Google NZ pays $870m fee to US parent, books $78m local revenue

The trend of increasing service fees has continued - and related issues raise question about Kiwi sending money to overseas parent companies. Photo / Getty Creative

Google New Zealand increased profit and revenue for 2022 - and also increased the service fee it pays to its US parent.

In 2019, the first year the company said revenue from NZ customers would be booked locally - its service fee to its US parent ballooned from $84.8m to $511.3m.

The trend of increasing service fees included 2020, when Google NZ paid $517m to its corporate parent and in 2021, when the service fee jumped to $697m.

In its accounts for the 12 months to December 31, 2022, the service fee increased 28 per cent to $870.4m.

Google NZ’s net profit for 2022 increased by 36 per cent to $20.6m.

Revenue increased by 35 per cent to $78.1m (Google NZ booked $57.8m revenue for 2021, $43.8m for 2020, $36.2m for 2019 and $17.5m in 2018).

Google NZ’s tax expense for 2022 was $4.3m from $2.9m in 2021.

Asked to comment on the jump in the service fee to its US parent from $84.8m to $511m in 2018, coinciding with the move to book NZ revenue in NZ, a Google NZ spokeswoman said the service fee increased because of a “new operating model”, which was compliant with tax law.

Reported NZ revenue excluded the service fee, the spokeswoman said. The firm could not comment further on the service fee.

This morning Google NZ country director Caroline Rainsford said: “In the 2022 calendar year Google New Zealand made a pre-tax profit of $24.5m, resulting in a current income tax expense of $6.4m.

“We continue to invest locally through infrastructure, community engagement and product launches, and work in co-operation with Inland Revenue to comply with New Zealand’s legislative requirements.”

Google continued to work with IRD to ensure compliance with New Zealand’s legislative requirements.

Last August, Google made its “biggest infrastructure investment to date” with the announcement of a Google Cloud Region for NZ.

It had also supported the local news industry through its Google News Showcase and Google News Initiative (its efforts on this front include a commercial agreement with Herald publisher NZME) and provided support to educators and funded nonprofits, such as TupuToa, to further digital skilling of Māori and Pacific talent.

None of the parties have put a dollar value on any of the initiatives.

Facebook on similar track

Facebook New Zealand has followed a similar trajectory.

The local operation, ultimately owned by Meta, tripled service fees to Facebook Ireland to $84.2m for its 2021 financial year, as it booked more revenue locally. It also listed “intercompany payable” amounts to Facebook Australia of $4.1m (from $2.8m in 2020) and $30.8m to Facebook Ireland (from $11.4m the year before).

Earlier this week, Facebook NZ reported a $2.2m net profit on $8.7m revenue from contracts with customers and intercompany payments of $47.6m and service fees of $149m to Meta Platforms Ireland.

Meta declined an interview request, but did send a statement from Meta NZ & Pacific Islands head of public policy Nick McDonnell, who said: “Meta pays all taxes required in every country that we operate in, including New Zealand. We have always paid income tax in accordance with New Zealand’s taxation laws. We take our tax obligations seriously and we remain committed to supporting local communities and businesses in New Zealand. Meta has long called for and would welcome reforms to global tax rules by the OECD, which would provide much-needed tax certainty for businesses and boost public confidence in the tax system.”

Size of NZ digital advertising market

Digital advertising revenue figures collected by the IAB (Interactive Advertising Bureau) NZ indicate the scale of the business that Google and Facebook book from NZ customers.

The IAB said revenue from search ads - a category dominated by Google - increased by 7.1 per cent to $1.27b in 2022.

Revenue from social media ads - where Facebook features heavily - increased by 12.1 per cent to $182.9m.

Earlier, Dr Victoria Plekhanova, a senior lecturer with Massey University’s School of Accounting, told the Herald New Zealand was giving tech multinationals like Google and Facebook a “free ride” on tax.

In 2019, our Cabinet agreed to investigate the possibility of a flat 2 to 3 per cent digital services tax on Big Tech firms’ revenue generated in New Zealand, but the idea was put on the back burner.

The rise in intra-company service fees indicated NZ’s rules were not strict enough, Plekhanova said. In her view, the Government should revisit the digital services tax concept.

Aussies get tough

With its Budget 2023, Australia’s Government (as previously flagged) adopted the OECD’s Global Pillar Two Anti-Base Erosion (GLoBE) measure to institute a 15 per cent minimum global corporate tax rate.

It means Australia will be allowed to apply a top-up tax on a resident multinational parent or subsidiary company where the group’s income is taxed below 15 per cent overseas.

The measure, which applies to firms with global revenue of €20b ($34.86b) or more, will apply from January 2024 - and is expected to bring in an extra A$370m in tax revenue, with around half from Big Tech firms.

Some 130 countries including New Zealand agreed to Pillar Two - in principle - back in 2021 but without any binding commitment to implement it. Australia is one of the first, after South Korea, to actually implement it.

NZRise - a ginger group representing local IT firms - has been pushing the Government to take a tougher line on Big Tech with tax, saying it skews the playing field for local tenders.

Budget 2023 was delivered with no mention of Pillar Two and NZRise co-founder Don Christie said that was “demoralising”.

This morning, Massey’s Plekhanova said while the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill - which has submissions closing June 30 - could pave the way for GLoBE measures to be introduced here, she was not sure the OECD measure would be beneficial to NZ. She saw no agreement being reached on “Pillar One” of GLoBE (which is supposed to allocate some income tax revenue of some very large multinationals to countries where they do business) by the end of this year, “if at all”.

On the upside, that would clear the way to return to the digital services tax first floated in 2019.

There is overseas precedent, the academic said. Canada Digital Services Tax Act will see a flat 3 per cent tax on multinational tech firms’ local revenue from 2025.

“Canada will collect its DST retrospectively [to January 1, 2022]; presumably. NZ tax policymakers can consider this option as well,” Plekhanova said.

While New Zealand did not follow Australia’s so-called “Google Tax” on revenue shifting and other measures, Inland Revenue did go through a period scrutinising tech companies’ local results. In 2019, after an international transfer pricing audit by IRD, Microsoft agreed to pay a $24.7m “tax adjustment” relating to its accounts between 2013 and 2017.

During those years, Microsoft NZ was owned by a Microsoft subsidiary in Bermuda.

Ownership was subsequently transferred to Microsoft Ireland. Microsoft 6399 New Zealand, established in 2020 for the firm’s new data centre business in NZ, is also owned by Microsoft Ireland. Monthly subscriptions to Microsoft-owned LinkedIn are invoiced to lower-tax Singapore.