Microsoft NZ reports another big rise in profit and revenue – and goes Irish

Microsoft NZ has reported another big jump in revenue and profit for its local operation.

For the 12 months to June 30, 2020, the company made a net profit of $27.3 million, against a year-ago loss of $3.8m (with the red ink caused by a settlement with IRD; see below).

Revenue for the period increased 35 per cent to $626.4m.

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There’s no doubt the company’s fortunes are on the rise overall. Microsoft globally has done well from the pandemic as remote working has dramatically boosted use of Microsoft Teams and other services in its cloud portfolio, and locked-down punters have reached for their Xboxes. Its market cap has more than doubled to US$1.6 trillion ($2.2t) this year on booming results, putting it neck-and-neck with Amazon as the second most valuable company listed in the US (behind $2t contender Apple).

But it’s not clear how much of Microsoft NZ’s profit and revenue lift reflects any rising business fortunes locally versus a shift in how much revenue from NZ customers is now recognised locally.

Microsoft declined to comment on that point, or answer other Herald questions. A spokeswoman said, “Beyond its tax statement, Microsoft does not provide additional commentary regarding its corporate structure.”

In December last year, Microsoft NZ reported it had reached a settlement with Inland Revenue that saw it pay $24m in back-taxes.

The special payment followed an IRD audit of Microsoft’s transfer pricing audit relating to its financial years from June 2013 through to June 2017.

Transfer pricing involves payments between one wing of a company and another for goods and services. These in-house charges can be high-balled or low-balled if a multinational is seeking to shift revenue between countries in a bid to evade or minimise tax.

At the same time, it appeared Microsoft NZ had moved to invoice more of its NZ revenue locally – mirroring a similar move across the Tasman.

Microsoft NZ revenue ballooned from $182.7m in FY2018 to $462.3m in FY2019 (and largely due to the one-off settlement, it reported a $3.7m loss vs a $16.2m profit in 2018).

Microsoft NZ is a wholly-owned subsidiary of MBH Limited, registered in Bermuda. Its ultimate owner is Microsoft Corporation in the US.

At least some of Microsoft NZ’s local revenue is invoiced to a subsidiary in Singapore, according to recent invoices sent to this reporter (Microsoft did not immediately respond to questions on the breakdown between products).

The FY2020 accounts filed this week also revealed that Microsoft has set up a new local subsidiary, called Microsoft 6399 NZ Ltd, which is 100 per cent owned by Microsoft Ireland.

The filing says Microsoft NZ “has contributed $39.1m for the construction of the new Data Centre building on behalf of Microsoft 6399 NZ Ltd.

In May, Prime Minister Jacinda Ardern revealed that Microsoft would build one of its Azure regional data centres in Auckland – the first time one of the Big Three cloud computing data centre operators (the others are Amazon and Google) had committed to a local server farm.

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In September, the Overseas Investment Office granted approval for the build, noting “the investment involves the acquisition of interests in land for the operation of data centres, the value of which is not yet confirmed but will exceed $100m”.

“It signals to the world that NZ is open for business and quality investment,” Ardern said.

Microsoft has been schtum on further details.

In October Canberra Data Centres (48 per cent owned by NZX-listed Infratil), confirmed plans to spend more than $300m on twin data centres – one in Auckland’s northwest at Hobsonville, the other north of the city at Silverdale.

Microsoft has been a close partner of CDC across the Tasman since 2017, when company announced two Azure data centre “regions” that would run out of newly-built CDC facilities – which were treated as top secret until they opened.

Neither Microsoft nor CDC will say if their Auckland data centre builds are interlinked.

Notes with Microsoft NZ’s FYY2020 financials also reveal that Microsoft-owned Metaswitch Networks paid US$49m to buy 100 per cent of NZ-founded, UK-based networking software maker Open Cloud in July this year. Early investors in Open Cloud included Jenny Morel’s No 8 Ventures.

Microsoft NZ also said it had renewed its lease on its Wynyard Precinct building in Auckland for a further six years for “approximately $11.5m”.

Encouraging multinationals to book more local revenue locally continues to be tricky, murky terrain.

Google fulfilled a pledge to book all NZ revenue in NZ with its FY2019 return, filed in July this year. But at the same time, inhouse service fee payments from Google NZ to its US parent ballooned from $85m in 2018 to $511m, and its tax payment remained in the single-digit millions.

Meanwhile, Facebook NZ again declined to file a financial return with the NZ Companies Office for FY2019.

The fully-owned Facebook subsidiary said its annual revenue fell under the $10m mandatory reporting threshold – despite Facebook and Facebook-owned Instagram dominating the social media market in NZ. IAB figures pegged social media ad spend at at least $119m in NZ during 2019 (IAB figures only include bookings made through agencies).

Massey University taxation lecturer told Victoria Plekhanova that changes were needed to make NZ tax laws more effective, and transparent. In Facebook’s case, the academic thought the multinational was exploiting a rule introduced to save paperwork for small businesses.

A Facebook spokesman said it was up to the NZ Companies Office whether Facebook NZ’s financial statements were published.

Ahead of the election Revenue Minister Stuart Nash would not comment on individual companies, but promised a tightening of the rules if Labour was re-elected. David Parker took over the portfolio post-election and is currently getting his feet under his desk.

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