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NZ tax base at risk from go-it-alone digital tax

New Zealand should drop its plan to try and tax borderless digital economy firms and focus instead on a "very damaging threat" from global proposals to change how exporters' income is taxed internationally.

John Cuthbertson, of Chartered Accountants of Australia New Zealand, says the country needs to be careful that the "tokenism" of the proposed unilateral digital economy levy doesn't end up costing a lot more than it will ever bring in.

"Whether that's in retaliation because we do something unilaterally or whether it's because we haven't been strategic enough in our thinking and woken up too late at the OECD that things have moved on significantly and we've got a problem," he told BusinessDesk.

"That opportunity cost is the bigger one."

In February, Revenue and Finance Ministers Stuart Nash and Grant Robertson announced their intention to impose a digital services tax that could collect between $30 million and $70 million a year, depending on its design. This would be an "interim measure" in response to how slowly international efforts, led by the Organisation for Economic and Cultural Development, had been moving to tighten the rules on borderless tech companies, which can effectively choose which jurisdictions they pay to tax in, if at all.

They also cited moves by Australia in the same direction.

But Cuthbertson, the New Zealand tax and financial services leader for peak accounting body, said Ireland and Germany were now backing off earlier proposals to impose such a tax - effectively a levy on the revenues booked by a digital services company within a country - because of wider changes emerging in the OECD work.

A January policy note from the OECD's tax avoidance project, known as BEPS, says the proposals it is now assessing "may reach into fundamental aspects of the current international tax architecture" by changing the presumption that profits earned by a company should, generally, be taxed in their home country.

"The very danger for New Zealand is that these talks are now heading down the path of a worldwide taxation system based on where customers are located, an idea that underpinned digital services taxes," Cuthbertson said.

"As an exporting nation, a customer-centric regime represents a very damaging threat to our tax base. There is a high risk that a large part of the business tax base will go offshore."

The proposed digital services tax could turn out to be "a Trojan horse for countries like New Zealand", he said, exposing the local tax base to claims from other countries that tax should be paid there rather than in New Zealand;

"Under the US proposal, currently favoured at the OECD, part of the tax revenue paid by exporters, such as Fonterra and Zespri, is at risk of migrating offshore," Cuthbertson said.

While the BEPS process had been glacial - and had spurred some countries to act alone as New Zealand proposes to do - it had "morphed" quickly into a bigger global conversation about the impact of digitisation on all economic activity across borders, not just tech company activity.

"Taxation based on source, and bricks and mortar, has served the global economy well since the 1920s, but it is becoming outdated as a basis for tax allocation," he said.

The January OECD note says the proposals "go beyond the limitations on taxing rights determined by reference to a physical presence generally accepted as another cornerstone of the current rules".

Concepts such as "significant economic presence" in a market were being examined to replace the long-standing rules requiring tax to be paid where a firm was judged to have a "permanent establishment" in a country.

A discussion document is due on the New Zealand digital tax proposal next month.

Cuthbertson said CAANZ questions whether it was "even worth going down that track", especially if it diverts finite tax policy resources that would be better applied to the potential for major shifts in long-standing in cross-border tax principles to be up-ended.

He said there was growing traction for the US-led proposals at the OECD.

"Something has to happen in the next year and it could be the starting point for the long term. If we're not happy with that starting point, it's a bit hard to change those foundations," he said.

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