Taxing tech giants carries too many risks

Taxing the internet giants would be an own goal for New Zealand. It’s been suggested we should join other countries in imposing a tax on the likes of Amazon, Facebook, Google and Apple.

There’s international concern that those companies can earn profits all over the world while choosing to pay very little tax in low-tax countries.

Over recent years the OECD has been working on new international tax rules to address this situation.

But some countries – Britain, India, France, Italy, Spain and others – have become impatient with the delay and are establishing their own rules for taxing the internet giants.

Our Government is

considering doing the same and is consulting on how New Zealand can tax the digital economy.

My view is we should not set up our own internet tax rules but should instead contribute to the OECD’s rulebook.

That’s because the way the tax is developing in several countries could be bad for New Zealand.

The idea of taxing tech companies has come about because the international system is not well set up to capture revenue from the internet giants.

The system is based on taxing production within a country, and a foreign company can only be taxed if it has a permanent presence in that country – but the internet companies are able to escape that net.

Large countries with big populations, such as India, are the ones that most want the tax. Their populations give the internet giants their large communities of users and customers from which they make money.

So, India, Britain, France, Italy and others are motivated to devise new approaches to tax the techs.

Those countries are using differing approaches, some more aggressive than others, and some are focusing wider than just the internet. Instead of just taxing internet companies, some are now looking at taxing all economic activity across borders.

That development would endanger New Zealand. We sell meat, dairy, kiwifruit, apples and wine overseas and earn most of our income from those exports.

Just like the internet companies, we make most of our money from large countries with big populations. A tax on economic activity across borders would hit us hard.

There’s another danger too. The United States, naturally opposed to taxing its tech giants, has been suggesting alternatives.

It’s suggesting taxing ‘‘marketing intangibles’’ – taxing the brand names, trade names or customer lists of companies operating across borders, based on the idea that companies with strong brands are able to build those brands because of large customer numbers in the US.

The US suggestion also broadens the focus beyond internet companies – again to the detriment of New Zealand.

A tax on marketing intangibles could easily apply to Fonterra, Zespri or other strongly-branded New Zealand export companies.

Over the last couple of years, these two ideas – ‘‘taxing across borders’’ and ‘‘taxing marketing intangibles’’ – have moved the focus from taxing the tech giants to another idea: taxing companies based on ‘‘where their customers are located’’.

Taxing companies based on where their customers are located would be worst of all for New Zealand. Our customers are overwhelmingly located in large countries like the US, Britain, Europe and China.

‘‘Taxing where their customers are located’’ would result in companies like Fonterra and Zespri being taxed by other countries, while our ability to tax foreign companies operating here in New Zealand – due to our smaller population and fewer consumers – would be quite small.

In summary, the OECD is working on a set of international rules to tax internet companies, but meanwhile individual countries are racing off in different directions imposing new taxes that go beyond just taxing tech, and this is now affecting the OECD work, which is starting to incorporate thinking around taxing intangibles and taxing across borders.

I believe New Zealand should contribute to the OECD rulebook and try to influence it away from these proposals that would penalise our economy. We shouldn’t try to generate our own version of an internet tax, since that would risk the possibility of tax or trade retaliation by the US.

We need to engage with the OECD to help get tax rules that work for everyone, and to head off tax proposals that would harm New Zealand worst of all.

We need to . . . head off tax proposals that would harm NZ worst of all.