Wednesday 9 June 2021

TwitterNZ, tax, and transfer pricing

BusinessDesk reports that Twitter is setting up a local affiliate. So we can expect, a year from now, performative outrage about local tax paid. 

When I taught public econ at Vic, we had a short bit on company tax and international considerations. I invited the students to imagine that there were no Google New Zealand. Instead, New Zealand companies would be invited to bid for the right to manage NZ-based advertising sales for Google, getting a cut of the revenue from the adwords auctions. In the limit, where NZ is a competitive marketplace, how much do Kiwi companies bid for that right? The price of the right to be the contracted local affiliate should eliminate any local economic rents. The rents instead accrue to the IP, developed, run and taxed in the United States. 

Under that setup, the local affiliate doesn't pay much tax in NZ. It collects a lot in revenue, which it pays as its license fee to the US. Company tax is based on revenue less cost, and that license fee is part of the cost. It's revenue to Google US, and then gets taxed there.

It's obvious when you run it as separate companies. When instead Google NZ pays Google US to get the advertising product it onsells here, people argue about the transfer pricing arrangements and whether they're set to replicate the numbers that you'd get in the separate-companies kind of scenario, or whether they're set to shift taxable income to places where taxes are low. There are OECD transfer pricing guidelines on this stuff, and I understand that Google works with IRD to make sure that their practice is sound. 

Like, imagine that people were outraged that, while Honda makes a lot of money selling cars here, they write off as expense the cost of buying the cars in Japan and shipping them here, and called for taxing Honda based on gross revenues. Is it that different from what Jonathan Milne says here, from today's Newsroom Pro newsletter?

Facebook doesn't disclose its earnings in New Zealand, but the G7 agreement coincides with Google NZ filing its annual accounts with the Companies Office. Its press statement highlights the $3.3m tax it is paying on a profit of $10.19m. It fails to mention the $517m that Google NZ has paid its US parent company in service fees – an expense that it books against its gross earnings in order to report a laughably small taxable revenue in this company.

Anyway, maybe there's some advantage in Twitter bringing its NZ sales in-house and having local staff. But expect outrage next year when similar amounts of money go back to head office to cover the IP, overall tax paid doesn't much change, but the optics of it do because it'll be a transfer pricing arrangement. 

Update: Pattrick Smellie at BusinessDesk is worth reading. You should subscribe. 

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 NZ 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 NZ, 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.

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