Ministers hopeful NZ won't have to act unilaterally on 'Facebook tax'

Friday, 22 March 2019

New taxes on internet giants such as Facebook and Google might be a crowd-pleaser, but acting without the blessing of the OECD would not be the Government's first choice, documents released under the Official Information Act stress.

Prime Minister Jacinda Ardern announced last month that the Government would release a discussion document in May that would canvass a 'digital services tax' on the New Zealand revenues of overseas multinationals.

Social media and online advertising companies such as Google as Facebook, as well as eBay and Uber would be in the frame.

Finance Minister Grant Robertson said the Government was 'determined that multinational companies pay their fair share of tax' but its strong preference was to work with the Organisation for Economic Cooperation Development (OECD) to find an internationally-agreed solution.

*** OPINION: NZ needs to seek the safety of the pack

Facebook and Google are among companies that might be hardest hit by any unilateral tax measures the Government took.

* Facebook and Google could face higher tax rates in New Zealand

* NZ could follow Europe and impose revenue tax on likes of Google**

The discussion paper that will be released in May would canvas the option of a tax similar to the 2 per cent tax that Britain plans to impose on the sales of some digital companies from April next year, a Cabinet paper released under the OIA said.

But it would also state that the Government saw benefits in aligning its approach with Australia, where a similar tax is also being considered.

What is at stake is the sharing of the 'tax pie' OECD tax policy director Pascal Saint-Amans says.

However, the Cabinet paper concluded it was 'more likely than not' that the OECD would achieve an international solution that would make independent action by New Zealand unnecessary, given that the United States now appeared to be on board for reforms.

It also reiterated warnings previously made by officials that New Zealand risked breaching international trade obligations and its double tax agreements – as well as inviting retaliation against New Zealand exporters – if it acted outside any internationally-ratified agreement.

'We currently consider that changing the internationally-agreed income tax rules, if possible, would be the best option for taxing the digital economy in the long term,' it said.

The Cabinet paper said it might only be worth the Government independently introducing its own new taxes on foreign multinationals if the OECD failed to make sufficient progress on an international solution this year, and if 'a critical mass of other countries, particularly Australia' also did the same.

That was because of the 'reputational risk' to the country.

The Government would also want to ensure Kiwi companies would not be unduly affected and that digital businesses would not simply pass on the tax to consumers, it said.

Speaking at a round table in Paris last week, US Treasury deputy international tax counsel Brian Jenn and top European tax officials all expressed confidence an international agreement would be reached by the end of next year.

That may be based on allowing countries to tax profits generated by multinationals from 'marketing tangibles' – such as the power of their brands – in each country, and by ensuring that multinationals paid a minimum rate of tax on profits they generated from sales in any country.

'What is at stake is how do you 'share the pie', either on highly digitalised business models or more broadly,' OECD tax policy director Pascal Saint-Amans said.

Jenn said he was 'very hopeful, you could say confident' that OECD countries would reach an agreement next year.

'Once you start down the road of having a conversation about how you allocate taxing rights in a different way than we have done for the past 80 or 100 years, that is not a conversation people will just quickly walk away from – something will come out of that,' he said.

If New Zealand did instead act independently a 'rough estimate' was that a 3 per cent tax on the local sales on the likes of Facebook, Google's YouTube, Uber and eBay could raise between $30 million and $80m a year, the Cabinet paper said.

It described that sum as 'small' in relation to the $26 billion value of e-commerce in New Zealand, but it said a digital services tax could also have the benefit of improving 'public confidence in the fairness of the tax system'.

Overall, New Zealand stood to gain from such taxes, it said.

'This is because New Zealand imports more highly-digitalised services than it exports.'