What share of corporate tax did New Zealand get from this huge amount? Nothing, because Google's business here had a negative financial result. And the results for last year are likely to be the same for us and for many other countries.
A central problem is the absence of an appropriate regime for tax co-operation between countries. Existing tax treaty rules are complied with, but they are being stretched to almost breaking point when it comes to the taxation of cross-border digital services.
Google's operations in New Zealand are a perfect example. There are no Google data centres here, and the vast majority of transactions between local advertisers and companies in the Google group involve direct payments to Google's subsidiary located in Ireland. There is almost no income that can be taxed in New Zealand - profits are shifted abroad. Furthermore, Google pays almost no corporate tax in Ireland.
How then can New Zealand tax these cross-border digital services? In theory, it could be possible to remodel the permanent establishment concept and apply withholding tax. However, this approach has been criticised by the OECD and raises a number of issues to do with tax imposition and collection.
Another method to prevent profit-shifting could be the further development of transfer pricing rules. For high-tech multinationals operating in the global internet advertising industry such as Google, Facebook, Microsoft and Yahoo, the ultimate result of improved transfer pricing rules would likely be the allocation of almost all profits to the place where the technology originated: effectively, the US. For the almost two decades since free internet has existed, multinationals based in one country (the US) have dominated the market for contextual and display internet advertising.
ZenithOptimedia, a leading global marketing group, expects internet advertising's share of total advertising revenue to increase to 43 per cent this year, while newspapers and magazines continue to shrink at an average of 1 per cent a year.
Local media are therefore likely to play a steadily reducing role in the delivery of internet advertisements to New Zealanders, and the Government will get a steadily reducing share of any taxes on income earned from that activity.
If internet ad service suppliers pay virtually no corporate tax, traditional NZ-based media organisations may find it difficult to survive in the longer term.
This is a good reason to at least start thinking about how to get a share of corporate tax from multinationals supplying "cross-border" internet ad services.
What are other countries trying to do? A very popular idea in the European Union is the imposition of a "Google tax". To take a payment for access to a domestic advertising market, as would happen with a Google tax, seems a perfect solution on the surface. However, such a tax is at odds with moves towards open markets and global commerce, exemplified by the internet.
It is also the thin edge of the wedge, creating a precedent for the imposition of a "special tax" on a range of other economic activities. The introduction, administration and collection of a "Google tax" would create a myriad of practical problems.
The suggestion that some countries might ban Google is also not viable in the absence of alternative local service suppliers. The fact is, New Zealand and most other countries do not have their own search engine technology - the core of contemporary life.
So what can be done to resolve the problem of under-taxation? First, we should accept not only that the problem exists, but also the necessity of a new level of international tax co-operation. If an internet ad service supplier has no physical presence in a country, existing rules do not permit either the assessment or collection of corporate tax.
We therefore need a multilateral tax agreement that will establish a set of common rules for the allocation of taxing rights between countries, relating to taxation of business profits from cross-border internet advertising and, possibly, some of the other digital services.
The allocation of taxing rights could be based on the supply/demand approach that is used for the determination of a source of income. This approach would mean that not only the countries of production (the US and countries where data centres are located) but also the source countries (New Zealand, for instance) can tax a part of business profits derived by an internet ad service supplier from worldwide business activities.
Under this approach the tax base of the entire multinational group could be consolidated and business profits distributed between relevant countries in accordance with a formula.
Application of this idea to the taxation of internet advertising has its own difficulties, but it seems at this point to be the better alternative. This would allow Google to pay a fair share of corporate tax on its income when there is the connection with New Zealand of both a deductible expense and the market in which the advertising is performed.
Victoria Plekhanova, a PhD student with the University of Auckland Business School, is doing research to develop a new model to help countries such as New Zealand impose corporate income tax on the business profits of multinationals. She was previously an advocate at the litigation group of Ernst & Young in Moscow, Russia.
