In New Zealand, a digital services tax would have the most impact on users of internet advertising services supplied by large digital firms.
The Government’s public consultation about the challenges of taxing multinational digital services companies is timely, says Massey Business School tax expert Dr Victoria Plekhanova.
“These challenges are complex and require an international solution, including the development of profit allocation and nexus, or right-to-tax, rules,” she says. “In this context, an interim tax measure could ease, but not solve some of the existing tax challenges. But a digital services tax is not without problems.”
Dr Plekhanova says the ideal solution would be agreed rules for all 129 members of the so-called Inclusive Framework on BEPS (Base Erosion and Profit Shifting). BEPS refers to tax strategies that exploit gaps in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.
“The OECD is working hard to build a consensus by 2020, but every state is generally self-interested so it is hard to see a consensus-based solution being reached in that timeframe, if at all,” she says.
A good interim measure
Dr Plekhanova says a digital services tax is a good interim measure that can be implemented and repealed quickly because it does not require a renegotiation of the country’s international agreements.
“The discussion document issued by the Government yesterday provides a detailed and thorough analysis of benefits and possible detriments of digital services tax for New Zealand. It suggests the impact of the tax on local businesses and customers, in most cases, will not be significant,” she says.
“Users of internet advertising services supplied by large digital firms are likely to be the most affected. The structure of this market, which is dominated by a small number of multinational firms, allows these firms to easily add the cost of the tax to the price of their services.”
Dr Plekhanova says a digital services tax will not generate significant revenue for New Zealand but it will improve the fairness of the tax system by ensuring large digital companies pay their fair share of tax.
“By joining a group of countries that have introduced the digital services tax, New Zealand will contribute to the OECD-led international work on a consensus-based solution,” she says. “The tax will put pressure on large digital firms, which could make their home countries more likely to cooperate meaningfully and develop a solution that would be suitable for the majority of countries.”