Google’s tax bill could double under new rules

The Government has announced a tech tax is on the way, saying the current tax settings allow multinationals such as Facebook, Apple and Google to avoid paying an appropriate amount of tax on the income they earn from New Zealand consumers.

While critics question whether the changes would be worth the effort, had the proposed rules been in place for the 2017 tax year they would have seen tech giant Google paying more than twice as much tax.

Prime Minister Jacinda Ardern said the proposed tax was about fairness. 

"Some companies can do significant business in New Zealand without being taxed for the income they earn," she said.

"This is not fair, and this is not sustainable.”

DST, it's easy as 1,2,3 

Unlike other companies taxes, the Digital Services Tax (DST) would be levied on revenue, rather than profit, making it extremely difficult to avoid paying. 

Multinational companies have been accused of artificially inflating their costs to reduce the amount of money on which they are liable to pay tax. This can be done by making high-cost loans between an overseas parent company and its New Zealand subsidiary.

This loophole was closed by the Base Erosion and Profit Shifting Act introduced by National before the election and passed by Labour last year. 

Now the Government is proposing tax changes which could more than double the tax paid by multinational digital services providers. For example, Google's New Zealand subsidiary paid just $393,000 in tax in 2017 on revenues of $14 million, although this did not include advertising revenue - Google’s main source of revenue.

In fact, Google officially made a loss in New Zealand in 2017, booking costs of $14.5 million, and thereby reducing its taxable profits.

If the Government decides to impose a 3 percent tax, akin to those proposed in the UK, Google’s 2017 revenue would net additional tax of $414,000 (on top of the $393,000) - more than doubling the revenue to the Government.

Google would also have to pay tax on advertising revenue booked here.

Jumping the OECD

The Government’s work comes in advance of work being done by the OECD to ensure income from large multinationals is taxed appropriately. That work has proceeded at a glacial pace, triggering countries like the UK to indicate they would implement a tax ahead of the OECD.

National’s spokesperson Amy Adams said the Government should wait for the OECD work to be completed.

“A country as small as New Zealand would find it difficult to go out on its own without our citizens missing out on much the global market has to offer,” Adams said. 

“We support the OECD work being ramped up. The solutions to these problems is best achieved by countries working together.”

The Government did not announce any detail on Monday, beyond saying revenue estimates for the tax were between $30 and $80 million. The precise form of the tax is currently being consulted on, but Revenue Minister Stuart Nash said it would likely be in force by 2020. 

Deloitte national technical director for tax Robyn Walker questioned whether the tax was worth the effort.

“The potential revenue is very low, in comparison to the potential trade implications and cost to the Government in having policy officials working on this rather than other issues,” Walker said. 

She said that the overall increase to the New Zealand tax base would be just 0.04 percent, 

“Is this worth pursuing?” she said. 

Independent tax consultant Terry Baucher said the proposal would be an effective way of New Zealand ensuring it was able to avoid getting sidetracked by questions of what was worthy economic value, that were often used by multinationals to force down their tax bills.

“That would completely get around those issues like what is worthy economic value. Generally it is difficult to get, especially for a country like ours that is at the end of the value chain," he said. 

Taxes of straight revenue rather than profits would be very difficult to avoid. 

"I'm not entirely sure people realise how manipulative the digital giants have been in their tax planning," he said.

Political motivation?

There is also the suggestion the tax could have a political motivation. The Government’s Tax Working Group will release its report this Thursday, which will likely contain a capital gains tax of some kind.

A tax on unpopular corporates announced ahead of the group’s report could be a way of softening the blow for those dreading the likely capital gains tax. 

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