New Zealand introduces draft legislation for a Digital Services Tax, while work progresses at the OECD toward a global solution
The previous Government introduced the Digital Services Tax Bill to Parliament in August 2023. The Bill proposes to tax the digital economy unilaterally if sufficient progress toward a global solution to the taxing of digital profits is not made. The Bill has now lapsed and will need to be reinstated by the incoming Government. If enacted, this could come into effect as early as 1 January 2025.
There has been concern globally around the ability of the current international tax rules to effectively tax digital multinationals (MNEs) for many years. This largely stems from the current tax framework being set against the backdrop of a much less mobile and more “tangible” economy.
In this regard, there has been significant work and prolonged discussions among OECD countries to agree on an international solution to taxing the ‘digital economy’. Most recently, the OECD released a detailed package of guidance (over 900 pages) in relation to the proposed global solution (referred to as Pillar One, Amount A). However, there are still issues to be resolved and a certain number of countries would be required to sign and ratify the solution in order to bring it into force. While work progresses, domestic discussions around implementing unilateral digital services taxes (DST) continue.
If you would like to discuss what the above developments mean for you, please reach out to your usual PwC advisor.
What would a New Zealand DST look like and who would it apply to?
The New Zealand Government consulted on options for taxing the digital economy back in 2019. This included consideration of either implementing a unilateral DST, or whether to follow changes to the international tax framework through the OECD-led process. Further detail on the discussion document is included in our earlier Tax Tips Alert.
There was limited public discussion following the submissions made on the 2019 discussion document, which meant that the release of draft legislation in August 2023 was a surprise to the New Zealand tax community.
The proposed DST will apply at a rate of 3% to multinational companies earning:
- over €750 million in revenue derived from “digital services”; and
- NZ$3.5 million of revenue attributable to “digital services” provided to New Zealand users, or in relation to New Zealand land, each year.
Digital services would include:
- Intermediation platforms e.g. online platforms with the main purpose of facilitating sales by users of goods or services to other third party users;
- Social media and content sharing platforms e.g. online platforms with the main purpose of promoting interaction or the facilitation of sharing of content between users;
- Internet search engines e.g. online platforms that allow users to search the internet for digital content of multiple unrelated websites; and
- Any activity that is carried on incidental to the above including advertising and activities in relation to user-generated data on those platforms.
The DST would be levied on gross revenues (rather than taxable income). The DST would apply in addition to a company’s income tax obligations, meaning that in some cases both New Zealand income tax and the DST would apply, and we understand no credit would be available against income tax. This also means that loss-making companies that fall within the criteria would regardless also be subject to the DST.
When might this apply?
The Bill’s commentary states that the Government remains committed to an internationally agreed solution but it wants to be ready to quickly impose a DST if “sufficient progress” is not made toward implementing the OECD-led solution. While it is unclear what “sufficient progress” looks like, the earliest the Bill could come into effect is from 1 January 2025.
The potential start date of 1 January 2025 is in line with an agreement by 138 countries (including New Zealand) in July 2023 to refrain from imposing new DSTs on any company before 31 December 2024. The commitment is held out as being made in recognition of the progress made to date on a global solution and the need to prevent its disruption or delay.
If the DST is enacted, the intention is for the New Zealand Government to repeal the legislation once an “acceptable global solution” has been implemented.
What are other countries doing in this space?
A number of other jurisdictions have introduced DSTs across Europe including the United Kingdom (UK), France, Italy, Spain and Austria. For example, the UK imposes a DST at a rate of 2% on MNEs with global revenue from in-scope activities of over £500 million, and over £25 million of UK digital services revenues. Similarly, France imposes its DST at a rate of 3% on MNEs earning global digital revenues of over €750 million, with €25 million per year from in-scope activities provided in France. As unilateral measures, all DSTs vary to some degree in scope.
As has been widely reported, there has been significant push back from the United States (US) Government with respect to jurisdictions imposing DSTs on the basis that they view such measures as discriminatory against US companies. The US initially threatened to impose tariffs on certain goods from those countries imposing DSTs (including France and the UK). However, these earlier threats were dropped as part of an OECD agreement in October 2021 to work towards a global solution.
In addition to New Zealand, Canada has recently introduced DST legislation, expected to come into force from 1 January 2024. The US has publicly criticised Canada for its refusal to back the global agreement to hold off on implementing DSTs until the end of 2024 and tariff threats have again been made.
New Zealand’s local revenue threshold of NZ$3.5 million is significantly lower than the thresholds in other jurisdictions. The Bill commentary explains that the NZ threshold is roughly proportionate to other jurisdictions’ thresholds (particularly the UK and France) relative to the size of these jurisdictions’ economies.
The discussions at the OECD to agree on a global solution are on-going, particularly with respect to the reallocation of taxing rights internationally (as noted above and commonly referred to as Pillar One, Amount A). It is important to note that the reallocation of taxing rights under Pillar One would only apply to about 100 MNEs globally - being the largest and most profitable global groups.
A key aspect with the introduction of an agreed international solution will be repealing and preventing a proliferation of DSTs (such as that contained in New Zealand’s draft legislation).
What does this mean for New Zealand?
The digital economy provides many benefits to New Zealanders, and is an important source of economic growth. Implementing a unilateral measure may trigger international concerns over taxing rights, risk double taxation and reduce the purchasing power of New Zealand consumers. Further, there are concerns around trade retaliations from the United States, as seen in response to other countries' DSTs, and care would need to be taken to ensure New Zealand’s trade agreements are not breached.
As outlined in the Government’s 2019 DST discussion document, at least a portion of the DST is likely to be on-charged to consumers, making many of the digital services being enjoyed by New Zealanders more expensive. The low local revenue threshold means only a small portion of a MNE’s digital revenues would need to be attributable to New Zealand for the DST to be triggered. All of these things could adversely impact the New Zealand economy.
The Tax Working Group looked at the issue of taxing the digital economy in 2019 and recommended that New Zealand should get ready to implement a unilateral DST if a critical mass of other countries move in that direction, and it is reasonably certain that New Zealand’s export industries will not be materially impacted by any retaliatory measures.
At this stage, there is no indication that any of New Zealand’s major trading partners (including China, Australia, or the US) are looking at implementing a unilateral DST. Other key jurisdictions also appear to be waiting for the OECD’s guidance in this area and, arguably, so should New Zealand.
The introduction of a DST has not been commented on in the General Election tax policies. In our view, a global solution is preferred to mitigate the risk of each country introducing their own unilateral measures, and MNEs therefore needing to work through, comply with and pay tax under multiple different regimes, potentially on the same income, leading to double, triple (or even more) tax.
