New Zealand Digital Service Tax – Go or No?

by Edika Amin

New Zealand is pushing on with efforts to ensure multinational companies pay their fair share of tax, with the release of proposed options for a digital services tax (DST). In February 2019, the New Zealand Cabinet agreed to consult the public on the problem of multinational digital companies which do substantial business in this country but pay no tax on income or revenues.

On 4 June 2019, Finance Minister Grant Robertson and Revenue Minister Stuart Nash proposed two broad options aimed to level the playing field between foreign and local digital providers. The DST would apply to:

1. Platforms which facilitate the sale of goods or services between people;
2. Social media platforms;
3. Content sharing sites; and
4. Companies which provide search engines and sell data about users.

What exactly is being taxed?

The proposed tax would be imposed on services that facilitate the sale of goods or services such as Uber or eBay, social media platforms like Facebook, content sharing sites like YouTube and Instagram, and search engines and the sale of user data. Such a tax is estimated to generated between NZD$30 million and NZD$80 million of additional revenue for New Zealand.

The tax wouldn’t capture ordinary sales of goods or services over the internet, such as through Amazon, which the government is already targeting in other workstreams. And it would also exclude the provision of online content, such as Netflix. In addition, cloud-based accounting services, such as Xero, would be excluded, as would telecommunications and internet service providers, standard financial services, and television and radio broadcasting.

The Proposal

The proposal offers two potential options.

1. Option 1: Continue to participate in the Organisation for Economic Cooperative and Development (OECD) discussion, with the aim of supporting an internationally agreed multilateral solution but do nothing in the interim.
2. Option 2: Applying a separate DST of three per cent (3%) to certain revenues earned by highly digitalised multinationals operating in New Zealand. The discussion document seeks feedback on how a DST might work in practice.

It is essential to note that New Zealand’s preference is to be part of a multilateral effort through the OECD, but if that doesn’t make sufficient progress, the government will introduce a 3 percent tax on certain digital transactions as an interim measure.

The main feedback that is currently being sought for the consultation paper is whether to wait for the OECD to come up with an internationally agreed solution, or to apply a separate tax on its own as an interim measure. New Zealand had emphasized that any tax implemented moving forward will contain a clause for it to be repealed once a consensus was reached with the OECD.

Analysis

According to the OECD, 129 countries had signed off on a roadmap for digital tax but there is still much work to be done as they seek a long-term solution by the end of 2020. The OECD will seek the blessing of G20 finance ministers for the roadmap when they meet in the Japanese city of Fukuoka on June 8-9. In the meantime, the UK has announced it will introduce a 2 percent digital services tax from April 2020. Austria, the Czech Republic, France, India, Italy, Malaysia, Singapore and Spain have also enacted or announced a tax.

New Zealand may be better off waiting for the OECD decision than going alone on a digital service tax. Justification as follows:

1. In the grander scheme of things, the tax generated is between NZD$30 million and NZD$80 million is not that large. As a small open economy, New Zealand should stick with an OECD-consensus based approach as it is unlikely to cause any retaliatory affects.
2. If New Zealand starts taxing gross revenues of companies providing services into New Zealand, then other countries may decide to tax the gross revenues of New Zealand companies exporting services and even goods to their markets.
3. The tax will also make it more costly for foreign firms to offer their services in New Zealand. There’s a risk the foreign firms will pass the price on to the consumer.
4. The tax seems to apply to sales (i.e. revenue) rather than profit. The proportion of net profit to actual sales can vary, with some companies even operating at a loss for a period of time before becoming profitable. This is common for a lot of tech firms who are vying for market share as attempted by Uber in South East Asia a couple of years ago. Forcing firms to hand over a proportion of revenue regardless of their profitability could result to loss of services.

Photo credit: https://www.newzealandnow.govt.nz/living-in-nz/money-tax/nz-tax-system