Did Google allocate excessive profits to its NZ operations?

Stuff reported that for 2019 Google NZ reported a significant increase in its reported profits and tax payable in New Zealand. Google NZ reported an operating profit of $10.6m, which represents tax payable of around $3m. Considering the overall Google sales in New Zealand captured by Google offshore appear to be around $550m, the $10m profit does not appear a generous margin for its NZ subsidiary. We understand Google NZ employs around 40 people and incurred $25m in operating costs (wages, office costs, marketing) to earn that $10m profit- interestingly, the 40% plus return on its total operating costs would better most NZ businesses. Compare with Spark that earned an equivalent return of 25% on its costs and undertook far more value-creating activities in NZ than did Google.

As the article rightly suggests, Google NZ may only be required to pay more tax if the OECD succeed in changing the international tax rules in allocating profits from digital companies like Google, or NZ imposes a digital services tax. The NZ Government prefer a consensus OECD approach, which would see Google allocating a greater portion of its offshore profits to NZ. As TPTS commented in our previous article, an initial estimate of OECD’s Pillar 1 proposals suggests only $60m additional tax revenue for New Zealand. An alternative 3% digital services tax would inevitably raise the overall NZ tax bill for Google. As we recently commented in our DST article the USA is not comfortable with the OECD proposal and is attacking countries imposing digital services taxes.