'Politics' may keep digital services tax in play as OECD readies for crunch year

Friday, 15 November 2019

A proposed 'digital services tax' on internet giants remains on hold, almost four months after public consultations closed.

Prime Minister Jacinda Ardern floated the idea of a 2 or 3 per cent tax on the local revenues of internet advertising and 'gig economy' companies such as Facebook, Google, Uber and Airbnb in February.

The revenue tax would be in addition to any taxes multinationals paid on their locally-reported profits, with officials estimating it could raise an extra $80 million a year.

Digital services taxes are often known as 'Facebook taxes' though gig economy companies as well as internet advertising firms can be caught in their net.

Submissions on the possible tax closed in July, but a spokeswoman for Revenue Minister Stuart Nash said there was no decision to report on whether the proposal would advance.

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* Ministers hopeful NZ won't have to act unilaterally**

There have been calls for the Government to scrap the proposal.

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

Fonterra is among the Kiwi companies that fear a backlash if New Zealand breaks tax treaties or its WTO commitments in its search for equitable taxation.

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'.

But instead, the Government has left a digital services tax (DST) on the table while it waits to see whether its preferred option of a new international approach to the taxation of the digital economy comes to fruition.

The OECD has released two complementary proposals over the past five weeks.

One would require 'highly-profitable' multinationals – including but not limited to digital companies – to allocate a portion of their profits to any country in which they had significant consumer-facing activities, regardless of whether they had a physical, taxable presence there.

The second would ensure multinationals were subject to a minimum rate of tax, by allowing countries to tax a portion of the profits that they booked in tax havens or low-tax countries, to bring their tax payments up to an agreed level.

Russell McVeagh partner Brendan Brown said there was as yet no international agreement for either measure, both of which were instead been sketched out by the OECD's own secretariat.

President Trump has threatened to retaliate against digital services taxes in France and Italy.

But Brown believed that the Government might as well kill-off its DST proposal, as Australia did in March, in the interim.

'It is almost impossible to design and implement a DST without breaching international law.

'If you design it as an income tax it will breach double-tax treaties, and if you design it not to be, then you end up having to target foreign companies which is discriminatory in terms of New Zealand's trade obligations.'

The Government stoked expectations of action in February, but a spokeswoman for Revenue Minister Stuart Nash says there is nothing to report yet on whether it will push ahead with a digital services tax.

Inland Revenue officials have previously come to that same conclusion.

But Brown expected the Government would continue to keep the DST proposal in reserve as an option, while it waited to see whether the OECD's work would succeed.

'You can understand the politics for the Government,' he said.

The OECD's two proposals could have some downsides for New Zealand, he believed.

'The first gives countries where consumers are based a bigger share of the taxing pie.

'That could help the digital economy problem, but New Zealand has got to be careful it doesn't end up hurting our exporters, particularly those that have their own 'marketing intangibles' – think about our wine industry and honey.'

It could be easier to get agreement for the 'minimum tax' plan, which could in theory be applied without a full international consensus, he said.

'Europe, the US, New Zealand and Australia do have an interest in not having a 'race to the bottom' on corporate tax rates.'

But there could be some unexpected consequences for New Zealand, for example if it was viewed as a tax haven because of its limited taxation of capital gains, he said.

It could also make it harder for countries to substitute company tax with new environmental taxes on business activities, Brown said.

He did not rule out the OECD making progress, saying it had 'no shortage of momentum'.

'But next year is going to be very interesting, because the countries need to get together and figure out whether they do support it.'

It was a valid question whether any work might be undone in a tweet by President Trump, he agreed.

'Until quite recently, tax had been seen as a technical area that didn't attract too much interest from political figures including the president. Trade on the other hand has long been a far more political issue.

'What we are seeing I think, especially with the US reaction to DST proposals, is they are coming together.'

Trump threatened sanctions against France in July after it pressed ahead with its own unilateral DST primarily targeting US internet firms.

But Reuters reported in August that a deal had been reached that would see France repay companies the difference between the French tax and tax payable under the planned mechanism being drawn up by the OECD.

Consultations on the two OECD tax proposals will be held in Paris next week and in early December.

OECD secretary-general Angel Gurria has said failure to reach agreement during 2020 would greatly increase the risk that countries would act unilaterally 'with negative consequences on an already fragile global economy'.

'We must not allow that to happen,' he said.