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 considering.
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 system; and
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 criticism.
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.
