The Government plans to bring in a digital services tax - a flat tax on tech giant’s New Zealand revenue - in a move designed to stop income generated by a multinational’s NZ customers from being invoiced to subsidiaries in lower-tax territories.
The “DST” concept was first floated by Finance Minister Grant Robertson in 2019 - before being quietly put on the back burner in favour of waiting for an OECD-led crackdown.
Now it’s suddenly back on the front element. The Digital Services Tax Bill will be introduced to the House this Thursday, and allow for a flat 3 per cent tax on a multinational’s taxable New Zealand revenue.
The Government has previously preferred not to pre-empt a multi-country, OECD-led approach to revenue and profit-shifting - particularly by the “Big Tech” firms.
But today Finance Minister Grant Robertson said: “While we will keep working to support a multilateral agreement, we are not prepared to simply wait around until then to find out. That is why we have prepared legislation that is ready to go if the OECD process does not succeed.”
It’s more of a backstop than a hurry-up. Robertson says the flat 3 per cent tax will be introduced on January 1, 2025, if OECD members can’t agree on the terms of a multi-country crackdown (a complex process that has already consumed more than a decade of talks).
“The proposed digital services tax will target large multinational businesses that earn income from New Zealand users of social media platforms, internet search engines, and online marketplaces,” Robertson said.
The proposed “DST” would be payable by multinational businesses that make more than €750 million ($1.4 billion) a year from global digital services and more than $3.5m a year from digital services provided to New Zealand users.
It is expected to generate $222m over the four-year forecast period, Robertson and Revenue Minister Barbara Edmonds said this afternoon.
The pair pointed to DSTs already introduced in the UK and France.
‘Drop in the ocean’
“It’s a bit of a drop in the ocean, but a start,” says Don Christie, co-founder of NZRise - a lobby group that represents local tech companies.
“What Government really needs to do is start enforcing its own procurement rules that allow it to properly value the economic impact of using Kiwi-owned companies to deliver Government projects. That would not only transform our local digital sector it would turn us into world beaters,” he said.
Local firms have been critical of Government tenders that have handed key contracts from Novopay (teachers’ pay) to a new vaccine register to Three Waters IT systems to multinationals. Christie says such tenders are not a level playing field, because Big Tech firms pay less tax.
He also maintains that our Government already has all the necessary legislative tools to tackle multinational tech firms in areas from privacy to harmful content to copyright issues and tax - it just hasn’t gone on the front foot to enforce them.
DST critics have warned it’s a two-way street, with New Zealand-owned cloud software firms facing possible higher tax bills in export markets if they follow suit.
Since the possibility of a DST was raised in 2019, tech giants Alphabet (Google) and Meta (Facebook) have switched to reporting most of the revenue generated from New Zealand customers to their NZ operations, instead of invoicing it to offshore subsidiaries in lower tax companies. But at the same time, the internal costs they pay to their offshore corporate parents has increased (dramatically, in Google’s case), reducing their taxable revenue, according to Massey University School of Accounting lecturer Dr Victoria Plekhanova.
And some ownership structures have retained their complexity. Microsoft New Zealand was a subsidiary of MBH Ltd in Bermuda (ultimately owned by Microsoft Corp) until May 2021, when ownership was transferred to a Microsoft subsidiary based in Dublin. Microsoft 6399 New Zealand, formed in May 2020 for the firm’s new hyperscale data centres in Auckland, has Microsoft Ireland Operations as its sole shareholder.
“It’s clear that the international tax framework hasn’t kept pace with changes in modern business practice and with the increasing digitisation of commerce,” Robertson said this afternoon.
“This is a problem faced by countries across the world. With more and more overseas businesses embracing digital business models, our ability to tax them is restricted and the burden falls to smaller groups of taxpayers,” Robertson said.
We have been actively participating in negotiations at the OECD for a multilateral agreement to address these issues. This work is making slow progress. As part of these negotiations, we have agreed not t o bring in a unilateral measure such as DST until 1 January 2025.
“While we will keep working to support a multilateral agreement, we are not prepared to simply wait around until then to find out. That is why we have prepared legislation that is ready to go if the OECD process does not succeed.”
National finance spokeswoman Nicola Willis has been asked for comment. The party is due to release its tax plan tomorrow.
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.