New digital tax risks US trade retaliation
Leading tax experts have voiced serious misgivings about the government’s proposed digital services tax, with one telling LawNews it’s an “ugly tax” that could result in consumers facing increased costs and some companies facing double taxation.
Hayden Roberts, Graham Murray & Lisa Murphy
Kim Jarrett, John Cuthbertson & Geof Nightingale
And these experts are highly critical of the government’s go-it-alone approach, saying it risks exposing New Zealand to trade retaliation from the United States, where many of the big tech giants are based.
Late last year US officials warned Australia, which was considering a digital services tax (DST), that such a unilateral approach would be considered discriminatory. The Australian government quietly shelved the idea and, after winning the federal election in May, did an abrupt U-turn and scrapped it altogether.
Last week France received the same warning. It is now being threatened with US trade sanctions as the Trump administration ponders the proposed 3% levy which, it says, “unfairly targets” American companies such as Google and Amazon.
Back in New Zealand, the government has sought public submissions on a DST which would apply to the New Zealand revenues of social media firms, online advertising companies and so-called “gig economy” platforms.
Such organisations are likely to include Google, Apple, Facebook, Uber, eBay, YouTube, Instagram and Airbnb.
But, according to one expert, anything resembling a digital marketplace could be caught, depending on how the government frames the tax.
And this could impact local companies such as TradeMe or even Air New Zealand, whose website, some argue, is now more akin to a general travel platform than a simple airline booking system.
The government’s initiative stems from concerns that it remains too easy for internet moguls to book their profits in low-tax countries.
The government’s discussion document (not documented):
- a digital services tax of 3% on “certain revenues earned by highly-digitalised multinationals operating in New Zealand”; or
- changing the current international income tax rules to allow more taxation, an option being discussed by the OECD and the G20.
Finance Minister Grant Robertson says the government’s preferred option for better taxing the digital economy remained an internationallyagreed solution achieved through the OECD.
“However, if the OECD cannot make sufficient progress this year, we need an interim solution. Other nations have already taken this step,” he says.
“The UK has announced it will introduce a 2% DST from April 2020. Austria, the Czech Republic, France, India, Italy and Spain have also enacted or announced DSTs.
“Modern business practices, digitalisation in particular, mean a company can be significantly involved in the economic life of a country without paying tax on income or turnover.”
Some observers wonder why New Zealand is pursuing the possibility of going it alone with a DST, especially without Australia on board.
This has not escaped tax experts contacted by LawNews, all of whom believe it is a minefield through which we should tread warily.
Lisa Murphy, tax partner at RSM New Zealand, says given the changing face of globalism and the increase in digitalisation, there is a definite need for a global effort to protect taxation bases worldwide.
“The Inland Revenue discussion document noted that in Europe, the traditional international business model has an average tax rate of 23.2% whereas the average tax rate for a digital company is only 9.5%. So there is definitely an impetus for action, in my view.
“I do, however, consider the government needs to tread carefully here. Inland Revenue suggests the revenue collection would be in the vicinity of $30 million to $80m.
“The tax take is not significant and I consider Inland Revenue needs to think carefully about potential economic impacts before taking its recommendations further, and should continue to work on an OECD solution in the first instance.
“As far as customer impact is concerned, one would anticipate there would certainly be some downstream impact, which invariably would mean an increase in pricing.”
John Cuthbertson, New Zealand tax leader for Chartered Accountants Australia and New Zealand (CAANZ), is more forthright.
“We believe the government should drop its plans for a unilateral digital services tax. It is an unnecessary distraction with limited upsides, if any.
“The international digital tax debate has now expanded beyond digital, and the potential changes to the allocation of international taxing rights being considered could adversely impact the New Zealand tax base.
“Rather than chasing a standalone digital services tax, our time would be better spent developing and executing a strategy for NZ Inc in OECD discussions.
“We should be looking to collaborate with likeminded, similarly-impacted small trading nations, to present a uniform strong voice at OECD deliberations.”
Cuthbertson says a digital services tax is not worth “the questionable $30m to $80m the government expects to get when it risks putting New Zealand out of step with our main trading partners and international agreements.”
Similar sentiments are shared by KPMG partner and international tax specialist Kim Jarrett, who says she has “underlying concerns about a DST” and “is not in favour of it being introduced in New Zealand at the present time.
“The DST is an indirect tax on certain sales and, as proposed, it is not transparent because it applies to a user base and not the revenue from a sale.
“It is a blunt tool (why 3%?), applying regardless of whether the taxpaying group is profitable or lossmaking and it is not a recoverable tax, either as an income tax credit or as input tax like GST.
“This means it will act as a tariff which operates internationally as well as to domestic businesses.”
Jarrett says the information required to comply will need to be interpreted, identified, gathered and systemised, and will be a cost of doing business.
As a result, compliance costs are likely to be high compared to the amount of tax collected.
“There is also a risk that the OECD does not reach a consensus which is workable and widely implemented. A poor tax would [then] be ‘baked into’ the New Zealand tax system.”
Jarrett says from a broader perspective it’s clear the United States does not like DSTs in any form and “it may potentially bring non-tax-related measures to bear on New Zealand to change its approach.”
A retaliatory response from the United States also concerns John Cuthbertson. “
Australia and other OECD countries have pulled back from a unilateral approach for good reason.
“Aside from the risk of double taxation, and the need to meet our WTO obligations, the United Sates has clearly signalled an intention to impose retaliatory measures on nations which it believes are unfairly targeting its businesses.
“It is not a good time to be an early adopter.”
Cuthbertson says DST proposals around the world have now morphed into a wide-ranging international discussion on how countries carve up tax revenues on international business profits.
“As a result, there’s a real danger for New Zealand that these talks are now heading down the path of a worldwide taxation system based on where customers are located, an idea which underpinned digital services taxes.
“As an exporting nation, a customer-centric tax regime represents a very damaging threat to our tax base. There is a high risk that a large part of our business tax base will go offshore.”
Cuthbertson believes a DST could be a Trojan horse for countries like New Zealand with deliberations about its introduction becoming “a distraction from the main event”.
“If the tax is implemented, there’s the risk that New Zealand consumers will face increased costs. And that will be from large Kiwi companies which will be caught by the tax, as well as multinationals.
“The New Zealand companies caught will be subject to double taxation: the DST, by design, cannot be credited against income tax so it will be an ugly tax.”
Cuthbertson also makes the point that such a tax will not encourage Kiwi businesses to innovate or embrace digital opportunities.
No pressing case
PwC tax partner Geof Nightingale is yet another tax expert with serious reservations about the proposed tax.
He says there are three key reasons why the time isn’t right to consider a unilateral DST.
- The forecast revenue is modest compared to our forecast corporate tax take of around $15 billion in 2019 - less than 0.2%. It’s not worth exposing our export industries to retaliatory measures, trade or tax, for such a thin slice of extra revenue.
- The current international tax rules that rely on attributing profit related to physical presence work very well for New Zealand’s exporters. Putting that framework at risk by starting to tax gross revenues could have significant downsides for our exporters.
- There does not seem to be a pressing case for New Zealand to act unilaterally while the OECD multilateral process is making reasonable progress, particularly when our major trading partners are either opposed to a unilateral digital services tax (US), likely opposed (China) or not proceeding (Australia).
Nightingale says the issue of how a DST might impact customers of companies caught by the tax is “interesting”.
“The government itself estimated the value of ‘free’ digital services to New Zealand consumers was more than $1bn a year. This is a valuable contribution to our economy.
“It is possible a digital service company, faced with a DST, may withdraw or limit its services into the New Zealand market. I suspect that is unlikely as the level of DST would probably not be enough to trigger such a response,” he says.
“The other possibility is that the digital services company passes on some, or all, of the cost of the digital services tax to its New Zealand customers. So while the tax is collected from the company, the New Zealand customer ends up bearing some or all of the cost.”
So given so many deep-seated reservations about a DST, why isn’t New Zealand waiting for the OECD to devise a global framework? And should this be a matter of concern?
Lisa Murphy is in no doubt about what’s behind the government’s push for a DST.
“I would say this is political,” she says. “In 2016 [then Prime Minister] John Key noted New Zealand would work with the OECD on digital measures.
“Three years later, various base erosion measures have been implemented yet DST, or like measures, have yet to be ironed out.
“Over this time there has been a lot of media coverage about the likes of Facebook, Apple and Google not paying their fair share of taxes.
“So with a change in government and the New Zealand public wanting these global operations to pay their fair share of tax, it is good political spin for Labour. In my view, though, it should not be rushed.”
Dragging its feet
But Bell Gully tax experts Graham Murray and Hayden Roberts believe the government’s go-it-alone strategy is largely because the OECD’s timeframe to get it done is just too long.
“The pathway to an international consensus on taxing the digital economy has been slow and difficult, and any consensus OECD solution is unlikely to be effective for a number of years – probably not until 2025 at the earliest,” they say.
“Implementation would also require a widespread amendment of double-tax agreements worldwide, which would most likely occur through signing on to a multilateral instrument that may take further time to bring into force.
“This timeframe is what is causing the government to start the conversation about what a domestic law digital services tax might look like.”
Murray and Roberts say while it may seem rational to start that conversation now, “the limited benefits attaching to the proposed interim solution need to be weighed against the potential pitfalls when deciding whether to actually implement the tax”.
Whatever the arguments for or against a DST, there is one issue on which many observers are agreed: the political risks for the government have the potential to be very damaging domestically and globally.
It’s a question LawNews attempted to ask Trade Minister David Parker but his office said he was overseas and referred us instead to Revenue Minister Stuart Nash.
Nash’s press secretary Kathryn Street was asked whether he had any concerns about the political risks involved with introducing a DST, given the serious reservations of many in the business, legal and accounting sectors towards it, not to mention the very real risk of trade reprisals from US President Donald Trump.
But Street side-stepped the question, referring LawNews to a 4 June media release outlining the government’s options for a DST and how it could be implemented.
“In short, the government’s preference remains a multilateral solution through the OECD,” she said.
“However it notes that other nations – the UK, France, Italy, Spain, India, Austria etc have enacted or announced DSTs.
“No decision has yet been made by the New Zealand government.”