21 May 2020

Taxing the digital giants

From Nights, 10:28 pm on 21 May 2020

The government’s proposed Digital Service Tax can compensate the for the loss of revenue from Facebook and Google’s business profits, an expert says.

Facebook and Google apps on a a tablet.

Photo: AFP

Dr Victoria Plekhanova, from Massey University's School of Accountancy, says in the absence of international consensus over how profits from digital businesses should be allocated within nation states' tax jurisdictions, the Digital Services Tax offers a viable means of redressing the global discrepancy.

She told Nights that the issue was pressing all governments, except those nations home to the major corporates benefiting from the extraction of advertising revenue from within other jurisdictions without it being taxed accordingly.

Not only was this affecting traditional media platforms in New Zealand, like NZME,  but it was robbing the public purse of revenue.

“It’s huge problem because countries have different interests. It’s very difficult to reach an agreement on these matters. We also have two tax jurisdictions with the largest economies in the world, China and the United States, countries that are home to the largest multinational platform firms and of course they are not interested in sharing the profits these firms derive with market jurisdictions.

“That’s why this international solution would be the best option for everyone. But because this isn’t working, New Zealand needs to look at some unilateral options unavailable.

“It would be a possibility to use the Digital Services Tax to compensate the income tax revenue loss that occurs because of these outdated rules that allocate business profits among tax jurisdictions.”

In June last year the Government released a discussion document proposing a Digital Services Tax (DST).

It proposed a DST in New Zealand if there was insufficient progress made by the Organisation for Economic Co-operation and Development (OECD) to come to a global solution to the problem of taxing the digital economy.

The tax would be a flat tax charged at 3 percent on the gross turnover attributable to New Zealand of certain digital businesses, including the global giants Facebook and Google. It would be applied on a consolidated group basis.

“It is a tax on turnover on revenue,” Plekhanova says.

“Take Google as an example. It means that tax would be at 2 or 3 percent, depending on the rate New Zealand chooses. This rate would apply to all tax revenue that would be collected in New Zealand, from New Zealand advertisers. This would effectively be revenue for New Zealand. It’s a pretty simple tax.”

If the companies tried to shift this burden on to local advertisers the companies would lose them due to excessive cost, she says. Local advertisers may then shift from targeted advertising with these firms back to media groups like NZME, creating a more equal playing field between new and traditional media platforms.

However, the main reason for backing the tax should not be seen as a mere means to support local media, but more so to bolster the public purse and promote economic fairness.

“My argument is that, because Google and Facebook are not paying enough tax in New Zealand, cost is effectively shifted to all taxpayers... It is not about putting New Zealand media in a worse position because of this tax issue.

“The problem is, because government needs to support local media and this support comes as subsidies and of course subsidies are funded by tax revenue, that is quite a direct link to you and me as taxpayers.

“Companies like Google and Facebook and the problem is they are highly mobile - they are not required to be physically present in New Zealand. That’s why it’s hard to establish this sort of connection for tax purposes … because of this invisibility and mobility.”

Plekhanova says the country gets some money from the companies at present, but this isn’t linked to the amount of ad revenue they derive in New Zealand.

“It’s really hard to get any information about Google’s presence in New Zealand and it’s all based on general estimates.

“But if we just have a look at the overall share of Google on line advertising markets, which is currently about 96 percent, together with Amazon and Facebook. And if we just think about New Zealand as a country of small businesses and small businesses tend to spend all their ad budgets on advertising services provided by Facebook and Google, I think maybe the share is 90-something percent at the moment.”

New Zealand Commerce Commission needs to request Google and Facebook declare revenue attained from these local advertisers, so tax authorities can ascertain how much money is being lost in potential tax revenue, she says.

Australia’s Competition and Consumer Commission (CCC) had made a similar request and received revenue figures from Google for 2018, with success.

“It was quite a good report that the CCC did as a result of this investigation,” she says.

“Now we at least know what’s going on in Australia. But it’s really hard to find any information about Facebook activities and revenue in New Zealand as Facebook doesn’t file financial statements, so that’s why we can’t really see the amount of income tax it pays.”

Because the digital corporates parade across multiple jurisdictions as “multi-sided business” it makes it particularly hard to deal with them, she says.

 “We have consumers or users in the case of Google and Facebook, and we also have advertisers. More and more economies now agree that users participate in that equation.

“So, when it comes to that multi-sided model it means some contribution usually comes from users of Facebook and Google in New Zealand and on the basis of existing rules used for the allocation of profits across jurisdictions, this profit allocation should be linked to the place where revenue is created.

“So, if we all agree that users can contribute to this revenue that Google and Facebook generate and transfer into their profits, then it means a much bigger portion of profits should be attributed to jurisdictions where users are allocated. So, it is another layer to this problem.”

The academic says tax policy-makers are only now getting to grips with the nature of firms like Facebook and how a “platform economy” operates to generate revenue and extract profits. The proposed Digital Services Tax is a result of this evolving understanding.

 “They are now capable of developing better tax policies that can target these companies.”

This was also reflected in an earlier move by government, with its amendments to the Income Tax Act introducing the permanent establishment anti-avoidance rule.

The Taxation Act 2018 inserted the rule for large multinationals that structure to avoid having a permanent establishment (PE) in New Zealand.

The rule deems a non-resident to have a PE in New Zealand if a related entity carries out sales-related activities for it here under an arrangement with a more than merely incidental purpose of tax avoidance.

The new rule applied after 1 July 2018.

“I think if this provision works we should see it in Google’s next financial statement,” she says.

“We should see that amount that Google pays in New Zealand increase substantially. If it doesn’t that means, of course, the anti-avoidance provision doesn’t work and we would need to think about something else, because the biggest problem at the moment is lack of international agreement on how we will change the rules that allocate profits among tax jurisdictions."

She says this shouldn’t bring pessimism and would simply enforce the need for the introduction of the Digital Services Tax.

“When it comes to taxes it is really just about doing something. You can’t say it’s too big a problem to deal with…The digital tax option will ease the problem, so there would be less revenue losses for local budgets and I think if more and more countries just joined this trend it would be better for everyone, because it would force Google and Facebook to change their behaviour, or at least to pay more.”

The Covid-19 lockdown also highlighted the need for urgency on tackling the problem, with the confinement of people to their homes vastly increasing internet use and hence strengthening the hand of digital corporates.

“Google and Facebook collect a lot of data about users because that’s how they sell their targeted advertising. This Covid lockdown – they wanted people at home and the amount of personal data that was shared during this lockdown it was just phenomenal.

“People were forced to work from home and they have generated data that went to the open internet, not through an intranet, a public network, and this data can be easily connected and was collected by Google and Facebook, so they improve their own businesses so they can now sell better targeted advertising.”