Taxing Digital: the current state of affairs

The days of bricks and mortar business are now fading into the rear-view mirror, and international jurisdictions are scrambling to work out how to cut the international tax pie as more and more businesses move to a digital way of working.  

The first steps in this process looked at how digital service providers such as Amazon, Netflix, Spotify and Uber paid taxes in the jurisdictions they operate in. This workstream was most recently progressed as part of the Taxation (Annual Rates 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill which will see offshore suppliers of low value goods to New Zealand customers required to register, collect and return GST from 1 October this year.  

Government have also recently announced their intentions to consult on the redesign of rules which currently allow multinational digital services companies such as Facebook to do business in New Zealand without paying income tax. While these digital services are a competitive threat to local businesses and the sustainability of our revenue base taxing the digital economy has much wider consequences. 

The OECD: the proposals currently on the table

The OECD recently called for public input into the tax challenges of digitalisation arising from the Inclusive Framework on Base Erosion and profit Shifting. Three proposals are being considered by the OECD to allocate more taxing rights to market countries. The first is a “user participation” proposal – essentially a taxation of digital service providers such as social media platforms, online marketplaces and search engines favoured by the UK. The second “marketing intangibles option” is the USA’s preferred option. This proposal has a much wider scope and addresses situations where multinational entities can “reach into” other jurisdictions remotely or through a local hub to develop marketing networks and customer bases. The scope of this proposal is important when taking into account recent research which suggests intangibles make up 87% of a business’s value – up from just 17% in the 1970s (based on the US stock market). And finally, a third option which is supported by the G24 developing countries is based on the concept of “significant economic presence”. This view states that technological advances which enable heavy involvement in a jurisdiction without physical presence have rendered existing nexus and profit allocation rules ineffective. 

International Responses

The international response to digital taxation is not just dependent on the OECD, who with 36 official member nations and extensive partnerships with non-member countries, may not reach a quick consensus (if at all). India, France, Spain, Italy, Korea and Austria have all made steps towards enacting digital services taxes, and the EU and Australia are discussing introducing one.  

As OECD Tax Chair, Pascal Saint-Amans recently discussed, the issue of addressing the tax challenges of the digital economy is more than simply taxing digital service providers such as Google, “it is something actually more broader than that because all companies – in one way or another – are digitalising... so we have a change even in the most traditional parts of our economy and this change is about doing business in a territory, without necessarily being present”. 

Framing the discussion solely around digital service providers distracts from the wider implication of these proposals. Ireland for example identify the risk of these proposals extending to tangible goods and, Ireland and Germany have both signalled concerns that proceeding with a form of digital taxation outside of the OECD group may risk retaliation from other jurisdictions in the form of tariffs or levies.

Small fish in a big pond: the risks for NZ

It is crucial that New Zealand understands the risks and wider ramifications of both the OECD proposed options and ‘going it alone’ outside of the OECD. The desire to target multinational entities competing in New Zealand needs to be carefully weighed against the reality that we are a small, export dependent nation.  

NZ Tax Leader, John Cuthbertson says New Zealand needs to be careful in our considerations and the risks at this stage do not outweigh the possible reward of an estimated $30 - $80 million in revenue from digital services. We should not be adopting unilateral measures in haste however; New Zealand needs to work with the OECD to ensure that the options put forward are workable and that we are not detrimentally impacted by mechanism ultimately adopted to share the international tax pie going forward.  

The current limitation of focus on digital services companies is a dangerous distraction.