'Facebook tax': Government proposes taxes for digital giants as it calls for submissions on proposals

Tuesday, 4 June 2019

A digital services tax has been colloquially called a 'Facebook tax' because it is an example of one of the companies that could be most impacted.

Facebook, Google, Uber and Airbnb could all pay more tax in New Zealand through a 'digital services tax' on which the Government is now seeking submissions.

The tax would apply to the New Zealand revenues of social media firms, online advertising companies and 'gig economy' platforms.

But the tax faces stiff opposition from critics - including the country's top accounting body, which has warned such a tax could invite retaliation and backfire on New Zealand exporters.

Prime Minister Jacinda Ardern first announced in February that the Government would release a discussion document canvassing the possible new tax and Finance Minister Grant Robertson said it could raise between $30 million and $80m a year, depending how it was applied.

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The initiative stems from concerns that it remains too easy for internet giants to book their profits in low-tax countries, despite an OECD-led clampdown on multinationals tax rorts.

The discussion document sets out two options.

Jacinda Ardern has mentioned consideration of a digital services tax as evidence the Government is still looking at ways to make the tax system fairer despite ditching a capital gains tax.

One would be applying a digital services tax of 3 per cent to 'certain revenues earned by highly digitalised multinationals operating in New Zealand'.

The other is changing 'the current international income tax rules', to allow more taxation – an option currently being discussed by the OECD and the G20.

Finance Minister Grant Robertson said the Government's 'number one preference' remained an international solution.

Ardern pointed to the possible tax in April as evidence that the Government still had ideas on ways it could improve the fairness of the tax system after it shelved a capital gains tax that would mostly have hit the wealthy.

A digital services tax appeared to have some of the rug pulled out from under its feet a month earlier when Australia announced it had decided not to go down the same track.

A Cabinet paper released under the Official Information Act had suggested there would only be benefits in New Zealand introducing such a tax if 'a critical mass of other countries, particularly Australia' also did so.

New Zealand officials have repeatedly warned that introducing a digital services tax outside of an international agreement could breach tax treaties New Zealand had signed with other countries, or World Trade Organisation (WTO) rules.

Some other countries - including India - have unilaterally introduced similar taxes, where they have been observed to act more like a tariff than a conventional company tax.

Robertson said the Government's 'number one preference' for better taxing the digital economy remained an internationally-agreed solution, achieved through the OECD.

'However if the OECD cannot make sufficient progress this year we need an interim solution. Other nations have already taken this step,' he said.

'Modern business practices, digitalisation in particular, mean that a company can be significantly involved in the economic life of a country without paying tax on income or turnover.'

The OECD is developing proposals that could see something akin to a digital services tax agreed by the end of next year.

It originally justified the work on the basis that social media and internet advertising companies derived a significant proportion of their value from content uploaded by users – not just from their own research and endeavours which would remain taxed where that activity took place.

But US officials have suggested any new tax should apply to a wider tranche of multinationals that derive value in overseas markets from 'marketing intangibles', such as their brands.

Tax consultant and former Inland Revenue deputy commissioner Robin Oliver said the message from the US appeared to be that 'if you tax Google, we will tax BMW'.

There have been fears a broader tax based on marketing intangibles could also result in sales of New Zealand milk attracting extra taxes in foreign markets.

Chartered Accountants Australia and New Zealand called on the Government to drop the idea of a go-it-alone digital services tax last month, saying the Europe Union as well as Australia had backed off that idea.

The country should instead be looking to collaborate with like-minded, similarly-impacted small trading nations to present 'a uniform strong voice' at the OECD, its tax leader John Cuthbertson said.

'Digital services taxes proposals around the world have rapidly morphed to wide-ranging international discussion on how countries carve up tax revenues on international business profits,' he said.

'The very real danger for New Zealand is that these talks are now heading down the path of a worldwide taxation system based on where customers are located.

'As an exporting nation, a customer-centric tax regime represents a very damaging threat to our tax base.'

Under the US proposal, currently favoured at the OECD, part of the tax revenue paid by exporters, such as Fonterra and Zespri, was 'at risk of migrating offshore', Cuthbertson said.

But Don Christie, director of NZRise, a lobby group that represents domestic firms in the technology industry, said a tax that correctly targeted multinationals that avoided tax at the moment would be welcome.

He questioned whether the proposed rate of 3 per cent on sales would be enough.

Nash said that if the Government did enact a standalone tax, it would be an interim measure until an international agreement was reached.

'The Government would look to repeal it if and when the OECD's international solution was implemented,' he said.

Submissions on the discussion document close on July 18.