Now that Base Erosion and Profit Shifting (BEPS) measures have been widely implemented, international discussion has moved on from whether multinational entities are paying tax to where they should be paying that tax.

In many countries, regulators are thinking about how to collect a fair amount of tax from multinational corporations operating within their borders.

This has left jurisdictions weighing the benefits of two courses of action: working as part of the Organisation for Economic Cooperation and Development (OECD) to come up with a multilateral response, or working unilaterally to instigate a digital services tax as an interim solution.

In February 2019, New Zealand’s government announced its plans to investigate such a tax as an interim solution until an OECD consensus can be reached. A discussion document on digital services taxes was released in June 2019.

Many jurisdictions, including Australia and the European Union, have stepped back from a local digital services tax to focus on developing a solution within the OECD umbrella.

A digital services tax has a lot of appeal when taken at face value. It is simple to point to large digital service providers (such as Facebook, Amazon, Netflix and Google) operating in a nation and say “you should be paying tax here”.

“Digital services tax conversations have quickly morphed into a wider discussion of the allocation of future international taxing rights.”

However, there are risks involved, including the potential for double taxation, breaching World Trade Organization rules and the risk of retaliation. Both Ireland and Germany identified these risks early and were among the first countries to step back from the digital services tax approach.

Guarding the tax base

CA ANZ believes New Zealand’s time would be better spent developing and executing its strategy for OECD discussions. The current innocuous banner of ‘digital taxation’ distracts from the fact that digital services tax conversations have quickly morphed into a wider discussion of the allocation of future international taxing rights.

How we slice the international tax pie is becoming increasingly important as businesses across all industries digitise and shift away from the traditional source and permanent establishment model that has served us since the 1920s.

The proposal currently favoured by the OECD has a wider scope than simply digital service providers and acknowledges global business digitalisation. However, its approach of allocating taxing rights based on brand value attributed to marketing intangibles where the consumer resides, needs to be carefully considered with the New Zealand context in mind.

New Zealand is a small exporting nation and we are concerned with the potential impacts the OECD outcomes could have for New Zealand tax revenue. If we are to move towards a worldwide taxing system based on customer locale, there is a high risk our tax base moves with it.

CA ANZ has strongly advocated that New Zealand needs to make sure the repercussions of this are fully understood. While we do not disagree that multinationals should pay tax, the issues at hand are much more complex.

In our view, Treasury needs to model the tax revenue implications of any option adopted as a priority. This will ensure our participation at an OECD level is informed and New Zealand’s position is clearly defined.

The New Zealand Government and Inland Revenue need to be collaborating with like-minded and likely to be impacted nations, such as Ireland, to amplify the voice and position of smaller exporters at the OECD table.

The risks are too great for us not to come prepared.

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