Alex Malley: 'Netflix tax' - adjusting to digital disruption

The digital economy was nothing more than a tech dream when our GST laws were being drafted back in 1986. Photo / AP

The Government's ambition to extend the application of GST laws to digital products and other services imported by consumers is a common sense move which will introduce greater integrity into the tax system and ensure a level playing field for resident businesses - if it can be done.

Coined the Netflix tax, this initiative is effectively a 'patch' on the GST laws - to cover a hole that is growing as a consequence of the rise and rise of the digital economy and the marketing and consumption of so called 'intangibles', like media downloads.

The digital economy was nothing more than a tech dream when our GST laws were being drafted back in 1986. While the dot-com bubble provided hints of what was to come, at the time it was not considered necessary to devote a lot of attention to the supply of intangibles when the legislation was amended in 1989 as the market was considered negligible at best.

The devices and ecosystems of e-commerce just didn't exist. It wasn't until 2001 that iTunes arrived and the first iPhone hit the market only in 2007. As for Netflix itself, the eye of the 'intangibles' storm, it didn't start online streaming until 2007.
When you're a company in California having a new tax named after you in New Zealand, Australia or elsewhere, you know you're a true disruptor.

The revolution in digital disruption and the subsequent explosion of online shopping is now a significant problem for governments around the world as people consume more and more of what's not taxed and their traditional tax revenue streams are being eroded.

The Netflix tax is a patch we have to have. The challenge is to make it durable, and enduring.

It is also a threat to New Zealand resident businesses, who are at a competitive disadvantage to a non-resident supplier providing the same services as them, but not charging GST. There is a basic issue of fairness at play and a need for the Government to ensure a level playing field.

As Prime Minister John Key pointed out in March, all countries will eventually have to address the erosion of the tax base resulting from online retail and singled out iTunes as an exemplar of the type of transaction not captured under the present system.

Many countries including Norway (from 2011) and the member states of the EU (from 1 January 2015) have already taken action to tax imported digital products. Japan is set to do the same from October this year.

New Zealand is part of the OECD online taxation working party but the Government is rightly concerned at the glacial pace of progress and is taking its own actions ahead of any recommendations.

Past work carried out by the OECD indicates that the most effective approach to ensure an appropriate GST collection on these supplies is to require the non-resident supplier to register and account for the GST on these supplies in the jurisdiction of the consumer.

Such an approach is not without its challenges though. For example, a taxing jurisdiction needs to be able to identify that supplies have been made, and be able to enforce collection of tax by the non-resident supplier.

Improved international co-operation between jurisdictions is essential to help address these challenges. Such cooperation would include enhanced exchange of information, assistance in recovery and simultaneous audits.

For the digital service providers there are also challenges. Consider for example the compliance issues where some jurisdictions have established thresholds for VAT /GST registration, whereas others apply the tax from the very first transaction no matter how small.

The Netflix tax is a patch we have to have. The challenge is to make it durable, and enduring.

It is encouraging that what is being considered for New Zealand seems to be largely in accord with the international trend on taxing digitally streamed supplies. This is important to ensure we can plug into the international grid and do not have our own unique system that is out of kilter with what may ultimately be the accepted multilateral approach to taxing digital services.

While the expected additional revenue is notable - an estimated $300 million in lost GST receipts -- of far more significance is the impact of the new tax on levelling the playing field.

While the expected additional revenue is notable - an estimated $300 million in lost GST receipts -- of far more significance is the impact of the new tax on levelling the playing field.

Certainly New Zealand firms which provide digital services, from Slipstream and Lightbox to Neon, are currently at a competitive disadvantage, which makes the proposed reform all the more important and the need for action pressing.

Alex Malley is Chief Executive of CPA (Certified Practising Accountants) Australia