Google NZ's 2020 financials have taken the same track as its "new normal" introduced last year.
With its 2019 result the tech giant fulfilled a 2018 pledge to book New Zealand revenue in NZ, where previously it had invoiced local business to subsidiaries in lower-tax Ireland or Singapore.
But at the same time, in-house service fee payments from Google to its US parent ballooned from $85 million in 2018 to $511m in 2019.
Similarly, for the 12 months to December 31, 2020, Google NZ has reported revenue that rose to $43.8m from 2019's $36.2m. The revenue figure was net of the service fee, which increased to $517m.
The fully-owned subsidiary anticipated it would pay $3.3m in tax, on a par with 2019.
Net profit was $7.8m from last year's $8.12m.
A Google NZ public affairs manager Carrie Jones said the service fee had increased because of a "new operating model", which was compliant with tax law.
Massey University School of Accountancy lecturer Dr Victoria Plekhanova told the Herald that Google NZ was playing within the new rules - which could mean they were not yet strict enough.
"Google was no doubt well advised on the new anti-avoidance provisions introduced in 2018 to capture profits diverted from New Zealand, but Google NZ's financial statements suggest these provisions were an inadequate response to the tax challenges of the digitalisation."
The counter-argument is that it's valid for companies to book most of their revenue to their home country, if that's where they incur most of their corporate expenses, including product development - and that NZ could suffer if the boot was on the other foot and local cloud companies like Xero had offshore earnings targeted by other governments.
And Google NZ public affairs manager Carrie Jones followed that path this morning, telling the Herald, "As a global business, we pay the majority of our US$7.81b total global corporate income tax in the US, where we also perform the majority of our US$27.6b worth of R&D work."
Jones added, "We have continued to work constructively and collaboratively to ensure that we comply with New Zealand's legislative requirements."
NZ giving 'free ride' for big tech
Plekhanova points to research by the Fair Tax Foundation, which over the last ten years found a gap of more than US$100 billion between the cash taxes actually paid by six Big Tech firms (Facebook, Apple, Amazon, Netflix, Google and Microsoft) and the amount that would be expected to be paid under the headline corporate income tax rates.
"The research also indicates that these firms are becoming more and more aggressive in their tax planning," she says.
The Massey academic notes that in its 2020 financial statements, "Google NZ confirms the Covid-19 pandemic caused no significant disruption to its business. The company's revenue from its New Zealand operations increased by 21 per cent. At the same time, its general expenses doubled; the 'costs of sales' rose by 56.9 per cent, while other sales and marketing expenses increased by 15.5 percent. And the amount of 'service fees'; Google NZ pays to related parties located offshore has increased from $511.4m in 2019 to $517.1m in 2020.
"As a result of these unexplained cost increases and profits shifted overseas, in 2020 Google reported even less net profit in New Zealand and paid less income tax than in 2019. "
In these circumstances, "The New Zealand Government's wait-and -see approach to the taxation of the tech giants raises more and more questions," Plekhanova says.
"Unlike the United Kingdom and Australia, New Zealand does not have diverted-profits tax that can target contrived arrangements of multinationals that shift profits offshore.
Such a tax could potentially increase New Zealand's tax intake from Google and other tech giants, she says.
But instead, "The NZ Government says it is waiting for a 'compromise solution' among the OECD members.
"But that is unlikely happen any time soon, if at all), given the lack of meaningful support from the US for changes to the tax system that would increase the foreign taxation of the tech giants."
Earlier this week Chancellor of the Exchequer Rishi Sunak urged world leaders to support a tax on tech giants – a reference to the digital services taxes that have been introduced by a number of countries.
"The New Zealand Government should stop allowing the tech giants to free ride, join Sunak's call, revive its work on the Digital Services Tax proposal and introduce the tax by the end of this year," Plekhanova says.
In June 2019, Finance Minister Grant Robertson and then Revenue Minister Stuart Nash saidoptions were investigated for a digital services tax, which had first been put to cabinet in February of that year.
They included our government taking a flat 2 or 3 per cent cut of all digital revenue that a multinational tech company earned from online services sold to customers in New Zealand - as long as the company had global revenue above $1b.
However, the initiative appears to have been put on the backburner, in the context of pledges from big tech companies including Google and Facebook to book more revenue in NZ (the Herald has asked Robertson and new Revenue Minister David Clark for comment. Facebook did not file a financial return with the Companies Office for its New Zealand operation last year. Plekhanova saw the social network exploiting an exemption that had been introduced to cut red tape for small businesses.)
Boom times globally
Globally, Google's parent company Alphabet had a brief dip in revenue when the pandemic first hit last year, but has otherwise boomed during the pandemic - following a similar arc as many companies who do most of their business in the cloud.
Alphabet reported on April 27 that revenue in its most recent quarter increased sharply from the same period a year ago, boosted by strong demand for online advertising on its search results and YouTube videos and by continued growth at its cloud computing arm.
Alphabet posted revenue of US$55.31b, up 34 per cent from a year earlier, and net profit more than doubled to $17.93b in the first quarter. It was the third straight quarter of record profit for the company. The results came in above analysts' expectations.
After a pullback in travel-related advertising during the first few months of the outbreak, Google's advertising business has rebounded with gusto. Businesses are spending money with Google to target consumers who are spending more time online.
Advertising revenue rose 32 per cent in the quarter spurred by strong demand for search marketing. Alphabet also generated $6b in YouTube ads, an increase of 49 per cent.
In the months ahead, Alphabet faces possible headwinds from an Apple clampdown on ad-tracking and antitrust actions brought by the US and EU. So far, however, the legal action has not crimped the US$1.6 trillion company's style.