Government moves to crack down on tax avoidance by multinational firms are already bearing fruit, with Google telling Parliament it will no longer funnel New Zealand revenues into low-tax jurisdictions such as Singapore.

Revenue minister Stuart Nash welcomed the move in a statement and said he hoped it was harbinger of things to come.

"Any organisation that decides to change its behaviour as a result of this legislation should be welcomed," he said.

"Let's hope it sets a precedent for the large multi-nationals who aggressively arrange their tax affairs in an attempt to avoid paying their fair share of tax."


Tax experts told the Herald the move was significant - part of a broader restructuring of affairs by Google and other internet companies - but would not by themselves resolve thorny issues in international taxation that have vexed world and business leaders.

Auckland University law professor Craig Erliffe described the announcement as "a real breakthrough".

"This is very, very interesting, and very positive. I think you do have to see it in the international context - Google will be dealing with this issue all around the world," he said.

A tax expert familiar with multinational affairs said Google's moves were being repeated by other technology firms - so-called "weightless" companies as they relied on intellectual property that could be easily relocated to different tax jurisdictions - in New Zealand and abroad.

Google's move comes after online rival Facebook announced a similar move in December, bowing to mounting pressure from governments who have seen tax revenue bleed to havens.

The expert said the moves weren't entirely designed to ward off potentially punitive action from tax authorities.

"It's slightly less cynical than that - all these companies need a social licence to operate, and the collective weight of all those signals [criticism from politicians and public concern] are being responded to."

Google's comments, in a letter from the company's New Zealand manager of government affairs Ross Young to the Finance and Expenditure select committee considering measures to combat loopholes in corporate tax law, signal a marked shift in approach and will see more tax paid by the internet search giant.

Alphabet - Google's parent - like other internet companies, structured their affairs so contracts with customers in territories like New Zealand were settled in a low-tax jurisdiction such as Singapore or Ireland - meaning the customer's government had no claim on any income tax revenue.

The practice saw Google's New Zealand subsidiary provide only services as part of the sales process - paying just $356,000 in tax on only $12.2m in revenue. Estimates of Google's sales revenue from New Zealand range in the hundreds of millions of dollars annually.

Young's letter said this practice would cease. "We intend to shift out business model from this past approach, such that customers will enter into contracts with our New Zealand entity, which will generate revenue from NZ advertising customers, and pay taxes in line with its role in the transaction."

The issue of multinational tax avoidance became an issue during the election campaign last year, largely on the back of a major Herald investigation that showed a cluster of highly-profitable international firms structured their affairs to pay virtually no tax in New Zealand despite making billions in sales.

The Tax Gap series led the government to announce an crackdown on big corporates in late 2016, with the incoming Labour-New Zealand First coalition continuing the reforms.

Young's letter said the proposed legislation "will change how overseas companies operate in New Zealand ... and it sends a clear signal to the corporate community that it expects a change in behaviour."

The moves will also allow a more accurate picture of the local online advertising market - worth nearly a billion dollars annually - believed to be dominated by Google and Facebook, but whose shares have been only estimated in the past.

Erliffe said the new reporting structures meant "there'll be a lot more sunlight on the transactions", it would shift the debate over tax avoidance from revenue being funnelled out of the country to how profitable local operations actually were.

Google's letter noted corporate tax was traditionally "paid in the country where a business's products are developed" - an arrangement that would likely see large royalty or licensing fees paid back to Google's parent.

"That the reason they [Inland Revenue] will have a focus now on the level of profitability," Erliffe said.

The letter also disclosed Google had a 30-strong local workforce, and its search engine was used by New Zealanders more than 10 billion times a year.