New Zealand outlines its proposal for a digital services tax
Tax Alert - July 2019
By Robyn Walker
After being announced in February, in June the New Zealand Government released a Discussion Document putting forward a proposal for a Digital Services Tax (DST) in New Zealand.
The key proposition put forward is the introduction of a DST in New Zealand if there is insufficient progress made by the Organisation for Economic Co-operation and Development (OECD) in 2019 to come to a global solution to the problem of taxing the digital economy.
The Discussion Document also seeks comment on broader work being undertaken by the OECD. We don’t discuss that OECD work in this article, but you can find more information about what the OECD is considering here.
What is a DST?
DSTs are commonly portrayed as applying to multinational digital businesses who have taken advantage of tax structuring options to minimise taxes in the countries in which they operate, however a DST can apply more widely and will apply to New Zealand based businesses. The proposed DST could add an extra layer of tax based on turnover to any large New Zealand business who are operating digitally in some way, even if they are already paying taxes on all profits in New Zealand.
There are three criteria which would need to be satisfied before a New Zealand business would be subject to the rules.
- The business operations include any of the activities defined to be in-scope (refer below); and
- In the previous year, the business has over €750million* (approximately NZ$1.25billion) of consolidated annual group turnover (this is all revenue, not just revenue related to digital services); and
- In the previous year, the business has revenue which is attributable to in-scope activities of New Zealand users of NZ$3.5million*.
*Thresholds are subject to change and may need to be lowered if it is considered the thresholds could breach international obligations under World Trade Organisation agreements and Free Trade Agreements by effectively discriminating against foreign businesses by virtue of the size of the de minimis.
DSTs are not common-place. A number of countries have talked about introducing one, but to date there has been limited traction in implementing the tax. The countries currently considering a DST are the United Kingdom, Austria, the Czech Republic, France, India, Italy and Spain. The European Union and Australia have both considered introducing a DST but have actively decided not to pursue it.
What is an in-scope activity?
New Zealand’s DST would apply to “the services provided by business activities whose value is dependent on the size and active contribution of their user base”, this would include supplies made through intermediation platforms, social media platforms, content sharing sites, search engines and the sale of user data.
These concepts are not expanded on in great detail in the discussion document, and it is perhaps “intermediation platforms” which has the greatest scope to catch New Zealand businesses who are looking to operate in a modern fashion. An intermediation platform facilitates the buying and selling of goods and services between unrelated persons (for example, travel, accommodation, peer-to-peer lending, labour supply, asset sharing platforms). Many businesses are looking at working together and bundling complementary services together that could potentially result in an intermediation platform. A user of an intermediation platform could be either the person buying or the person selling through the platform. What constitutes an “active contribution” of a user base is also not clear but, but specific examples mentioned in the discussion document as being in-scope include Uber, eBay, Facebook, YouTube, Instagram and Apple music.
Excluded from the rules would be:
- The sale of ordinary goods and services (other than advertising or data)
- The provision of online content (such as music, games, TV shows and newspapers)
- Services delivered directly through the internet
- Information and communications technology (ICT) providers
- Standard financial services, such as credit cards and EFTPOS providers
- Television and radio broadcasting
While the combination of the de minimis thresholds and the specific exclusions from the rules means that many businesses needn’t be concerned about being caught by the new tax, any large New Zealand businesses looking to do business in a digital way will have to seriously think about whether its services could get caught within the broad ambit of "digital services."
How would the tax be calculated?
A business subject to the DST would need to determine the annual gross global revenue attributable to its in-scope business activities and then determine the proportion of revenues attributable to New Zealand. The 3% DST would then be payable to Inland Revenue on the New Zealand share of global revenue.
The DST will not be an income tax, rather it is likely to be considered a separate tax such as excise tax. Because the DST is not income tax, there will be no tax credit available to any business who is already paying New Zealand income tax on its income (but it may be available as a tax deduction as a business expense).
The DST is forecast to raise between $30 and $80million annually.
Who would pay the DST?
The liability to pay the tax would sit with the business who is undertaking the digital activity. However, the real question is whether it will be New Zealand consumers who actually end up paying the tax through increased charges. This is an area where the Government is seeking views, noting that the Discussion Document predicts up to 50 percent of the cost of a DST may be passed back to consumers.
Is a DST a good idea?
It’s difficult to see too many redeeming features to a DST. While it would collect revenue from some large multinational digital companies which might otherwise not pay much tax in New Zealand, it could also see New Zealand consumers bearing the cost of the tax, as well as seeing New Zealand businesses subject to tax on turnover and profits.
The Discussion Document itself provides some insightful comments. On the plus side, if more countries like New Zealand look to introduce unilateral taxes, this may help incentivise countries to agree to an “international solution”. On the negative side:
- Any “international solution” may put New Zealand in a worse position if it results in New Zealand businesses paying more tax outside New Zealand;
- A tax on turnover isn’t an ideal solution for a business with losses or low profit margins;
- DST may increase the cost of capital and may impact on New Zealand’s important (and growing) digital sector;
- New Zealand’s reputation as a good place to do business may take a battering and other countries may take retaliatory action;
In the scheme of things, the level of potential tax is quite low and may be quite compliance cost intensive to introduce and enforce. A DST could not be another part of the existing income tax legislation, it would need its own separate legislation and processes.
Key to whether a New Zealand DST will progress will be feedback the Government receives on the proposal. Submissions on the Discussion Document close on 18 July.
Please speak to your usual Deloitte advisor for more information.
Key elements of the proposed DST
Digital platforms whose value is dependent on the size and active contribution of their user base, such as:
- intermediation platforms, which facilitate the sale of goods and services between people
- social media platforms
- content sharing sites
- search engines and the sale of user data
The DST would not apply to sales of goods and services (other than advertising or data) over the internet.
3% of gross turnover attributable to New Zealand users.
Turnover de minimis:
€750 million global turnover and NZ$3,5 million digital revenue attributable to New Zealand.
Type of tax:
Not income tax, not creditable. It could be an excise tax.
To be determined. The New Zealand Government should make a decision whether to proceed with the DST in late 2019.