Google says it will pay more tax here – but it's vague on key details

Perhaps sensing which way the wind is blowing, Google has indicated it will restructure its business so ad revenue generated in New Zealand is booked locally rather than invoiced to low-tax Singapore.

The key thing to watch now is whether other multinationals follow in Google's footsteps, making voluntary concessions in a bid to water down corporate tax legislation now before Parliament. That legislation cracks down on using high-interest loans from a parent company as a way to minimise tax (a jape favoured by Vodafone for a period) and "artificial arrangements that avoid a taxable presence in New Zealand."

“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," Revenue Minister Stuart Nash tells NBR.

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

In a parallel move, IRD is auditing 16 multinational firms for alleged tax avoidance. The agency has refused to name the firms, but in filings, Oracle and Microsoft (which recently transferred ownership of its New Zealand operation to Bermuda) have acknowledged they are part of the audit. 

Google pledges to invoice NZ ad revenue to an NZ entity
In a letter to Parliament's finance and expenditure committee, which is assessing ways to combat profit and revenue shift by multinationals as it considers the Taxation (Neutralising Base Erosion and Profit Shifting) Bill, Google’s New Zealand government affairs manager Ross Young relitigates arguments traditionally used for minimal tax payment in New Zealand, including that Google has only 30 staff here, and that most product development is carried out in the US.

But then he switches tack and reveals Google’s surprise change in approach. He writes: "Noting the desire of seeing New Zealand-sourced income booked locally, we are pleased to advise the committee that Google intends to shift to a new operating model in New Zealand. This will increase transparency on the revenue generated by our New Zealand business.

“In the past, when a customer bought advertising from Google, our Asia Pacific headquarters in Singapore entered into a contract with that customer, and earned revenue from that contract in Singapore, while Google NZ received an arm’s length remuneration for the services it performed," he says.

The remuneration must have been modest; IAB figures indicate Google’s search of the local ad market runs to hundreds of millions of dollars but it booked only $12.2 million in revenue in 2016, showing a $603,000 loss and paying $305,000 in tax.

Mr Young says Google intends to shift its business model from this past approach, "such that customers will enter into contracts with our New Zealand entity, which will generate revenue from New Zealand advertising customers, and pay taxes in line with its role in the transaction."

Google dominates the search ad market with 90% share – and search, in turn, dominates the digital ad market. A PwC survey for the IAB (Interactive Advertising Bureau) indicates Google probably booked hundreds of millions of ad revenue from New Zealand customers in 2016. However, by invoicing most of that business to offshore subsidiaries, it was able to declare just $12.2 million in New Zealand revenue for the year and pay a modest $305,000 in New Zealand tax.

Unanswered questions
NBR had a number of questions about Google’s change in policy, including when it would kick in, whether it would apply to new customers or new and existing customers, whether GST will now be applied, and whether it would apply to products like Google Play and the commercial versions of Google Apps.

However, the company's new spirit of transparency did not extend to making Mr Young available for an interview. In fact, the company would make no comment at all.

Spark: good to see Google acknowledge issue
Spark managing director Simon Moutter has been a fierce critic of Google's revenue sharing, even going as far as accusing the company of "despicable behaviour." 

This afternoon, his company cautiously welcomed Google's pledge to book more NZ revenue in NZ. 

"It’s good to see Google has acknowledged this issue. A basic principle should be that all companies making money from doing business in New Zealand, regardless of where they are located, should make an equal contribution to our society by collecting and paying their fair share of taxes," Spark corporate relations GM Andrew Pirie told NBR.

Tactical move?
There is popular momentum behind the previous and present government's slow creep toward a revenue and profit-shifting clampdown.

However, some have said a clampdown could hurt foreign investment in New Zealand or lead to tit-for-tat reprisals against New Zealand companies who generate revenue offshore.

The Australian government's so-called "Google tax" notwithstanding, former prime minister Sir John Key said it would be difficult to crack down on profit-shifting through unilateral action. It was better to wait for the OECD's multi-country BEPS (Base Erosion Profit-Shifting) project to eventually grind into action.

RAW DATA: Google's letter to the committee 

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