The New Zealand government has released a discussion
document proposing a digital services tax (DST) as an interim
measure while OECD discussions continue on possible changes to
the international tax framework to address the digitalisation
of the global economy.
The discussion document, entitled 'Options for taxing the
digital economy', also comments on the measures the OECD is
The DST would be imposed at the rate of 3% on the New
Zealand proportion of a group's global turnover from certain
digital businesses, such as intermediation platforms, social
media platforms, content sharing sites and search engines. The
DST is intended to catch business activities whose value is
dependent on user contribution and user base size.
Form of the DST
The DST would be a new tax, imposed by reference to gross
revenues rather than net income. It would apply only to
businesses meeting two de minimis thresholds: (i) a
global consolidated annual turnover of €750 million ($850
million) per year; and (ii) NZ$3.5 million ($2.3 million) of
in-scope revenue (i.e. from business activities within the
scope of the DST) attributable to New Zealand per year.
The discussion document proposes that gross turnover
attributable to New Zealand could be based on the proportion of
global users in New Zealand. A suggested alternative for
attributing turnover is to use the actual contribution of users
in New Zealand to global turnover.
Potential effects of a DST
The discussion document concedes that a DST would be
unlikely to raise a significant amount of tax; it is estimated
to raise NZ$30 million to NZ$80 million per annum. The
discussion document, however, refers to other asserted benefits
of introducing a DST including:
i) improving public confidence in the tax
ii) avoiding a delay while waiting for a
solution at OECD level.
The government may be especially sensitive to the question
of whether large businesses are paying enough tax, given its
decision in April not to implement a capital gains tax as had
been recommended by a tax working group.
As a DST would apply to both New Zealand resident and
non-resident businesses (to comply with World Trade
Organisation and free trade agreement obligations), it would
apply to New Zealand businesses meeting the de minimis
thresholds in addition to income tax. Although the DST may be a
deductible expense for the purposes of computing income tax
liability, the DST would not be creditable against income tax
or vice versa. Consequently, New Zealand businesses that offer
in-scope services and exceed the de minimis thresholds
will be subject to a greater New Zealand tax burden than other
businesses. This feature of the proposal will likely attract
Another controversial aspect of the proposed DST is that the
US (one of New Zealand's largest trading partners) has stated
that it regards DSTs such as that proposed by New Zealand as
discriminatory and contrary to international law. It will be
interesting to see how the New Zealand government manages these
and related concerns, especially given that another of New
Zealand's largest trading partners, Australia, recently shelved
plans to introduce its own DST.
Next steps and implementation
Submissions on the discussion document close on July 18
2019. The government has indicated that it intends to make a
decision regarding the DST in the second half of 2019. If the
government decides to proceed with a DST, it is likely to
introduce legislation in 2020.