Digital Services Tax Bill introduced

Following its announcement on Tuesday, the government has now introduced the Digital Services Tax (“DST”) Bill in Parliament. Having considered and consulted on this previously, the government has made it clear publicly that it would only introduce a DST if agreement on a multilateral solution cannot be reached at the Organisation for Economic Co-operation and Development (“OECD”). With the OECD work still progressing, the timing and urgency of the announcement shortly before the election have caught many by surprise, particularly, given the Inclusive Framework members, including New Zealand, have agreed not to unilaterally impose any new DSTs before 1 January 2025.

The current international tax framework was developed around taxing companies largely based on having a physical presence in country. This traditional approach does not work well for digital companies raising concerns that these companies pay insufficient income tax in many countries they service.

Countries have been working to resolve this problem at the OECD over the past decade, with new rules now looking to be finalised later this year. However, success of this process is not guaranteed, particularly, if key countries like the United States are unable to implement the rules.

A number of countries, now including New Zealand, have designed taxes, such as a DST, looking to address limitations imposed by the current international tax framework. By introducing a DST, New Zealand will be joining a growing number of countries that have either implemented (e.g., the United Kingdom, France, Spain, Italy, India, etc.) or have announced (e.g., Canada) a DST or similar taxes. 

Based on the proposed legislation, a New Zealand DST would apply to multinational groups that:

• provide internet search engine, social media and content sharing, or intermediation platform services (“in-scope services”);
• earn annual global revenue of EUR 750 million or more from in-scope services and
• earn NZD 3.5 million or more per annum from providing in-scope services attributable to New Zealand users OR New Zealand land.

The DST would impose a 3% tax on the revenue from in-scope services attributable to New Zealand. Based on the draft legislation, the scope and design of the rules have many similarities to existing rules in other countries, such as the United Kingdom.

By its very nature, the DST is fundamentally different from an income tax. It would tax gross revenue meaning even loss-making multinational groups would potentially be subject to tax. It also means any tax paid under the DST is not creditable against income tax resulting in double taxation.

It is proposed the DST will apply as an annual tax, based on the financial reporting year of each multinational group. In-scope multinational groups will need to register with Inland Revenue within 90 days of the end of the first revenue year they are subject to the rules, with failure to do so resulting in a penalty of up to NZD 100,000. An annual DST return will need to be filed by in-scope multinational groups within 6 months of the end of the DST revenue year, with the DST payment due at the same time.

A high application threshold, combined with specific exclusions, mean it is unlikely any New Zealand headquartered multinationals would be subject to the proposed DST. Instead, the DST will apply to a relatively small number of foreign multinational groups, particularly, those based in the United States.

Previously, the United States has carried out trade investigations on DSTs introduced by other countries on the basis they disproportionately target large United States multinational groups. These investigations have resulted in additional tariffs being imposed on exports from countries with DSTs, although these are currently on hold while the OECD process continues. New Zealand exporters may similarly be at risk of additional tariffs on goods exported to the United States, if the proposed DST is implemented.

In 2019, the former New Zealand government consulted on different options to tax the digital economy, including a DST. At that time, a decision was made not to implement a DST in order to give the work at the OECD a chance and more time to progress. Introducing a DST at this stage may suggest the government has reservations regarding the results of the OECD process and that it wants to be ready to address fairness concerns if the OECD process does not deliver the desired outcomes.

The timing for introducing the DST Bill is also interesting due to the lack of urgency for this legislation. As drafted, the rules will not come into effect until 1 January 2025 at the earliest, with the commencement date possibly being deferred by up to five years.

Introducing the DST legislation now could also be an attempt by the government to demonstrate its commitment to the promise made in the 2020 Labour party manifesto that it will ensure multinational groups pay a fair share of tax in New Zealand. However, the future enactment of the DST may depend not only on progress at the OECD, but also on the composition of the next New Zealand government.