”

Purcell said both globally and in Australia, IBM was “undergoing a significant transformation”. The costs from this - together with a decline in profits - meant the company had paid less tax in recent years.

“We have had reduced revenues resulting in lower profitability and as a result a decline in our Australian income tax contribution,” he said.