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NZ releases discussion document on digital service tax

The release of the proposed options for a digital service tax (DST) signals New Zealand’s efforts to guarantee that multinational companies pay their fair share of tax.

As reported, Finance Minister Grant Robertson and Revenue Minister Stuart Nash proposed two broad options to ensure offshore digital companies no longer enjoy tax breaks, which are not available to local businesses.

The two options for digital service tax

One of the preferences remains to be an internationally agreed solution through the Organisation for Economic Co-operation and Development (OECD).

This entails changing the current international income tax rules, to allow more taxation in market countries.  This option is currently being discussed by the OECD and the G20 group of large economies.

However, if the OECD is unable to make sufficient progress this year, an interim solution is needed, which is a step that other nations have already taken.

For instance, 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.

New Zealand must protect its economy and the integrity of the tax system.

Modern business practices, particularly digitalisation, mean that a company can be significantly involved in the economic life of a country without paying tax on income or turnover.

Multinational companies like social media platforms and e-commerce sites generate income through cross-border digital services rather than face-to-face retail.

The second option would apply a separate DST of 3% to certain revenues earned by highly digitalised multinationals operating in New Zealand.

Where is DST applicable?

The discussion document that was released outlines where DST will be applied to. These include:

  1. Platforms which facilitate the sale of goods or services between people
  2. Social media platforms
  3. Content sharing sites
  4. Companies which provide search engines and sell data about users.

DST would be narrowly targeted at certain highly digitalised business models.

It would not apply to sales of goods or services. Rather it will be applied to digital platforms that depend on a base of users for income from advertising or data.

The value of cross-border digital services in New Zealand is estimated to be around NZ$ 2.7 billion while the estimated revenue of a DST is between NZ$ 30 million and NZ$80 million, depending on the design.

Future-proofing New Zealand’s tax system

Revenue Minister Stuart Nash shared that the Tax Working Group came to the conclusion that New Zealand should continue to participate in the OECD discussions.

However, the country must also stand ready to implement a DST if a critical mass of other countries moves in that direction.

Any DST in New Zealand would be an interim measure. The Government would look to repeal it if and when the OECD’s international solution was implemented.

The Government is committed to future-proofing the tax system to ensure it can handle changes to how people work and how business is done.

The significance of the digital economy is only going to grow over the coming decades. Adaptation is needed to ensure multinationals that do business in the country paying their fair share of tax.

OpenGov Asia recently reported on New Zealand to tax multinationals in digital services.

The report highlighted that the Cabinet has agreed to issue a discussion document about how to update the tax framework to ensure multinational companies pay their fair share of tax in this country.

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