The G7’s agreement on a minimum corporate tax rate is a considerable milestone in the campaign against tax-avoiding tech giants. But as Pattrick Smellie of BusinessDesk writes, it will take a lot more to hold the likes of Facebook accountable.
It’s a fair bet that neither Facebook’s Mark Zuckerberg nor anyone at Google HQ in Mountain View, California, wakes up in a sweat worrying about their social licence to operate in New Zealand.
Both globe-wrapping digital behemoths do business here in the same sort of split-screen world as banks and electricity companies. On one hand, nobody really likes them much. On the other, almost everybody with access to the internet uses one or both platforms most days of the week without a second thought.
Unlike banks and power companies, however, the global digital companies have a lot of choice about how much tax they pay in New Zealand. And here, a gulf between the attitudes of Facebook and Google emerges.
Back in the middle of this decade, Google’s New Zealand operations showed relatively small revenues of around $10m to $15m and the operation was typically loss-making. To put this in perspective, Advertising Standards Authority figures shows New Zealand’s digital-only advertising turnover was $1.21 billion in 2020, almost 55% of the total ad spend in the year.
Something must have gone wrong in the 2014 financial year because Google NZ produced a profit of $162,253, but in 2015, 2016 and 2017 it returned to booking losses, recorded at $601,463, $603,755 and $1m respectively.
Clearly, these could not possibly reflect the true scale of Google’s NZ activities. Rather, the company was booking its New Zealand profit in some other jurisdiction, most likely with a lower tax rate.
In the last two financial years, however, Google NZ has taken a new tack. In the 2019 and 2020 financial years, it has declared the advertising booked by its New Zealand office as local income, leading to substantially higher revenues and the declaration of material profits in New Zealand for the past two years.
In the accounts filed last week with the NZ Companies Office, Google NZ reported revenue of $43.8m for the 12 months to Dec 31, up 21% on the previous year, and profit after tax of $7.8m.
On that, it declared $2.4m in tax payable, for an effective tax rate of 23.5%.
That’s still somewhat below the New Zealand company tax rate of 28%, but by comparison with Facebook NZ’s disclosures, a remarkably creditable effort.
Crickets from Facebook
That’s because Facebook hasn’t filed any accounts with the Companies Office since 2015.
Perhaps the company got sick of the fact that its accounts would, each year, be reported with barely disguised disbelief at the tiny revenues and apparently inevitable losses it incurred in New Zealand.
Whatever the reason, Facebook NZ is in clear breach of its legal obligation as a foreign-owned company to file accounts with the Companies Offices.
It looks almost as if Facebook simply doesn’t care what the rules here are, nor is inclined to book revenue and profits in New Zealand.
What can be inferred from these differing approaches to corporate citizenship?
Firstly, it shows that multinational companies have become increasingly sensitive to how they are perceived – particularly how much tax they pay – in the countries where they operate.
That’s hardly surprising. For the last eight years, the OECD’s base erosion and profit-shifting (BEPS) initiative has been trying to find ways to police income and taxes declared by companies that operate across international borders. Frustrated by the lack of BEPS progress, numerous countries have pursued initiatives most often aimed at the big US-born but “borderless” tech companies like Facebook, Google, Amazon, Apple and others.
Some have pursued a digital revenue tax, prompting sanctions from the US government. Others, such as Australia, have played hardball over payment for content exploited by the social media and search companies.
New Zealand has sniped from the sidelines and has a digital tax discussion on the books, but would rather go with an agreed international approach.
That makes last week’s G7 agreement in principle on a new global tax regime particularly significant. It will seek to force multi-national companies – digital tech companies in particular – to pay reasonable amounts of tax in every country where they operate.
This is perhaps the biggest advance on this tortuous road so far and has the backing of governments with clout, particularly the US.
However, the actions of Facebook and Google in NZ also indicate how differently the big tech companies can respond to such pressure.
It is clear Google NZ is inclined to make nice, choosing in the last two financial years to declare advertising revenue booked by its New Zealand office paying tax on that.
It presents an activist face in its government relations and is trying to stay ahead of a government showing increasingly regulatory instincts. It will placate local news media by implementing its Google News Showcase product, which will pay news producers something for republication and is being hailed in Australia as reviving news media companies’ fortunes.
In short, Google is pursuing a self-interested, carefully calibrated exercise in good corporate behaviour to maintain its political and social licence to operate in NZ.
Facebook, apparently, doesn’t give a flying one.
The company has a few employees in New Zealand, but the only time this reporter has ever clapped eyes on a Facebooker in an official capacity was before the 2017 election when executives from Sydney hosted a breakfast to explain how journalists could do a better job of providing free content for Facebook to monetise.
At the same time, the company has simply stopped disclosing anything about the scale of its commercial activities here.
Where Google pursues what it hopes is enlightened self-interest, Facebook’s approach is cynical – and arrogant to the extent that it has been flouting its filing obligations for five years.
There is a third important aspect to the way Google and Facebook report their New Zealand financials. That is: they can still very much choose what to put in and what to leave out.
At $43.8m revenue in fiscal 2020, Google NZ’s contribution to parent Alphabet’s total global revenues is minute.
Both companies are fantastically profitable at a global level, both have experienced exponential growth in a little more than a decade, and both have enormous capacity to decide where, whether and when to take their profits and pay their taxes.
Take Facebook, which recorded total revenue of just US$777 million revenue in its 1999 financial year. By 2019, the year it live-streamed the Christchurch mosque shootings, its annual revenues were US$70.7 billion, rising to US$86b in the 2020 financial year.
On “income from operations” of US$32.7b for 2020, Facebook declared an operating margin of 37% and an effective tax rate of 12.5%, according to company filings in the US.
The Google story is similar, although the numbers are bigger. By 2009, it was already turning over US$29.3b and, as part of Alphabet, had total revenue of US$182.5b in the 2020 financial year.
Profit before tax came in at US$48.1b, with tax provisioning of US$7.8b – an effective tax rate of 16.2%.
The G7 agreement
The G7 agreement on a minimum global tax rate of 15% on multinational companies earning margins above 10% suggests that Google is running its business in a way that might roughly meet those metrics already.
Facebook, however, would have some catching up to do.
What is far less clear from the bare bones announcement from the G7 is whether tax authorities will be either clever or powerful enough to reliably establish such companies’ taxable activities in each country where they operate.
Depending on ethical, political and commercial considerations, the global tech companies’ ability to rearrange their affairs to meet the G7 thresholds while still shifting income into lower taxed jurisdictions may prove extremely difficult to police, let alone halt.
The G7’s high-level agreement on a fairer global tax system already faces a sea of political hurdles: agreements from the G20 next month, the US Congress, and the 29 EU member states, not to mention the geopolitical chasm opening up between China and the US.
Overcoming those hurdles would be a huge achievement. But the capacity for global-scale corporations to run rings around domestic tax law is hardly likely to disappear.
For big companies to pay their fair share of tax, they need to decide it’s their duty to do so. Only when their customers, rather than governments, make that duty very clear are they likely to consider it.
This article originally appeared on BusinessDesk. Their team publishes quality independent news, analysis and commentary on business, the economy and politics every day. Find out more.