New Zealand looking into how to tax income of digital services multinationals

Kiwi companies disadvantaged when competing against foreign multinationals in the digital realm, Wellington has said.

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The New Zealand Cabinet has agreed to issue a discussion paper on taxing multinationals that offer digital services.

"Highly digitalised companies, such as those offering social media networks, trading platforms, and online advertising, currently earn a significant income from New Zealand consumers without being liable for income tax. That is not fair, and we are determined to do something about it," Finance Minister Grant Robertson said on Monday.

"The current tax rules also provide a competitive advantage to foreign companies in the digital services field compared to local companies who offer e-commerce, online advertising, and social networking services."

Robertson said that there was approximately NZ$2.7 billion in cross-border digital services value, and that a digital services tax could generate NZ$30 million to NZ$80 million.

Revenue Minister Stuart Nash added New Zealand is involved in OECD work to create an international framework on how to tax the digital economy, but Wellington would push ahead on its own as an interim measure, and the paper should appear in May.

"The document will make it clear we are determined that multinational companies pay their fair share of tax," Nash said.

"We are committed to finding an international solution within the OECD but would also consider an interim option till the OECD finalises a position."

Nash cited similar work by Australia, which released its own discussion paper on taxing companies that were not located in the nation but had offered digital services after it introduced a form of the Google Tax in 2017.

"Businesses can generate significant profits from the contribution of users, but have little or no physical presence in the country where those users are located," the Australian Treasury paper said.

"Highly digitalised businesses can derive value from user data or user-generated content without significant physical capital, paid labour, or investment in the country where the user is located, with the result that current corporate tax laws may not allocate sufficient profits to that country."

Developed in the 1920s, the current international tax framework allocates taxing rights based on the location of physical assets, capital and labour, the source of income, and the residence of taxpayers.

But the paper says that digital businesses often rely heavily on highly mobile, intangible assets, with these assets, such as algorithms, capable of being located anywhere in the world, and usually only requiring a network to be established for them to be accessed.

"As a result a digital business may have a significant economic presence in one jurisdiction, while the majority of its profit-generating assets and labour can be located in a different jurisdiction," the paper said.

"In this way, under the international tax framework and Australia's corporate income tax system, only a relatively small amount of the global profits of a highly digitalised multinational may be sourced in Australia."

At the start of the year, the Australian Taxation Office (ATO) said its tax avoidance taskforce raised AU$2.96 billion in liabilities for 2017-18 from multinationals and large public groups, and a further AU$1.8 billion from wealthy individuals and associated private groups. The liabilities covered tax returns from 2005 to 2018.

"Over AU$3 billion of this related to six significant cases we were able to bring to conclusion with the help of the taskforce funding and the MAAL [multinational anti-avoidance laws]," the ATO said.

"The MAAL measure influenced the outcome in a number of very significant cases by encouraging settlement discussions to be brought forward in relation to past and future years."

The Taxation Office also said in January the collection of GST by vendors on imported items worth less than AU$1,000 is doing well.

It was expected that the laws would raise AU$300 million over three years from over 3,000 vendors who the government believed would voluntarily register with the ATO.

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