Google NZ's 2019 financial result, filed earlier this week, suggests that a government attempt to clamp down on revenue-shifting by multinationals was "inadequate", an academic says.
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Earlier this week, Google filed the 2019 accounts for its New Zealand operation (its financial year coincides with the calendar year).
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. (Facebook, which made the same pledge, has yet to file its 2019 NZ accounts.)
But at the same time, inhouse service fee payments from Google to its US parent ballooned from $85 million in 2018 to $511m in 2019.
That meant while Google NZ did book notably more revenue in 2019 ($36.2m vs $17.5m in 2018) and pay more local tax ($3.7m on pre-tax profit of $10.6m vs $532,000 in 2018 after a $1.0m loss), its reported revenue was still way below conservative industry estimates of $687.96m - based on Google's domination of at least 90 per cent of search ad revenue in NZ, put at $1.26 billion by industry tracker IAB.
A Google spokeswoman said the $36.2m reported revenue was net of the $511m service fee. The service fee had increased because of a "new operating model".
Google was compliant with all applicable tax laws, the spokeswoman said.
Massey University School of Accountancy lecturer Dr Victoria Plekhanova didn't dispute that claim, but did note to the Herald that a local company with Google's result would have paid at least $85.53m in tax.
"With a conservative estimate of $687.96m in NZ search ad revenue for Google, net costs could be around $305.45m - based on the cost of the revenue for Alphabet of 44.4 per cent reported in 2019) and net income $382.51m. A domestic company without available losses and tax credits with the estimated net NZ search ad revenues of Google would have an $107.1m income tax bill [$305.45m taxed at 28 per cent]; somewhat greater than the $3.6m Google paid." (Alphabet is the holding company that owns Google Inc.)
Plekhanova notes net income would have been north of the $382.51m, given Google also sells display ads on YouTube, and various cloud software and services.
"It might be time for the Inland Revenue to look closely at the fee payments made by Google NZ to other companies in the group and the amount of ad revenue booked in New Zealand," Plekhanova said.
"Google was no doubt well advised on the new anti-avoidance provisions introduced in 2018 to capture profits diverted from New Zealand.
"Google's NZ financial statements for 2019 suggest these provisions were an inadequate response to the tax challenges of the digitalisation."
Across the Tasman, the so-called "Google Tax" legislation has seen tech giants report more revenue locally over the past two years. Google Australia recently reported A$4.8 billion in revenue for 2019. It made a pre-tax profit of A$134m, which resulted in A$59 million in income tax - or a total A$99.8m after an adjustment for 2018.
Here, the Taxation (Neutralising Base Erosion and Profit Shifting) Act, which came into force in July last year, was designed to make it harder for multinationals to revenue or profit-shift.
The government has been mulling a further move: a digital services tax that could be set at 3 per cent of a tech multinational's New Zealand revenue (as opposed to profit). However, the proposal has now been on the back-burner for more than 18 months.
Opponents of unilateral moves argue that unless globally coordinated moves are made to clamp-down on revenue and profit-shifting (such as the OECD's slow-moving BEPS process), multinationals will always find loopholes; that New Zealand has to be wary of other countries laying claim to our largest exporters' profits; and that companies like Google are entitled to charge local subsidiaries hefty service fees to cover R&D and other product development costs incurred by a US parent.
Plekhanova says the sudden jump in Google NZ's service fee in 2019 is worth a closer look by IRD, however.
Asked about the increase in service fees from 2019, a spokeswoman for Google NZ said 2019 was the company's first full-year under its new modus operandi of invoicing all New Zealand business locally.
"This is our first full year of operating under our new business model and we have worked constructively and collaboratively to ensure that we comply with New Zealand's legislative requirements," she said.
A spokeswoman for Inland Revenue said, "We don't comment on the tax affairs of individuals or entities, so we won't be commenting on Google's 2019 accounts."
An alternative approach
Earlier this month, Plekhanova noted that the Australian Competition and Consumer Commission is developing a mandatory code of competitive conduct that will require Google and Facebook to pay news media for the use of their content. There are similar developments in France.
Such codes target anti-competitive conduct, whereas a DST involves compensation for the loss in revenue caused by outdated international tax rules. To some extent, a digital services tax (GST) is a charge for the dominant market position of multinational digital services firms, the Massey academic said.
"The ACCC's code is not a substitute for a digital services tax, but New Zealand could do worse than consider a similar scheme. In the end, both a DST and enforcing payment for content will be necessary if New Zealand wants its local media to survive, let alone thrive - and not just at the expense of taxpayers."