Big Tech and tax: Revenue Minister Simon Watts on moves to address profit-shifting

Revenue Minister Simon Watts says one move to address Big Tech and tax is ready to roll from January 1. Photo / 123rf

Revenue Minister Simon Watts says one move to address Big Tech and tax is ready to roll from January 1: a tax law tweak to support the OECD’s Pillar Two plan for a global minimum corporate tax. He’s also reinstated Grant Robertson’s Digital Services Tax Bill. An academic says one measure will change nothing, while the other is potentially effective. A PwC partner raises practical drawbacks.

Facebook New Zealand recently reported revenue for the year to December 31, 2023, that rose 4 per cent to $9 million while its payments to Meta Platforms Ireland increased by 5 per cent to $157m. It paid $1.3m income tax on net profit of $3.1m.

“We have always paid income tax in accordance with New Zealand’s taxation laws. We take our tax obligations seriously and proactively engage with Inland Revenue to ensure transparency in the taxes we pay in New Zealand, and we remain committed to supporting local communities and businesses in New Zealand,” Facebook owners Meta said in a statement.

The Herald asked Revenue Minister Simon Minister Watts about the Government’s plans to address revenue-shifting by Big Tech firms.

“The issue you refer to is of concern not just to New Zealand, but to all jurisdictions. That’s why the OECD is currently working on a solution, known as the ‘Two Pillar Solution’. Pillar Two has just recently been passed and enacted into New Zealand law. This targets the problem of a large multinational reducing its tax liabilities by relocating mobile income to low- or no-tax jurisdictions,” Watts said.

Watts said Pillar Two rules mean large multinationals with global annual revenue of more than €750m ($1.35 billion) face a minimum 15 per cent tax in every jurisdiction in which they operate. “This will reduce the incentive to shift mobile income to achieve a tax advantage.”

Pillar Two comes into effect on January 1, 2025.

“A multilateral solution remains our preferred approach. While we have reinstated the Digital Services Tax Bill, we have made no decisions about whether it should progress at this time,” Watts said.

Digital services tax: Back to the future

In 2019, then finance minister Grant Robertson and then revenue minister Stuart Nash took the idea of a digital services tax (DST) to Cabinet. The policy followed Britain adopting a flat 2 per cent DST on locally-generated revenue and the 3 per cent DST imposed by Spain, France and Italy.

The idea was put on the backburner until August 31, 2023 - that is, the final sitting day of the last Parliament - when the Digital Services Tax Bill, providing for a 3 per cent DST, was introduced.

The House rose for the election before it could have its first reading.

National was cool on a DST ahead of the election, so Watts reinstating the Digital Services Tax Bill on December 8 is a qualified win for its supporters. If the current Government decides to push ahead with the flat tax on Big Tech firms’ New Zealand revenue, its implementation date (as the bill currently stands) would be January 1 next year.

The impact would depend on how it was applied. Facebook New Zealand - which for 2023 reported more than $163m in local sales before reducing its net revenue to $9m through expenses paid to its Irish sister firm - could end up with a very different tax bill, depending on which figure the DST is applied to.

Would Big Tech simply pass on the cost to consumers?

Massey University School of Accounting senior lecturer Dr Victoria Plekhanova said while Pillar Two was complex, “in contrast, the DST is a very straightforward tax. It allows targeting of a specific problem”.

PwC partner Sandy Lau said that if the DST does go ahead, it could well apply to Facebook New Zealand’s gross local sales revenue of $163m, depending on the shape of the legislation.

But the crux of it would be if Facebook New Zealand (or Google or Microsoft or any of its peers) absorbed the cost of the DST, the PwC tax specialist said. “Or if the additional cost was just passed on to New Zealand consumers and as a country we just pay 3 per cent extra to cover Facebook’s additional tax take.”

Another issue, raised by Ministry of Foreign Affairs and Trade (Mfat) officials, is that New Zealand could potentially face retaliatory tariffs, which could hit Xero and other New Zealand-headquartered cloud firms which collectively brought in some $3b in export receipts last year.

The officials saw a DST bringing in about $90m per year. But based on France’s experience with software exports to the US following its introduction of a DST, it saw possible retaliatory tariffs of $100m per annum.

Pillar what?

The headline aim for the OECD’s Pillar Two push - enabled here by a tax law tweak passed on March 27 this year - is simple, even if the underlying rules are dense: some 140 nations have signed on to the concept of a global minimum corporate tax rate of 15 per cent.

Its key provisions apply from January 1, 2025, as part of the OECD’s decade-in-gestation Global Anti-Base Erosion (Globe) initiative.

Signatory countries include low-tax havens including Ireland, the Netherlands, Luxembourg and Barbados, although the US and China are notable holdouts.

Two takes on Pillar Two: No impact, little impact

The underlying rules of Pillar Two - and a companion measure known as Pillar One - are “very complex”, Plekhanova said.

But her bottom-line assessment is simple: “Pillar Two will not impact the amount of revenue Big Tech firms report in NZ and the tax they pay in NZ.”

Lau noted a regulatory statement accompanying our Pillar Two-enabling legislation put the estimated additional revenue from the measure at around $25m - “quite small in the scheme of tax revenue”.

NZ not in the frame

If a big tech firm has an effective tax rate of less than 15 per cent in any given market, then under Pillar Two it will pay top-up tax in the country it is headquartered in.

In Meta-owned Facebook New Zealand’s case - and that of almost every Big Tech - their HQ is the US.

Given the US has not signed on for Pillar Two (yet), then the undertaxed rule is applied to the next layer down in their multinational operations - which is up for debate, but won’t be New Zealand. Again, the underlying rules are extremely complex, but in most circumstances, New Zealand just won’t be in the Pillar Two frame - unlike, for example, Ireland (corporate tax rate: 12.5 per cent), used by many Big Tech firms as an R&D hub and a staging post for the EU.

“New Zealand is not a home jurisdiction of ultimate parents of any Big Tech firms that fall in the scope of its Globe rules, nor is it a low-tax jurisdiction. New Zealand’s statutory income tax rate for companies is 28 per cent, which is well above the 15 per cent minimum tax rate,” Plenkhanoa said.

“Big Tech firms are minimising their income tax base in New Zealand, but not their income tax rate, meaning their effective tax rate in New Zealand is the same as New Zealand’s statutory income tax rate for companies - that is, 28 per cent.”

Pillar One worth its salt?

While Pillar Two measures are all set for January 1, 2025 - however effective they ultimately prove - Pillar One discussions are at an earlier stage, with no timelines at this point. Plekhanova sees little likelihood of them amounting to anything.

Pillar One would target multinationals with more than €20b in global revenue and net profit in excess of 10 per cent of revenue. The idea first proposed was that it could potentially divvy up 25 per cent of the profits of these large multinationals among every market in which they operate.

“But over years of international negotiations and lobbying, Pillar One has become something that, even if agreed, will generate very little revenue for market jurisdictions, including New Zealand,” Plekhanova said.

Pillar One talks push DSTs into the distance

“The OECD is likely to continue “working on a compromise solution” rather than admitting the impossibility of the consensus - and its own failure to deliver the result. This indefinite ‘work on the compromise solution’ benefits Big Tech firms, as countries refrain from imposing DSTs and similar taxes,” Plekhanova said.

There’s an example close to home: Robertson and Nash’s rationale for parking their DST - after first taking it to Cabinet in 2019 - was to give the OECD process a chance.

“There will be no international consensus on Pillar One, as the United States is unable to enact any legislation that reduces its tax intake from cross-border taxation. In this situation, there is no valid reason for the New Zealand government to refer to the ‘Pillar One consensus’ to explain its own inactions. New Zealand tax treaties do not preclude the introduction of the DST in New Zealand,” Plekhanova said.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.