Tax News

The OECD’s latest update on progress in taxing the digital economy

27 Oct, 2020 | The Week in Tax

  • The OECD’s latest update on progress in taxing the digital economy
  • The potential impact of the United States House of Representatives Judiciary Committee’s Subcommittee on Antitrust, Commercial, and Administrative Law’s report on competition in digital markets
  • An accidental new lover tax?

Transcript

This week, the election tax talk has all been about a possible wealth tax, which Jacinda Ardern has repeatedly ruled out. Personally, I found the repetitive questioning whether the tax would come in to be pointless. A better line of enquiry would have been to ask both leaders of the main parties why they don’t think a wealth tax is needed and what they’re going to do about taxing capital.

On the other hand, Labour is committed to introducing a digital services tax GST in certain circumstances, and several major reports have been released the past few days, which underline why taxing the digital economy is going to be increasingly important and something that the new government, regardless of who forms it, will need to take action about.

The first of these reports was the United States House of Representatives Judiciary Committee’s Subcommittee on Antitrust, Commercial, and Administrative Law’s report on competition in digital markets. At 449 pages this is a real blockbuster and the culmination of a sixteen-month investigation launched in June 2019 into the state of online competition

The report focuses on the dominance of the “GAFA”—Google, Apple, Facebook and Amazon and is damning.  The Subcommittee heard from the CEOs of the GAFA and concluded “Their answers were often evasive and non-responsive, raising fresh questions about whether they believe they are beyond the reach of democratic oversight.”

The report brands the GAFA “dominant platforms” as they possess monopoly power due to factors including their role as “gatekeepers” of key distribution channels, which allows them to control access to digital markets. Consequently, as the report states

 “…companies that once were scrappy underdog start-ups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons… These firms typically run the marketplace while also competing in it—a position that enables them to write one set of rules for others, while they play by another, or to engage in a form of their own private quasi regulation that is unaccountable to anyone but themselves.”

The investigation found that the GAFA engaged in a series of anti-competitive conduct to maintain their market power, including self-preferencing and so-called “killer acquisitions” of potential competitors.  To give you some idea of how many of these have happened, an appendix to the report lists over 560 acquisitions by the GAFA, going back to 1988.  Few of these have been investigated by the US federal anti-trust agencies.

The report recommends reform of the antitrust laws and breaking up the “dominant platforms” through structural separations online of business restrictions. If implemented, it would be one of the biggest antitrust trust actions taken by the U.S. government in decades.

One of the things which caught my eye about this report was that very interestingly, it referenced the 600-page Australian Competition and Consumer Commission (ACCC) Digital Platforms Inquiry report released in July 2019. This too raised concerns about the digital giants. According to the ACCC, Facebook’s sheer size “appears to protect it from dynamic competition”.  The report estimated Facebook and Instagram’s combined share of the online display advertising market in Australia to be 51%, noting “no other online supplier of display advertising has a market share of greater than 5 per cent.”

What the ACCC report did as well was take a look at the impact of Google and Facebook’s actions on Australian classified advertising revenue. It noted that classified advertising revenue has fallen in absolute terms from A$2 billion in 2001 to A$200 million in 2016. Adjusted for inflation, the decline over that period is from A$3.7 billion to A$225 million, a 94% drop in revenue.

The report pointed out that this has resulted in, amongst other things,

“a significant reduction in provision of multiple categories of reporting related to public interest journalism; that is, journalism that performs a critical role in the effective functioning of democracy at all levels of government and society. In particular, the research indicates a significant fall in the number of articles published covering local government, local court, health and science issues during the past 15 years”

I am sure that most of this will sound very familiar to everyone involved with the New Zealand media industry.  We have seen the same hollowing out of local newspapers and the struggle to financially survive.

The ACCC’s recommendations are not as potentially far reaching as those of the House Judiciary Committee subcommittee but did include changes to competition law. It also recommended Google must offer Android users the ability, as in Europe, to choose their default search engine and default Internet browser from a number of options. The ACCC also recommended that tax settings should be changed to establish new categories of charitable purposes and deductible gift recipient status for not for profit organisations that could create, promote or assist the production of public interest journalism.

Following on from these two reports, I would think that it should be an urgent matter for our own Commerce Commission to undertake a similar enquiry into the extent of the digital competition here in New Zealand.

Now, virtually the same time as the Congressional report was released the OECD released its latest tax report to the finance ministers and central bank governors of the G20 regarding its progress in addressing the tax challenges of the digital economy.

One of the matters the OECD report discussed is the progress made in relation to matters such as offshore voluntary disclosure programmes, offshore tax and investigations. And so far, these have led to the identification of an estimated €102 billion of additional tax revenues. And of course, since 2017, there has also been the automatic exchange of information under the Common Reporting Standards. So far, the exchange of information has identified 84 million bank accounts totalling almost €10 trillion.

There has been a lot of movement in investigating the tax affairs of multinational enterprises such as the GAFA. This includes almost 30,000 information exchanges on previously secret tax rulings since 2016. More than 90 jurisdictions have now become involved in the exchange of country by country reports on the activities, income and assets of multinationals since June 2018.

Now, the next big step that the OECD is currently working on is what’s called the Pillar One and Pillar Two blueprints to deal with digital taxation. Pillar One focuses on what we call the nexus and profit allocation, and Pillar Two is focussed on a global minimum tax, which is meant to address the issues arising from base erosion and profit shifting, which is the result of international tax avoidance.

Together the Pillar One and Pillar Two initiatives could increase the global corporate income tax revenues by an estimated US$50 to 80 billion per year. That’s roughly equivalent to about 4% of the global corporate income tax take. Covid-19 has delayed progress in this matter, and it is now hoped that an agreement can be reached by the middle of 2021.

The OECD also released an overview of the current taxation treatment of cryptocurrencies covering over 50 jurisdictions, including all G20 and OECD members.   It’s the first comprehensive analysis of the existing approaches and tax policy gaps across the main category of taxes applicable to cryptocurrencies.

What’s also happening in this space for cryptocurrencies is new provisions and guidelines around exchange of information relating to cryptoassets.  The OECD report estimates that as of end of September 2020 cryptocurrencies are worth US$354 billion.   And you may recall that Inland Revenue has recently targeted crypto-asset providers requesting information about customers. So this appears to be part of the OECD initiative, which we know means the information obtained will get shared at some point.

So what does all this mean for New Zealand and the new government? Well, firstly, as I mentioned, the government will be very keen to get the OECD Pillar One and Pillar Two proposals go through quickly. Interestingly, the latest is the US do not seem to be stalling action on this, but we’ll have to wait and see what happens with the American election.

What the government could do if it wanted to get things to move along, would be to apply pressure by introducing a digital services tax, which is part of Labour’s manifesto. In reality, the maximum $80 million annually it would raise isn’t terribly significant in the scheme of things, but it would be politically quite popular.

The bigger issues are whether, as in Australia and the US, the GAFA are carrying on anti-competitive behaviour in New Zealand. And if so, how do we address that? In particular, one of the issues I think the government is going to need to consider is how much financial support is needed for local media.  Allowing a tax deduction for donations to some media organisations similar to that proposed by the ACTC would be of some help.

A more significant action might be to follow the Indian example, imposing a digital advertising levy, which raised an estimated $200 million in the year to 31st March 2019.

One other international measure, which has been put into place quite recently is increased of GST or VAT on online sales goods. And this, according to the OECD, has resulted in the European Union reporting €14.8 billion from these measures in the first four years of their operation.  The New Zealand take from the expansion of online GST to online supplies has been quite significant, amounting to $207 million in the year to June 2020 according to the OECD report.

But the scale of the digital economy will mean that the incoming Minister of Revenue and the government will have should be paying a lot more attention to this space. And I think we’ll be facing demands from the media here, and rightly so, about the anti-competitive behaviour similar to that which has been called out in America and appears to be happening in Australia.

And finally, it has been a long election campaign and possibly it’s been too long for David Bennett, the current national MP for Hamilton East, who accidentally proposed a “lover tax” on one of his billboards.  This prompted the swift formation of a new tax working group to consider the issue on Twitter.  I will leave it to your imagination about some of the proposals, but I was very much impressed by the suggestion that clearly secondary tax must apply after the first lover.

And on that note, that’s it for this week. I’m Terry Baucher and thank you for listening. And until next time, Ka kite āno.

A tax law change could be of major benefit to Kiwis with Australian superannuation funds

29 Jun, 2020 | The Week in Tax

  • A tax law change could be of major benefit to Kiwis with Australian superannuation funds
  • Rethinking the taxation of redundancy
  • Google’s 2019 results highlight the difficulties of taxing the digital giants

Transcript

This week, a seemingly arcane tax change could be of major benefit to Kiwis who have Australian superannuation funds, rethinking the taxation of redundancy and Google’s 2019 results highlight the difficulties of taxing the digital giants.

Right now, New Zealand citizens or New Zealand permanent residents are the only people who can get into the country. And as the news headlines over the past couple of weeks have shown, testing at the border has become incredibly important in ensuring that COVID-19 does not gain another foothold in the country.

What you are also seeing is a significant rise in the number of Kiwis wanting to return to New Zealand. There are approximately one million Kiwis around the world, including nearly 600,000 in Australia. And the way the pandemic has been handled so far has made many expatriate Kiwis look at returning to New Zealand.

And a significant number of those may come from Australia. Now Australia has compulsory superannuation under which you and your employer are required to make contributions to a superannuation scheme.  Unlike KiwiSaver, where you can only ever have one KiwiSaver scheme, it’s quite possible to have a number of Australian superannuation schemes. And what sometimes happens is that people lose contact with their superannuation schemes or vice versa.

Under Australian law, after a while unclaimed superannuation money is required to be repaid to the Australian Tax Office. This could affect Kiwis who have returned to New Zealand but have lost their records relating to an Australian superannuation scheme. After a while the Australian scheme must pay the funds in that scheme to the Australian Tax Office as unclaimed superannuation money.

All this sounds a little arcane, but there are absolutely billions and billions of dollars invested in these schemes (A$2.7 trillion as of the end of the March 2020 quarter), and the amount of unclaimed superannuation money can be quite significant.

Since 2013, New Zealand and Australia have had a Trans-Tasman Savings Portability Agreement in place to mainly encourage or rather remove barriers to workers freely moving across the Tasman.

So the potentially significant amounts involved and the Trans-Tasman superannuation agreement are the reasoning behind a measure in the recent the introduced The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced a few weeks back.

The bill has a provision which is to allow the direct transfer of New Zealanders’ Australian unclaimed superannuation money from the Australian Tax Office into a KiwiSaver scheme.

This is a measure to get around the issue that once the Australian superannuation scheme deems the funds lost, it’s impossible under Australian legislation for Kiwis to get their money out.

Another handy thing to keep in mind, is that unlike the tax treatment of other foreign superannuation schemes, if you have an Australian superannuation scheme and you transfer it into a KiwiSaver scheme, you will not be taxed, even if that transfer happens more than four years after your return to New Zealand.

So, this is a measure which is favourable for those who have Australian superannuation schemes and may have forgotten what they’ve got and now want to bring the funds across. They can do so tax free into a KiwiSaver scheme. As I said this seems a little bit arcane, but it occurs to me given the numbers of returning New Zealanders we’re likely to see, this could become quite important over the next few years.

Taxing redundancy payments

Moving on, a few weeks back, I was talking to Newshub’s Madison Reidy about the taxation of redundancy payments.  At present, redundancy payments are simply treated as ordinary pay and taxed at the normal rates, which means that for someone receiving a substantial redundancy payment much of it will be taxed at the top rate of 33%. I suggested this was something that needed to be looked at.

Based on an article in the Herald this week it seems that the Minister of Revenue, Stuart Nash, has received correspondence on the matter and is asking officials to look into it, which is encouraging to see.

The problem is given the circumstances we’re in right, now this sort of thing ought to be dealt with quite urgently. Maybe if we’re going to move forward with changes, it would be opportune to include some form of measure in the tax bill I mentioned earlier, which is going through Parliament right now.

One thing to think about regarding redundancy payments, is because they’re treated as ordinary pay, that means if you have a student loan 12% of the payment will be deducted. If you’re in a KiwiSaver scheme, then a further 3% at a minimum will be deducted and to your KiwiSaver scheme, fortunately, ACC does not apply.

There’s an additional bite to this for those who might receive a payment of over $30,000 before tax.  This group of people are not eligible for the COVID-19 income relief payment. This is the special relief benefit for anyone who’s lost a job because of COVID-19 between 1 March and 30 October 2020.  Such persons are entitled to a weekly benefit payment of $490 if they were working for more than 30 hours.  The payment is untaxed and is nearly double the payment someone would normally receive who is unemployed.  Fortunately, MSD has lifted its requirement for someone to spend all their redundancy before they can apply for the job seeker payment of $250 a week.

Nevertheless, the current tax treatment of redundancy needs to change urgently. But it can only be done by a statutory amendment. So, it would be good to see Inland Revenue and the Minister of Revenue moving quickly on this to make a change to help those who are going to lose their jobs or have lost their jobs in the past few months.

Taxing Google

Google New Zealand not so long ago released its financial statements for the year ended 31 December 2019. These show that its income tax bill has risen to $2.4 million.

Now, Google’s 2019 accounts were the first ones prepared as part of its more transparent country by country reporting. The accounts showed that its New Zealand revenue had increased significantly since previous years to $36 million with a pre-tax profit of just over $10.6 million.

What the accounts also show is the difficulty of taxing the digital giants and how little revenue will come through for income tax purposes. According to the accounts the pre-tax profit of $10.6 million represents the value of sales less the direct costs of sales for its advertisements and cloud services. And tucked away in the financial statements, was a note that well over $500 million was paid in service fees to related offshore parties.

And this shows the problem with the digital economy.  Because so much is now driven off intellectual property, and New Zealand is at the tail end of the world in Google’s case we don’t create much intellectual property. Our right to tax is therefore quite limited.

This is not a problem unique to New Zealand. All around the globe countries are grappling with this question that Google and Facebook are piling up billions of dollars in earnings, but not much income tax is being paid in the relevant jurisdiction.

To deal with this matter the OECD has been working on a coordinated approach. The problem is, in the last week or so, that it’s hit a big hurdle with the US Treasury Secretary, Steve Mnuchin, withdrawing the US from the negotiations.  Presently the United States and Europe are at pistols drawn stage, arguing over the question of digital taxation, and Mnuchin and the US pulled out of talks in the last week. This is not good for the whole global economy, and it’s not good for moves to try and get a fairer share of the enormous revenues Google and other digital companies generate.

The Tax Working Group recommended going along with the OECD approach. But it also said that we should have a digital services tax ready to go if negotiations do not go well. We’ve also been watching what the Australians are doing and for the moment they have backed off a digital services tax. But over in Europe, then Britain, which needs a trade deal with the United States, has actually introduced a digital services tax. The French have got one up and running and the Germans are talking about one, too.

So international tensions are building on this and it’ll be interesting to see what the Government decides to do over the next few months as this plays out. But as part of the general upheaval in the tax world going forward we’re going to be seeing this development with the US pulling out of the talks with Europe is not a good one. We’ll monitor developments as they happen, but for the moment it looks like tensions will continue to escalate.

Well, that’s it for this week.  Next week, I’ll be joined by Josh Taylor of tax pooling company Tax Traders. We’ll be discussing how tax pooling was able to help businesses’ cash flows in the past few months.

Until then, I’m Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, thanks for listening. Ka kite anō.