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Digital Services Tax Impact

Mark WIther discusses the proposed digital services tax, what forms the taxation might take and how it may impact short term accommodation businesses. DIGITAL SERVICES

By: Mark Withers

1 July 2019

The Government has recently floated its thoughts on the introduction of a digital services tax in New Zealand, and put a discussion document out for public submission.

The tax is targeted at multinational organisations who derive revenue by selling digital services that are consumed in New Zealand. Because the entities deriving the revenue are headquartered overseas (and in low tax jurisdictions) very little tax on the revenue derived from New Zealand is paid here.

The problem is not unique to New Zealand; countries around the world are recognising the issue and seeking ways to extract tax revenue from digital service providers.

Digital services revenue will likely include advertising revenue and commissions derived on services sold in New Zealand.

Of particular interest to property investors is the operation that derives commission on the short term letting of properties in New Zealand (such as Airbnb). The rise in popularity of short term letting of properties via such sites has a number of tax implications, not least of which the fact that short term letting is a taxable activity for GST. But for now, investors’ minds are focused on whether the introduction of a digital services tax would lead to the cost of the tax being passed directly on to users here.

The Government is proposing two options for the tax:

1. Changing the current international income tax rules to facilitate more taxation of revenues derived in local markets.

2. Applying a “top line” approach by charging 3% tax on the revenues earned by digitalised multinationals selling services into New Zealand.

Tax commentators have urged the Government to delay any decision on the introduction of a tax here until the results of similar options being considered by OECD and G20 nations are known.

That said, the Government is nervous that gaining a consensus internationally may take time and they are determined to have a strategy available to implement here regardless of what happens abroad.

It is thought that if New Zealand is an early adopter of a tax that is not universally applied across jurisdictions that it is more likely that multinationals would simply seek to recover the cost of tax from the customers in the jurisdictions they operate in, where the tax liability is triggered.

This then would run the risk that the tax would essentially end up a tax on Kiwis using the platforms rather than a tax borne by the multinationals themselves.

The consideration of the two options is probably indicative also of fears the Government may have over compliance costs associated with a digital services tax that could significantly erode net revenue gains the Government might expect to enjoy. It is likely that a straight top line tax on revenue would have a lower compliance cost and be harder to avoid than a complex re-write of our international tax rules. Though, bolt on stand-alone tax law can also be problematic in terms of fairness of bottom line profits not being in line with top line revenues.

Whilst Kiwis who use and consume digital services may not welcome the prospect of a new tax being passed on to them, it is fair to say that the Government will need to face the rising tide of digital business and the challenges associated with taxing gains from it. These technologies are making it increasingly easy to derive income on a global basis and most Kiwis would see it as fair that a multinational profiting from activity in New Zealand would make a contribution via the tax system.

Submissions on the Government’s discussion document close on July 18.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz

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