NZ is giving big tech a ‘free ride’ on tax: Expert

Our Government is giving big tech companies like Google and Facebook a “free ride” on tax, a Massey academic claims – while it waits, and waits, on a co-ordinated OECD process she thinks will probably never come to pass because of US opposition.

Massey University School of Accountancy lecturer Dr Victoria Plekhanova says a proposed digital services tax – first put in front of Cabinet in February 2019 – is to be taken off the back-burner and implemented by the end of this year.

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A DST would see multinationals pay a flat 2 or 3 per cent tax on the total digital revenue they generated from customers in NZ, regardless of their profit or loss. It would apply only to companies with global revenue of $1 billion or more.

Plekhanova’s comments came on the back of Google NZ adopting a “new model” over 2019, and with its 2020 result reported yesterday, that has seen it fulfil a pledge to book more NZ revenue in NZ, but at the same time dramatically increase a new service fee to its US parent, which tamped-down the amount of revenue exposed to the NZ taxman.

Plekhanova points to research by the Fair Tax Foundation which, over the last 10 years, found a gap of more than US$100 billion (NZ$137b) between the cash taxes actually paid by six big tech firms (Facebook, Apple, Amazon, Netflix, Google and Microsoft) and the amount that would be expected to be paid under the headline corporate income tax rates.

“The research also indicates that these firms are becoming more and more aggressive in their tax planning,” she says.

The Massey academic notes that in its 2020 financial statements, “Google NZ confirms the Covid-19 pandemic caused no significant disruption to its business. The company’s revenue from its New Zealand operations increased by 21 per cent. At the same time, its general expenses doubled; the ‘costs of sales’ rose by 56.9 per cent, while other sales and marketing expenses increased by 15.5 per cent. And the amount of ‘service fees’; Google NZ pays to related parties located offshore has increased from$511.4 million in 2019 to $517.1m in 2020.

“As a result of these unexplained cost increases and profits shifted overseas, in 2020 Google reported even less net profit in New Zealand and paid less income tax than in 2019.”

In these circumstances, “The New Zealand Government’s wait-and-see approach to the taxation of the tech giants raises more and more questions,” Plekhanova says.

“Unlike the United Kingdom and Australia, New Zealand does not have diverted-profits tax that can target contrived arrangements of multinationals that shift profits offshore.”

Such a tax could potentially increase New Zealand’s tax intake from Google and other tech giants, she says.

But instead, “The NZ Government says it is waiting for a ‘compromise solution’ among the OECD members.

“But that is unlikely happen any time soon, if at all, given the lack of meaningful support from the US for changes to the tax system that would increase the foreign taxation of the tech giants.”

Earlier this week Chancellor of the Exchequer Rishi Sunak urged world leaders to support a tax on tech giants – a reference to the digital services taxes that have been introduced by a number of countries.

“The New Zealand Government should stop allowing the tech giants to free ride, join Sunak’s call, revive its work on the Digital Services Tax proposal and introduce the tax by the end of this year,” Plekhanova says.

In June 2019, Finance Minister Grant Robertson and then Revenue Minister Stuart Nash saidoptions were investigated for a digital services tax, which had first been put to Cabinet in February of that year.

However, the initiative appears to have been put on the backburner, in the context of pledges from big tech companies including Google and Facebook to book more revenue in NZ (the Herald has asked Robertson and new Revenue Minister David Clark for comment. Facebook did not file a financial return with the Companies Office for its New Zealand operation last year. Plekhanova saw the social network exploiting an exemption that had been introduced to cut red tape for small businesses.)

A Google spokeswoman said the move reflects that most of its R&D costs are incurred in the US, where its corporate parent Alphabet pays most of its tax, and that Google has “continued to work constructively and collaboratively to ensure that we comply with New Zealand’s legislative requirements.”

How Google NZ fared in 2020

Google’s 2020 result took 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 $85m 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 $3.3m in tax, on a par with 2019.

Net profit was $7.8m from last year’s $8.12m.

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.

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.”

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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 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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