Digital services tax would have 'chilling effect', Government told

Monday, 26 August 2019

Revenue Minister Stuart Nash (left) and Finance Minister Grant Robertson issued a discussion paper on a digital services tax against the advice of Chartered Accountants Australia and New Zealand which had argued it was not worth pursuing.

Kiwi businesses have joined foreign technology companies including Google, eBay and Uber in slamming a Government proposal for a revenue tax on digital giants doing business in New Zealand.

The Asia Internet Coalition whose members include, Airbnb, Apple, Amazon, Facebook, Google and Twitter, said the possible tax would have a 'chilling effect' on investment and 'long term negative consequences for the country's tech sector'.

Fonterra, Spark, Trade Me, The Warehouse and Air New Zealand also expressed fears that unilaterally imposing what has been dubbed a 'Facebook tax' could invite retaliation or otherwise backfire, submissions released under the Official Information Act show.

The Corporate Taxpayers Group called in its submission for the Government to announce 'as soon as possible' that it would abandon the proposal 'to minimise damage to New Zealand's reputation'.

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Foreign technology companies have advised the Government to follow Australia and back down from imposing an extra tax on their revenues.

Finance Minister Grant Robertson and Revenue Minister Stuart Nash released a discussion document in June that canvassed a 3 per cent tax on the local revenues of digital giants including Facebook, Google, Uber and Airbnb.

The 'digital services tax' (DST) would be in addition to existing taxes on the profits of their local subsidiaries and has been promoted by the Government as a possible interim measure, in case the OECD is unable to reach a timely agreement on the taxation of the digital economy.

President Trump has warned of 'substantial retaliatory action' against France, which is one of the few countries to impose a similar unilateral tax, while Australia has backed away from the idea.

Google noted in its submission that existing international tax law meant companies were taxed on profits in the countries where they created value, not where they sold goods and services.

In Google's case, that meant it paid most of its tax in the United States where it employed 'tens of thousands of engineers', not in New Zealand where it employed about 45 staff, it said.

Uber said in its submission, also released under the OIA, that it strongly opposed taxing revenues as opposed to profits.

'Any unilateral action taken by New Zealand might set a precedent of breaking from the traditional basis of taxation which has been internationally agreed-upon and abided by,' it said.

The Government envisages a DST tax could apply to internet advertising and digital platform companies that have a global turnover of more than €750 million (NZ$1.3b) and sales of more than $3.5m in New Zealand, forecasting it would raise between $30m and $80m a year.

But Google, Uber and eBay argued any tax that attempted to single out digital businesses would be discriminatory.

BusinessNZ said it did not support the idea of a digital services tax (DST) which 'would spark retaliatory measures by other countries'.

'From both a principled and practical perspective, we struggle to understand why a DST is being proposed, especially at this time,' BusinessNZ said.

Fonterra said New Zealand was vulnerable to the 're-balancing' of tax, and even the threat of unilateral action is undesirable.

'We believe the overall risks and costs to the New Zealand economy are most likely to be far greater than the somewhat meagre revenue returns government might accrue.'

A spokeswoman for Nash said the Government had 'already made plain its preference for a multilateral solution through the OECD'.

'The discussion document was designed to seek a wide range of views to inform the Government's decision-making' and had sought views on the trade implications of a unilateral move, noting they would need to be considered, she said.

Fonterra said the threat of unilateral action was 'undesirable' even it was just a negotiating tactic aimed at increasing pressure for an OECD tax deal.

Tech firms could be treated like mining firms and made to pay royalties for using New Zealanders' personal data, the Council of Trade Unions suggests in a rare submission favouring a digital services tax.

'The composition of New Zealand's exports make us vulnerable to a significant rebalancing of taxing rights towards countries with a large volume of in-market activity and end users,' it warned.

Russell McVeagh partner Brendan Brown has separately expressed concern about the direction the OECD's work is now taking, warning that was not about continuing its work closing multinational tax loopholes, but rather about 'reallocating taxing rights between countries'.

Trade Me said it did not believe it would be captured by a DST, but said the tax was 'just not worth it' given the stance of the United States, while The Warehouse said the proposal risked creating 'double taxation'.

Air New Zealand said it was concerned elements of its own business, such as its airpoints scheme and code-shared ticket sales could be 'unintentionally' caught by the tax.

Former Spark chief executive Simon Moutter frequently called for more action on multinational tax avoidance.

But Spark's head of tax Francis Evett said in its submission that it strongly believed a unilateral DST would negatively impact the economy and 'significantly prejudice New Zealand's largest firms' by introducing a barrier to technology and innovation-led change.

'The proposed unilateral DST is not in New Zealand's best interest' and carried a 'very real risk' of retaliatory action, he said.

Federated Farmers said it was strongly opposed to New Zealand adopting a unilateral position.

'New Zealand is trade exposed and would leave itself open to retaliation, particularly in the current international environment.'

The Asia Internet Coalition said it understood there had been 'significant international concern over the perceived undertaxation of the digital economy and digital multinationals in particular'.

But it said the Government would be 'better served devoting its efforts to formulating an internationally agreed solution at the OECD'.

The coalition suggested Trump's threat to France appeared to have broad political support within the US.

'Democrats and Republicans from the US Senate Finance Committee called on the US Treasury in a bipartisan letter to 'consider all available tools under US law to address such targeted, discriminatory taxation,' it noted.

The United States Trade Representative had also initiated an investigation to explore whether the French law unfairly targeted US-based technology companies, it said in its submission.

'Given the current challenges with global trade, particularly between the US and China, it is unusual that New Zealand would expose its exports to heightened risk, and potentially to retaliatory tariffs by the US.

'A unilateral approach is even more unusual when considered against New Zealand's longstanding support for a multilateral rules-based trading system.'

There was support for a DST from lobby group Tax Justice Aotearoa and the Council of Trade Unions (CTU), though both described it as 'second-best' to a multinational approach.

The CTU said the Government should consider treating the commercial use of New Zealanders' personal data as analogous to 'mining a resource in New Zealand and charging a royalty on its use'.

Nash's spokeswoman said the submissions were being analysed by Inland Revenue officials, who would report to Nash and Robertson on their recommended next steps.