Digital services: one-two punch?

Digital services: one-two punch?

Darshana Elwela

Partner - Tax

KPMG in New Zealand


On Friday the OECD released its updated work programme on tax issues arising from the digitalisation of the economy. Yesterday, the Government released its previously announced Digital Services Tax (“DST”) discussion document.

The discussion document has regard to the OECD process and requests submissions on the OECD options, as well as feedback on a DST for New Zealand if sufficient progress on a multilateral solution is not made. A meeting of the OECD in June is shaping up as a key indicator of likely progress.

A DST would apply to electronic platforms facilitating the sale of goods and services (i.e. intermediation platforms), social media platforms, content sharing sites, and companies providing search engines or selling user data. This includes NZ businesses operating in this space, if thresholds are met. A number of the OECD proposals are more wide ranging and potentially apply to a wider set of multinational businesses.

The Government’s media statement, accompanying the release, labels this as a move to ensure “multinationals pay their fair share of tax”. Who pays the DST is not necessarily the same person as who bears the cost (either directly or indirectly). The consultation is an opportunity to consider the OECD and NZ DST proposals and their wider effect on the New Zealand economy and tax base to answer that question.

Consultation on taxing the “digital(-isation of the)” economy

The taxation of the digital economy has been on the agenda since the Global Financial Crisis laid bare concerns around contributions to tax revenues by multinationals. There is a realisation that the old taxation norms may no longer be valid for digital companies.

At the same time, it is difficult to separate digital companies from others – the internet as a means of doing business is all pervasive. The digital economy is the modern economy, hence the OECD’s work programme focussing on the “digitalisation of the economy”. Governments and the OECD have been seeking solutions to these tax issues.


The OECD is considering two means of taxing digital businesses. The first option seeks to find a way to allocate residual profits (that is, after compensating for company functions) to so-called “market countries”. There are multiple taxing proposals under this option based on: user participation, location of marketing intangibles, or significant economic presence. The second option seeks to apply a minimum level of tax for multinationals (through either a foreign income inclusion or deduction denial rule).

Both options have the potential to apply beyond the digital companies that a DST would target. From a New Zealand perspective, as an exporting country, there is no guarantee that either option would provide a net tax benefit to New Zealand.


In a nutshell:

  • The DST would be a 3 percent tax on the gross revenue of digitalised businesses attributable to their NZ users. 
  • It would apply to businesses that provide: intermediation and social media platforms; content sharing; search engines; or sell user data. (It is similar in scope to the DST implemented by the United Kingdom and others.)
  • It would only apply if prescribed thresholds are met. These include a global group revenue threshold (based on the current country-by-country reporting threshold of EUR750m consolidated turnover) and a NZ specific revenue threshold of NZ$3.5m (i.e. global revenues attributable to NZ users). 
  • “In scope” revenues would include commissions charged on transactions carried out through intermediation platforms and revenue from advertising provided through social media platforms and search engines. 
  • The revenue attributable to NZ would be based on NZ users. The discussion document notes that for intermediation platforms, a “user” would typically be a person who enters into a transaction using the platform (with each transaction treated as a separate user). The tests of location for NZ GST on remote services (such as billing address, IP address, or mobile country code stored on a SIM card) would apply to determine if the user is resident in NZ. 
  • The DST would not be treated as income tax to avoid Double Tax Agreement conflicts, but rather a sales/excise tax (so would not be creditable). To be consistent with the World Trade Organisation and NZ’s international trade obligations, however, it would also need to apply to NZ-resident digital businesses. 
  • The intention is that any DST would be temporary, until such time an international tax solution is found.

What’s the impact?

The OECD options are likely to impact all companies with cross-border activities. The DST will be of more limited direct application.

The OECD options are fundamental changes. They are likely to have less fiscal benefit to New Zealand because of the size of the New Zealand market – less profit will be allocated to New Zealand, as a market country, than elsewhere.

The DST, superficially, will impact the digital companies that are covered by the DST’s scope. However, if the market allows, the cost of the DST will be passed on to New Zealand businesses and consumers receiving the services. As the DST is a sales tax, this will increase the cost of doing business. It will operate in a similar way to tariffs. (The discussion document notes that the economic impact is hard to determine.)

As Officials noted in their Report on submissions on the Tax Bill to collect GST on low-value imported goods, New Zealand is progressively removing tariffs from goods sold cross-border. This is because tariffs are seen as an impediment to trade. For the same trade reasons, the DST will also apply to New Zealand businesses who are within the scope of the rules (i.e. exceed the prescribed revenue thresholds at a global and local level).

Even though narrowly scoped to cover only highly digitalised business, a DST could indirectly impact all NZ exporters. This is because the principle that NZ is prepared to act unilaterally could be viewed unfavourably by other countries, inviting responses that may not be limited to digitalised business. The potential impact of a DST on our export sector is noted, but there is no meaningful analysis in the discussion document.

The Government estimates that a 3% DST will raise $30 to $80 million in additional tax revenue, whilst the revenue impact of the OECD proposals (in the absence of specific details) have not been able to be estimated. The discussion document notes that revenue considerations are only one of many factors, including compliance costs and NZ’s economic efficiency and wellbeing.

An initial view

These proposals are important to New Zealand’s economy and tax base. They therefore require careful consideration for their wider impact, not just tax.

The application of the OECD solution (whichever option gains approval, if any), or a DST, relies on companies being prepared to perform the calculations, return income and pay tax in NZ. A simple means to ensure that compliance is not required is to stop providing the service to NZ market users. That has not been the experience to date with GST on cross-border services. It is yet to be seen what will happen with GST on low-value imported goods. However, there is a risk that decisions will be made not to service the New Zealand market if the revenue stream is insufficient or the service is untested.

Further, to the extent the cost of a DST cannot be passed on, the DST is an additional cost so there will be double taxation. This double taxation will apply to New Zealand business suppliers of digital services caught by the rules. 

The possibility that the OECD’s options will apply more broadly mean that exporters of New Zealand goods may face higher taxes outside New Zealand. However, a DST is not immune from this risk, as we have noted above.

Submissions on the discussion document are due by 18 July. If you would like help to make a submission, please contact your KPMG advisor.


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