Google books NZ more revenue locally - but there are still many missing millions

Google's financial results still don't paint a full picture of local revenue. Photo / Getty Images

Google has fulfilled a pledge to book revenue locally rather than shift it to low-tax Singapore or Ireland. But industry analysis of the online advertising market indicates a majority of its local income is now being consumed by service fee payments by Google NZ to its parent that have suddenly ballooned from $85m to $511m.

In accounts filed this morning, the tech giant says its 2019 revenue rose to $36.2m in 2019 from $17.5m in 2018 (the company's financial year coincides with the calendar year).

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While the online ad market grew strongly last year, it didn't double. The jump in revenue has more to do with Google's 2018 pledge to stop invoicing New Zealand customers to lower-tax Ireland or Singapore.

According to the Interactive Advertising Bureau (IAB), online advertising in NZ increased 12.8 per cent to $1.26 billion in 2019.

Source / IAB

As usual, by far the largest category was search - almost totally dominated by Google - which grew 15.9 per cent to $764.4m. The gulf between that figure and Google's reported NZ revenue of $36.2m can be accounted by big increase in inhouse service fees.

In 2019, Google NZ paid $511.4m in service fees to related parties and received about $2.9 million of service income from other Google entities. In 2018, those services fees amounted to $84.9m while service income was $13.6m.

Earlier, digital media expert Kris Hadley, a founding partner at independent media agency Together, said that at least 90 per cent of the overall search value can be attributed directly to Google.

Hadley some advertisers might spend a small percentage of their budgets on alternative services such as Bing, but this only applies to a tiny niche.

So, at a conservative estimate of 90 per cent, around $687.96m in NZ search ad revenue would have gone to Google in 2019.

The Herald asked Google for comment on the difference between its reported 2019 NZ revenue and that figure.

A spokeswoman replied, "This is our first full year of operating under our new business model and we have worked constructively and collaboratively to ensure that we comply with New Zealand's legislative requirements."

Google's revenue reported for NZ was net of service fee costs, in line with accounting requirements.

Google NZ made an $8.1m profit in 2019 vs the $1m loss it reported in 2018.

And it paid $3.7m in tax vs $532,000 last year.

Operating expenses jumped to $20.4m from the prior year's $3.0m.

Globally, search ads accounted for 81.4 per cent of Google's revenue last year, with the balance coming from Google Cloud, the professional version of Google Apps and other paid services.

In its 2019 NZ result, Microsoft - whose NZ subsidiary is incorporated in Bermuda - said it had reached a $24.7m back-tax settlement with IRD, covering June 2013 to June 2017. Oracle has yet to file its 2019 local result.

Australia pre-empted a slow-moving OECD-wide effort to clamp down on profit-shifting by introducing its so-called "Google tax". NZ's Cabinet is mulling its own possible unilateral move - a digital services tax that could be 3 per cent of revenue generated in NZ. But for now, the issue is parked on the back burner.

Google and Facebook have both sought to blunt possible legislative change by voluntarily changing their practices to pay tax locally on profit generated in NZ.