Google’s results are an indication of the huge and increasing scale of its local business. Photo / AP
Google NZ paid nearly $1 billion in inter-company service fees for the year to December 31, 2023 — an indication of the huge and increasing scale of its local business.
The firm, which has a
reseller agreement with Google Asia Pacific for search ads, Google Cloud other services, paid in-house service fees of $959.4 million, a 10 per cent increase on the $870.4m paid in 2022. “The company incorporates a margin in the calculation of its service fees,” notes with its accounts say.
Google NZ, a subsidiary of the US-based Google International, and Google Asia Pacific, headquartered in low-tax Singapore, are both ultimately owned by the tech giant’s US holding company, Alphabet.
Google NZ’s 2023 revenue, which is net of inter-company payments, was $84.3m — a 7 per cent lift on 2022′s $78.1m.
A rise in expenses had after-tax profit drop to $17.8m from the prior year’s $20.5m.
Estimated income tax expense was $5.6m v $4.4m in 2022.
Google declined an interview. A spokeswoman said in a statement, “We continue to invest locally through infrastructure, community engagement and product launches, and work in cooperation with Inland Revenue to comply with New Zealand’s legislative requirements.”
A lot of noise, little-to-no impact
There are two big tax-rule changes in the works for multinationals operating in NZ — one confirmed (Pillar Two), the other possible (a Digital Services Tax).
Following Facebook NZ’s recent accounts, which had the social media firm book $9m in NZ revenue as it made $157m in payments to a Meta subsidiary in low-tax Ireland, the Herald asked Revenue Minister Simon Watts about the Government’s plans to address revenue-shifting by Big Tech firms.
“The issue you refer to is of concern not just to New Zealand, but to all jurisdictions. That’s why the OECD is currently working on a solution, known as the Two Pillar Solution. Pillar Two has just recently been passed and enacted into New Zealand law. This targets the problem of a large multinational reducing its tax liabilities by relocating mobile income to low or no-tax jurisdictions,” Watts said.
He said Pillar Two rules meant large multinationals with global annual revenue of more than €750m ($1.35 billion) faced a minimum 15 per cent tax in every jurisdiction in which they operated. “This will reduce the incentive to shift mobile income to achieve a tax advantage.”
Pillar Two comes into effect on January 1, 2025.
In a note with its 2023 accounts, Google says, “The company is currently assessing the potential implications of the recently enacted Pillar Two legislation. It is not yet possible to estimate its potential impact based on the information available at the time of financial statements approval. The company expects to progress its assessment during 2024.”
But experts’ verdict is already in: it will have little-to-no effect.
The underlying rules of Pillar Two — and a companion measure known as Pillar One — are “very complex”, Massey University School of Accounting senior lecturer Dr Victoria Plekhanova said.
But the real-life result for NZ is simple. For several reasons, including the fact NZ’s corporate tax rate of 28 per cent is above the measure’s 15 per cent minimum tax, “Pillar Two will not impact the amount of revenue Big Tech firms report in NZ and the tax they pay in NZ”.
The same goes for a companion measure called Pillar One, Plekhanova says, should an international consensus ever be reached on its tax-sharing measures (unlike Pillar Two, its agreement seems far off. The US is a notable hold-out).
Digital Services Tax back on the table
In 2019, then Finance Minister Grant Robertson and then Revenue Minister Stuart Nash took the idea of a digital services tax (DST) to Cabinet. Big Tech firms would pay a “DST” equivalent to either 3 per cent or 6 per cent of their locally booked revenue, regardless of profit.
The policy followed Britain adopting a flat 2 per cent DST on locally generated revenue and the 3 per cent DST imposed by Spain, France and Italy.
The idea was put on the back burner until August 31 last year — that is, the final sitting day of the last Parliament — when the Digital Services Tax Bill, providing for a 3 per cent DST, was introduced. The House rose for the election before it could have its first reading — and of course Robertson’s party went on to a defeat.
Big Tech might have thought that would be the end of a DST, but Watts reinstated the bill in December — though whether he sees it as more than a bargaining chip has yet to be seen.
“A multilateral solution remains our preferred approach. While we have reinstated the Digital Services Tax Bill, we have made no decisions about whether it should progress at this time,” Watts told the Herald.
PwC partner Sandy Lau said if a DST were implemented, it would probably apply to a firm’s gross local revenue — in Facebook NZ’s case, its total sales of $163m rather than its net revenue of $9m after payments to Meta Platforms Ireland. But she said it was also possible that firms like Facebook, Microsoft and Google would simply pass on the 3 per cent cost to their NZ customers.
Another issue, raised by Ministry of Foreign Affairs and Trade officials, is that New Zealand could potentially face retaliatory tariffs, which could hit Xero and other New Zealand-headquartered cloud firms that collectively brought in some $3b in export receipts last year.
The officials saw a DST bringing in about $90m a year. But, based on France’s experience with software exports to the US following its introduction of a DST, it saw possible retaliatory tariffs of $100m a year.
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.