Google Australia has filed its financial statement for 2018 and it provides an astonishing glimpse at how the business works.

It’s well known by now that Google Australia pays scant tax. It collected $4.32 billion in cash from customers in 2018, and declared only $1.07 billion in revenue. Of that revenue, Google Australia says, around $900 million went to costs, leaving $155 million in profit. It then dutifully pays company tax at the 30% rate, giving it a tax bill of $49 million.

So what explains the tremendous gap between the cash paid to Google Australia and the revenue it reports?

The answer is that Google Australia sends payments off to other entities that belong to its corporate parent. Billions worth.

Conceptually, this is fine. Much of the cost of running Google is offshore. To clarify the point, we will use a simple example.

Imagine a car company that owns a dealership in Australia. If we were to calculate the profit of the local arm by subtracting staff wages from the revenue made by selling cars, it would appear to be a very profitable business indeed. But of course there are costs of making the cars that are not located in Australia. The car dealership will — and ought to — pay its corporate parent for those cars. The same is true for Google.

But the question is how the car company values those unsold cars, or in our example, how Google calculates the value of the services provided by all the people in Mountain View California, and other locations.

If Google says the services it provides to Australia are very valuable, large sums of money flow away from Australia to places where the company tax rate might be lower than Australia’s. If it decides the services are not very valuable, large sums stay here and pay Australia’s company tax rate.

Would Google put a high value on those services in order to make Australian-sourced cash flow from Australia back to other locations where the company tax rate is lower?

This sort of question is central to the enormous debate roiling the tax world at the moment. Businesses these days span the globe, meaning imports and exports are often inside a company. In these cases we cannot rely on market pricing to tell us the value of those imports and exports. How to calculate “transfer pricing,” as it is called, is a technical question but one with the potential to undermine the global tax system.

It’s tempting to imagine that Google’s transfer-pricing decisions are made on a strictly technical basis. Certainly the ATO requires Google Australia to benchmark pricing against companies providing similar services, and Australia is a leader in making policy to combat transfer pricing that would permit profit shifting.

But it is very hard to imagine all the wriggle room is eliminated. And Google is not above moving money around. In 2017, Google just moved US$23 billion to Bermuda, a renowned tax haven.

Media profit

Focusing only on the tax implications of Google’s finances can make us miss the implications in the media space. Of its $4.3 billion in revenue, $3.7 billion is from advertising. That makes it a true monster of hitherto unseen size in the Australian media landscape.

Fairfax never made that much money. In its peak year, 2008, Fairfax earned $2.9 billion in operating revenue. (That had dropped to $1.7 billion in 2018, before it was bought by Nine).

News Corp never made so much either. In the peak of the golden age, 2008, its Australian revenue hit $3.2 billion.

Google represents something different. Despite the incredible proliferation of online space into which it can insert ads, it is able to command a high price for them. Ads, of course, fit neatly into search. It is undeniable that the best time to serve ads to someone is when they are searching for something. That’s what the classified pages of Newspapers represented too, and they were described as “rivers of gold.”

But classifieds usually also propped up news businesses (honourable exception to the Trading Post). Now our classifieds don’t.

News was the product media businesses gave away in order to win ad revenue, just like search, email and YouTube is what Google gives away in order to win ad revenue. Google produces almost no content, just mediums (media) for other people to produce content. In that sense, it truly is a media business. But is the value of that to a functioning democracy as high as the value of news? That’s a question we should consider alongside Google’s tax arrangements.