Amazon cloud pays barely $1m tax on $391m revenues

The Government has set in place a new “cloud first” policy requiring all its agencies to store their information on the cloud. “Do not invest in on-premise ICT infrastructure unless information meets specific criteria,” chief executives are told.

Ideally, it says, information classified as “restricted” should be hosted in a New Zealand-based data centre, where a suitable onshore service exists.

Yet for now, restricted information about New Zealand departments, businesses and residents is all being shipped offshore. That’s because agencies have agreed to store most of their data with providers like Amazon and Microsoft that (despite assurances) haven’t yet opened their own local data centres.

Sustainability Council executive director Simon Terry says the new cloud first policy leaves New Zealand vulnerable to overseas cloud providers, and the resilience of their systems.

“The biggest issue to my mind is the cloud first policy’s failure to assess what would be the consequences for NZ Inc of certain government data becoming unavailable, were connectivity lost for whatever reason to offshore data centres,” he says.

According to a Cabinet paper that informed last year’s ministerial decision, there are concerns about a “less benign geopolitical environment”. There have been legal changes in some overseas jurisdictions where agencies keep their data, like the United States, that enable authorities to seize New Zealand data.

Despite that, the Government now requires its agencies to put almost all their data on the cloud and, because it hasn’t generally acknowledged the suitability of New Zealand data centres yet, that means shipping the data offshore to overseas providers like Amazon and Microsoft.

“It is a failure to both assess and then specify what data must be stored onshore to ensure resilient government systems through a crisis,” Terry says. “Only the national security aspect of data storage is considered, which concerns only a tiny slice of the information covered by the cloud first policy.”

Big-name companies have lent their reputation to Microsoft and Amazon, in New Zealand. Fonterra, BNZ, ASB, ACC and Auckland Transport have all announced they’re signing up to store their data (or your data) with Microsoft – ultimately in the company’s Auckland data region, when that finally opens.

How Amazon Web Services buries its profits

Ministers signed off approval last year for the company to buy 6.5 hectares of semi-rural Auckland land to build a data centre.

Both Microsoft and Amazon have sites near Westgate in west Auckland where they plan to build data centres – though Microsoft’s construction is running slowly.

And Newsroom revealed last week that Amazon’s project is paused without ground even being broken. Its site on Fred Taylor Drive has become empty and overgrown, while its resource consent application has been put on hold.

The Ministry of Justice, the Department of Conservation, Air New Zealand, ANZ bank, Spark NZ, Contact Energy and are among the ministries and firms to sign up with Amazon, citing the importance of “data sovereignty” – that is, keeping control of their data, and keeping it close.

Now there is no chance of Amazon opening its New Zealand cloud region this year, as it has promised, and it’s unclear when it will open. It hasn’t even sought resource consent from Auckland Council for a second or third data centre.

That’s not stopping it selling its cloud storage services to New Zealand companies with repeated assurances of its “commitment” to local storage.

Dr Victoria Plekhanova is a senior lecturer in the School of Accountancy at Massey University. At Newsroom’s request, she’s analysed the past five years of Amazon Web Service financial statements. Its 2023 accounts were filed with the Companies Office last week.

Amazon refuses to confirm anything about its construction projects, even though Auckland Council has disclosed to Newsroom where the sole data centre is proposed to be, and that the consent application has been on hold for six months pending any explanation from Amazon about how it will discharge stormwaters on the water intensive, flood-prone site.

Plekhanova says the accounts confirm that no capital assets (real estate) have been built in New Zealand. “In 2021, substantial amounts were spent on leasehold improvements ($5,282,520) and construction ($4,580,411); however, no capital item was created as a result of construction,” she says.

From November 2021, Amazon Web Services shifted to what Plekhanova calls a reseller model or “the Google model”. Up until then, its principal activities had been the provision of marketing support services to Amazon Web Services international, and the provision of professional and training services to external parties.

But since that date, its principal activity has changed to the re-sale and promotion of cloud computing services. That is, it sells overseas cloud storage to New Zealand customers.

Because these are sister companies, mainly in the USA, they can charge an agreed fees for their storage services. This fee has allowed Amazon Web Services New Zealand to offset its significant revenues, in order to conveniently report a small loss every year – thus minimising its tax liability.

Any company can net off its operating expenses against its revenues; the difference is that the main expenses paid by Google NZ, and now by Amazon Web Services NZ, are to their overseas sister or parent companies. And because the value of internet advertising or cloud storage is so nebulous, the overseas companies can charge the fee that best suits their business needs.

So in 2021, Amazon Web Services earned $50m from New Zealand customers, and conveniently offset that with expenses included employee benefits, share distributions, and a $32m “cloud service fee” to its overseas sister company. It paid no tax that year.

In 2022, its revenue leapt to $364m, but again, it offset that with expenses including a $278m cloud service fee. It paid $2.1m tax that year.

Then last year, its sales revenue climbed again to $378m. This was supplemented by $6.6m from related parties, and $4.6m from finance income, taking the grand total to $391m. This time, a $286m could service fee ensured it dropped into a slight before tax loss – and reported itself as liable to pay only $1.7m tax.

In 2019, 84.5 percent of AWS’s total revenue was from its overseas sister companies; by last year, that revenue stream made up just 1.7 percent of its earnings. All the rest was fees charged to New Zealand customers to store their data – in overseas data centres.

Meanwhile, the cloud services fee has climbed to more than three-quarters of Amazon Web Services’ New Zealand revenues – an absolutely enormous offset for tax purposes.

“My concern is that Amazon Web Services, like many other digital tech giants, has been deriving significant revenue in New Zealand through its subsidiary while paying very little income tax here,” says Plekhanova. “The hope that Amazon Web Services, will create new capital assets and more jobs in New Zealand is also evaporating.”

Amazon’s New Zealand spokesperson Pam Wong will say only: “Amazon Web Services pays all applicable taxes in New Zealand and every country in which we operate.”

She refuses to answer questions about the construction or the location of Amazon’s Auckland ‘region’, saying the secrecy is part of the company’s secure design approach. “We are committed to launching an AWS Region in New Zealand to support growing demand from customers,” she reiterates.

“Our NZ$7.5 billion investment in world-leading cloud infrastructure will democratise access to technologies such as AI and act as a catalyst to accelerate innovation, drive productivity, fuel economic growth, and level the playing field for New Zealand organisations.”

Two weeks ago, Newsroom asked Wong whether the company would be apologising to customers who signed up on the assurance that the domestic cloud region would open in 2024 and their data could be repatriated to NZ. She did not provide an answer.

Nor has she replied to questions about whether customer contracts will be voided by Amazon Web Service’s failure to deliver a domestic data cloud region, or whether the company will be liable for contractual penalties.

Ann-Marie Cavanagh, the Department of Internal Affairs deputy chief executive responsible for a digital public service, remains outwardly confident in Amazon’s assurance that it remains committed to building a region of data centres in Auckland.

Cloud services lower costs and enhance security, along with promoting innovation, Cavanagh says. That’s why the new cloud-first policy requires that government agencies use public cloud services when possible, for information systems.

“The use of on-shore facilities is being supported through the introduction of a security certification regime for data centres, meaning data remains within New Zealand’s borders,” she says.