Big tech and tax: Google NZ defends ‘new model’

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.

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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 $2.36m in tax, against the year-ago $2.49m.

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 statementssuggest 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.”

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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.

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