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Taxing the digital economy

Taxing the digital economy

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Should a bad tax be implemented to enhance the prospects of the implementation of a good tax?

Our Australian colleagues asked this question for Australia’s consultation on a Digital Services Tax (DST) and the OECD’s work on a solution for taxing the digital economy (the so-called “good tax”).

Their answer was a clear no. We agree.

The digital economy poses a number of opportunities and challenges for Governments and regulators. New Zealand is no exception.  

The digital economy calls into question the traditional model of taxing multinational enterprises based on “bricks and mortar” presence. Companies may have a sizeable digital reach into a country without physical presence. This has inevitably led to concerns about foreign multinationals paying their “fair share” of tax in New Zealand.  The perception is that value is created here but it is not taxed under the traditional model.

The Government recently put out a discussion document with two broad questions on the digital economy. Should:

  • There be a temporary 3% DST on the gross revenue attributable to New Zealand users of specified digital services?
  • New Zealand continue to participate in the OECD’s search for a multi-lateral solution and, if so, what is the best solution for New Zealand?

A number of countries have announced or implemented DSTs, including France and the UK. Notably, Australia considered but ultimately rejected a DST.

The argument for a DST is that countries individually adopting a DST will help bring about an international consensus through the OECD. Our view is that New Zealand should not accept this argument. 

We agree with our Australian colleagues that a DST is a bad tax. From a tax policy perspective, it is inefficient and unfair as it applies to turnover (not profit) and select activities, its projected revenue is not significant, and its design will catch New Zealand companies raising the possibility of double tax (collateral damage).   

More importantly, there are real risks to New Zealand from going it alone. Given New Zealand’s small market size, foreign multinationals may pass on the costs of the DST or, if too burdensome, choose to withdraw from servicing the New Zealand market altogether.

This is also potential for tax and retaliatory action from trading partners. The United States, for example, has indicated it will take trade action against countries introducing a DST.

There is little upside, and significant downside, with proceeding with a DST.

The DST has received all the headlines. The OECD work is more important.

Reaching and, where possible, influencing international consensus through the OECD needs to be a priority.

The OECD process is not “risk-less” for New Zealand. Any solution is likely to be driven by the interests of the major players. Bluntly, they are not promoting change because they think New Zealand will benefit. Any solution may be to New Zealand’s fiscal and economic detriment.

Standing on the side-lines, at least for now, is not an option. However, this is not just a narrow tax question of how multinationals should be taxed. There are important economic questions as well as impacts for New Zealand’s trade and international relations.

We believe New Zealand’s response should be a “NZ Inc” collaboration with a whole government perspective, which is politically sustainable, and backed by evidence-based analysis and testing of the OECD options.

Click here to read: Options for taxing the digial economy "work in progress" response

 

For further information, please contact one of our team members:

John Cantin - Partner, Taxation Advisory

Darshana Elwela, Partner, Taxation Advisory

Kim Jarrett - Partner, Global Transfer Pricing Services

Matthew Gan - Director, Taxation Advisory

Neesha Morar - Senior Manager, Taxation Advisory

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