Trump threat shows proposed extra tax on internet giants 'just not worth it'

Tuesday, 30 July 2019

Facebook is one of the companies that is expected to be hit hardest if a digital services tax was implemented in New Zealand.

President Trump's threat to retaliate against France's 'digital services tax' demonstrates the big risk that New Zealand would be taking if it decided to press ahead with a near identical tax on technology multinationals, tax experts are warning.

French president Emmanuel Macron signed a law last week that will impose a 3 per cent tax on the revenues of large internet advertising companies and digital platform providers, with the tax applying retrospectively from the start of this year.

Companies would pay the tax if their qualifying global annual revenues exceeded €750 million (NZ$1.26b) and their revenues in France were above €25m.

US trade officials believe about 30 multinationals would fall under the net of the French tax and that most of them would be American.

**READ MORE

President Trump says if anyone taxes US technology multinationals it should be the US.

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* NZ 'Facebook tax' on digital giants dealt blow after Australia rejects the idea**

Trump responded in a tweet on Saturday that the US government would impose 'substantial retaliatory action', hinting that could include tariffs on French wine.

The New Zealand government has been consulting on imposing a similar 3 per cent tax on the New Zealand revenues of technology giants such as Google, Facebook, Airbnb and Uber.

OECD tax director Pascal Saint Amans has said some countries that thought they might benefit from an extra tax on digital giants might find they end up on the wrong side of the ledger, now it appears any tax change might impact a much wider range of businesses.

That tax would be in addition to the taxes that the New Zealand subsidiaries of those technology multinationals already pay on their local profits.

New Zealand's proposed tax – often referred to as a 'Facebook tax' – would also target companies with global revenues exceeding €750m, but with the New Zealand revenue threshold set at $3.5m to reflect the smaller size of the local economy.

The proposal has hit a wall of opposition from tax experts.

Government officials have previously cautioned the proposed digital services tax could breach international trade rules or tax agreements and invite retaliation, and PWC tax partner Geof Nightingale said Trump's response showed that risk of retaliation was real.

Trump's tweet was evidence of the 'exact risk' that New Zealand tax practitioners were worried about, he said.

PWC tax expert Geof Nightingale backed a capital gains tax on the wealthy but says NZ's proposed digital services tax is not sensible.

'It is one thing for France and the US to get involved in a tit-for-tat around that stuff, it is another thing for New Zealand.'

Inland Revenue has estimated New Zealand's digital services tax would raise between $30 million and $80m a year and Nightingale said it was not worth the risk of provoking the sort of response threatened by Trump for that sort of money.

'That might seem to lack courage, but it is just not sensible to take that risk when there is a process to reach an international solution.'

Nightingale was a member of the Tax Working Group chaired by Sir Michael Cullen, where he supported its consensus for a broad-based capital gains tax that would have mainly targeted the wealthy.

Russell McVeagh partner Brendan Brown noted the Tax Working Group advised that New Zealand should stand ready to implement a digital services tax if a critical mass of other countries did, but only if it was 'reasonably certain that New Zealand's export industries will not be materially impacted by any retaliatory measures'.

'I think when you look at how the US has reacted to France's digital services tax I just don't think that condition can be satisfied.

'We could not be satisfied our exporters wouldn't face retaliatory action – New Zealand exports wine too.'

The OECD and officials from countries including the United States are attempting to broker an international agreement that would see new taxes imposed on digital giants but which could also apply much more broadly to a far wider range of exporters.

Finance Minister Grant Robertson has said the Government's preference is for an international agreement and not to act unilaterally, but that the digital services tax might be required as an interim measure before the OECD came to an agreement.

OECD tax director Pascal Saint Amans told Stuff last month that New Zealand's decision to consult on a digital services tax might be smart if it was a negotiating tactic in those international talks, but cautioned that acting unilaterally had proved a hard road elsewhere.

He also said that some countries that initially thought they might gain from a new international approach to taxing the digital economy might in fact lose out, now that the focus of the OECD initiative had broadened.

Brown echoed that view.

Trump's comment underscored how cautious New Zealand should be, not just with regards to a unilateral tax, but also with regard to the direction the OECD's work was now taking, he said.

'This is a very different mindset from previous tax reforms.

'It is not so much about 'plugging loopholes' as about reallocating taxing rights between countries, and as a small country we have got to do everything we can to ensure we are protecting our country's interests because you can bet that is what every over country will be doing.'

Australia decided against imposing a unilateral digital services tax earlier this year.

But the Office of the United States Trade Representative said that the countries considering such taxes, in addition to France and the UK, included 'New Zealand, Austria, the Czech Republic, India, and Spain'.

Submissions on the digital services tax proposal closed on July 18.

KNOW YOUR DIGITAL TAXES

'Netflix tax' – the requirement for foreign firms such as Netflix to levy GST on the sale of digital services such as music, internet TV and software subscriptions sold to New Zealanders from overseas. This was introduced in New Zealand in 2016 and is raising about $130m a year and is generally perceived as a 'success'.

'Amazon tax' – the requirement for foreign firms such as Amazon to levy GST on low-value items they sell to New Zealanders from overseas. This will apply from December 1 and is expected to raise $100m in its first full year. Viewed as riskier than a Netflix tax, some concerns remain about whether foreign firms will play ball.

'Facebook tax' – also known as a digital services tax. This is a tax on the local sales of foreign digital giants and can be intended to compensate for the fact they may arrange their international affairs to minimise tax on their profits in higher-tax countries. Another justification for the tax is it taxes the 'value' created for digital giants by the local users of social media platforms. This tax is more controversial and has been described as being more like a trade tariff than a conventional tax in its impact.