Explainer: How Government's digital services tax will effect offshore tech giants

The Government said the tax will specifically target companies with no New Zealand presence. Photo / Getty

The government has vowed to sting internet giants like Facebook and Google more tax on the income made within New Zealand.

Prime Minister Jacinda Ardern said Cabinet would consult on the design of changes to tax rules which at present allow multinational companies in the digital services field to do business here, without needing to file income tax.

Arden said the introduction of a digital services tax would level the playing field, and that interim measures would be in place by 2020.

"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," she said.

"That is not fair."

So what might a digital services tax for internet giants look like?

The Government is looking to raise between $30-$80 million through the policy each year which works out to be a levy of between 2 and 3 per cent of annual revenues, inline with proposed levies overseas.

The tax on revenues would operate like a tariff.

A number of countries are looking at implementing a similar tax for internet companies, such as Australia, France and Germany.

The move to tax internet companies follows the introduction of a similar tax in France, and a report last month by the OECD's Base Erosion and Profit Shifting (BEPS) working group that the challenges faced by the increasing digitalisation of the global economy would this year be a key area of work.

The proposed tax in France is a levy on all internet direct sales, advertisements and the sale of private data. Similar measures being discussed by the European Union and the United Kingdom, are limited to online advertising.

The European Union has been debating a uniform digital services tax for quite some time, with discussions surrounding creating a digital interface which would allow member states to find and interact with companies registered in one or more countries.

Ireland, along with Sweden and a handful of other countries, have opposed the proposed digital services tax on the basis it would breach international treaty obligations, in the view that they should be a more global solution as opposed to a European solution.

Britain has already outlined plans to hit tech giants with a digital services tax from 2020. The 2 per cent tax, revealed in the latest UK budget, will target revenues earned in the country by online players ranging from search engines to social networks.

The tax will only apply to companies that generate more than £500m (NZ$940m) a year in global revenues.

The value of cross-border digital services in New Zealand is estimated to be $2.7 billion.