By Leslie Prescott-Haar, Stefan Sunde, & Sophie Day, TP Equilibrium AustralAsia
New Zealand Inland Revenue on 4 June 2019 launched a consultation seeking public feedback on New Zealand’s approach to a digital services tax.
The tax could either be deferred until an OECD solution is reached, or New Zealand could join a growing list of countries taking unilateral, preemptive action. The consultation period closes on 18 July.
The discussion paper, Options for taxing the digital economy, was prompted by the government’s concern that even if OECD consensus on digital services taxation matters is reached, realistically, it could be five or more years until enactment of legislation.
As such, the discussion paper proposes a digital services tax at a 3% tax rate on New Zealand turnover for a given multinational corporation. The digital services tax would only be applied to companies which meet two threshold tests: global turnover exceeding EUR 750 million and New Zealand-attributable turnover exceeding NZD 3.5 million.
An alternate approach to computing the digital services tax based on New Zealand attributable profit was initially rejected, with feedback nonetheless requested by New Zealand Inland Revenue.
The digital services tax “would apply to the services provided by business activities whose value is dependent on the size and active contribution of their user base”. As such, this could include intermediate platforms (e.g. Uber), social media providers, search engines, and shared content sites.
The proposed digital services tax would raise between NZD 30 and 80 million in taxes payable annually; hence, the digital services tax would not materially affect aggregate tax revenues.
The New Zealand Inland Revenue has proposed an online registration model to ensure payment of the digital services tax, similar to New Zealand’s recently implemented approach for GST on remote sales. This would require a separate tax return for the digital services tax liability, at regular intervals to be determined. New Zealand Inland Revenue is also open to annual payment, as part of a company’s wider tax return filing process.
One of the key concerns surrounding the implementation of a digital services tax in New Zealand relates to violation of tax and trade agreement obligations and in this regard New Zealand could potentially be similarly affected.
Bilateral tax treaties are typically signed to avoid the imposition of double taxation by revenue authorities. As a digital services tax may become a tax on a non-presence and tax treaties typically require a physical taxable presence (company or permanent establishment), a digital services tax might conceivably not violate bilateral tax treaties. That said, New Zealand Inland Revenue accepts that modifications to double tax agreements would likely be required.
Concern also exists, stemming from New Zealand’s existing double tax agreements and World Trade Organisation obligations, that the application of a digital services tax differently, or discriminately, to foreign versus domestic companies could create compliance risk, especially if unilateral action is taken by New Zealand.
The government accepts that valid concerns exist with respect of the digital services tax’s application to companies which are loss-making and likewise that the digital services tax would apply to income, which income also contributes to taxable profit.
The latter is primarily an issue for New Zealand-resident business and needs to be worked through. Recent reforms in respect of the Inland Revenue’s powers of requesting information, and payment of tax by local companies as agents of a foreign multinational, should go some way to supporting the enforcement of any digital services tax structure imposed on large multinational corporations.
Plausibly, a digital services tax will also affect economic incentives, whether this refers to the cost of capital, development of New Zealand’s digital sector, or the incidence of the digital services tax burden.
For example, local New Zealand businesses are those most likely to pay to advertise on social media platforms operated in New Zealand. Hence, the imposition of the digital services tax on social media companies in New Zealand could simply be passed on as an increase to the costs of New Zealand companies advertising on these platforms. Given the need for modern businesses to advertise in the age of social media, a relatively high incidence on local business, as compared with the social media companies themselves, is a plausible outcome in this context.
Given the ongoing work of the OECD, there is also a risk of imposing a new compliance burden on companies, one which has a lifespan limited until the completion of the OECD’s consultation on digital tax matters.
More broadly, both the profit split method and an alternate fractional apportionment approach, are being considered as potential solutions to the digital taxation challenge. A profit split method, as a generally recognised and understood approach to current transfer pricing, would arguably represent the lesser implementation challenge for digital businesses.
A fractional apportionment method may be viewed as thematically contrary to current transfer pricing principles, including the arm’s length standard – i.e., more akin to global formulary apportionment. As such, implementing a global (or unilateral) digital taxation framework which adopts fractional apportionment would inevitably present more significant challenges in respect of implementation and upfront compliance, both for taxpayers and revenue authorities.
The above being said, at this time, neither New Zealand-resident companies or multinational corporations operating in New Zealand have undertaken significant (public) media campaigns in the digital taxation space. The government and New Zealand Inland Revenue’s current discussion paper will likely result in numerous submissions from affected stakeholders, however, in the coming months.
— Leslie Prescott-Haar is a Managing Director with TP EQuilibrium | AustralAsia LP
— Stefan Sunde is a Manager with TP EQuilibrium | AustralAsia LP
— Sophie Day is a Senior Analyst with TP EQuilibrium | AustralAsia LP
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