Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search


Australia And New Zealand Are Signing Up For An International Tax On The Tech Giants — But Will It Be Enough?

Victoria Plekhanova, Massey University

Australia, New Zealand and many other countries are losing hundreds of millions of dollars in revenue each year by not adequately taxing the profits of digital giants doing business in their jurisdictions.

Australia has opted not to impose a digital services tax (DST) on the likes of Google, Facebook, Amazon, Uber and Airbnb. Meanwhile, New Zealand has been sitting on the fence. But things may be about to change.

On July 1, 131 countries – including Australia and New Zealand – agreed in principle to a tax scheme negotiated under the auspices of the G20 and OECD.

More detail may emerge from a meeting of the G20 finance ministers on July 9-10. If approved, the scheme will be finalised next year and implemented in 2023.

The scheme is designed to “create a single set of consensus-based international tax rules” to address the problem of multinational companies moving profits to low-tax jurisdictions — a practice known as “base erosion and profit shifting” (BEPS).

Read more:
Google and Facebook pay way less tax in New Zealand than in Australia – and we're paying the price

Specifically, such a BEPS scheme would target 20% to 30% of the net profits (above a 10% sales margin) of large multinationals engaged in automated digital services and the direct sale of goods across international borders.

This tax base would then be divided proportionately among the individual countries in which the multinationals have their customers. Local company income tax rates would then apply.

In exchange for a new right to tax the profits of the digital giants, however, countries would give up any unilateral tax measures they might already have in place — or might have been considering imposing on such firms in the future.

Unanswered questions

The most popular alternative to the BEPS scheme is a digital services tax imposed by individual countries directly on firms with annual revenue of more than €750 million (about A$1.2 billion), a threshold first suggested by the OECD and used in most DST legislation.

Usually set at 3%, such DSTs provide relatively small but easy to monitor tax revenue streams.

Like most taxes, a DST is imperfect. But would the BEPS scheme be better? The New Zealand and Australian governments haven’t released impact assessments of the scheme on their domestic businesses, national economies and tax systems. This leaves several unanswered questions:

  • will a BEPS tax scheme improve or undermine the competitiveness of Australian and New Zealand suppliers of automated digital services?

  • what would its other likely impacts be on domestic businesses and national economies in the short, medium and long term?

  • how much will it cost to introduce and administer?

  • how much tax revenue would it actually generate?

  • how would that compare with a unilateral tax measure such as a 3% DST?

Read more:
A new levy on digital giants like Google, Facebook and eBay is a step towards a fairer way of taxing

How a digital services tax compares

As currently drafted, it appears the BEPS scheme would generate considerably less revenue than a 3% DST. The exact difference would depend on the total and domestic annual sales revenue and profits of the business in question, as well as the country’s corporate income tax rate.

But let’s assume, for example, the total net profit of a large multinational firm is A$15 billion, and 1% ($1 billion) of the firm’s $100 billion sales revenue comes from Australia.

Under the BEPS scheme, the Australian portion of the firm’s profits would be just $10 million. Taxed at Australia’s corporate rate of 30%, that would generate $3 million.

By comparison, a 3% DST on the firm’s $1 billion of Australian sales would generate $30 million — ten times the tax revenue of the BEPS scheme.

Read more:
The U.S. takes aim at Facebook — here's why the big tech giants must be reined in

When Australia and New Zealand discussed introducing a DST in 2018-19, business and advisory groups in both countries criticised the idea. In particular, it was argued such a tax earns too little revenue relative to the cost of implementation.

And yet, the new BEPS tax scheme would generate even less revenue while still requiring a complex system of rules. This complexity risks imposing high compliance costs on countries, creating opportunities for avoidance and increasing tax disputes.

Ideally, a BEPS scheme should at least promise more tax revenue than a 3% DST. The portion of profits allocated to individual market jurisdictions should be increased, and efforts made to ensure low margin but profitable giants such as Amazon don’t escape paying tax where they do business.

Compensation for personal data

Finally, a BEPS scheme should account for the free use of data extracted from local internet users by these digital giants.

The common assumption that personal data and attention have no (or trivial) economic value is wrong. Google might claim it charges customers for access to its infrastructure and algorithms, but these are often of little value without the personal data they process in the first place.

Uber wouldn’t exist without access to data about passengers and drivers. Facebook couldn’t generate multi-billion dollar revenues without the information exchange and attention of its millions of users.

Read more:
US lawmakers are taking a massive swipe at big tech. If it lands, the impact will be felt globally

Personal data and attention are key resources for the provision of automated digital services. An adequate tax on those service providers is fair compensation.

More importantly, any final international agreement on a BEPS scheme should be conditional. Countries need an opt-out provision allowing them to switch to a DST (or other unilateral measure) if the new system fails to generate sufficient revenue.

This would both protect national interests as well as create a disincentive for the big multinational firms to avoid paying their fair share of tax wherever they make a profit.The Conversation

Victoria Plekhanova, Lecturer, Massey University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The Conversation

© Scoop Media

Top Scoops Headlines


Peter Dunne: Time To Revamp MIQ

The monolithic Managed Isolation and Quarantine System (MIQ) is rapidly becoming a huge millstone around the government's neck. Moreover, it could yet become a lasting metaphor for the bureaucratic inertia that seems to have replaced the government's once agile and sure-footed response to the pandemic crisis... More>>

Keith Rankin: Territorial Fundamentalism In Our Post-Globalisation Era

We have this pretty fiction that the world is made up of approximately 200 politically autonomous nation-states. This in the entrenched 'Wilsonian' view of the political world that, in particular, was sort-of realised after World War One; a view that rendered the national empires (such as the British Empire) of the past obsolete... More>>

Richard S. Ehrlich: U.S. Embassy In Laos: Facebook & "A Terrorist"

The U.S. Embassy in Laos has publicly apologized
and blamed Facebook's auto-translation for describing an ethnic
Hmong-American Olympic Games teenage gymnast as "a terrorist" on the
American Embassy's official site, days before she won gold... More>>

Podcast: Buchanan + Manning On Cyber-Attacks And The Evolution Of Hybrid Warfare

Paul G. Buchanan and Selwyn Manning present this week’s podcast, A View from Afar with a deep-dive into cyber-attacks and hybrid warfare – Especially how 2021 has witnessed a Cold War II styled stand-off between global powers... More>>

Climate Explained: Is New Zealand Losing Or Gaining Native Forests?

Apart from wetlands, land above the treeline, coastal dunes and a few other exceptions, New Zealand was once covered in forests from Cape Reinga to Bluff. So was Europe, which basically consisted of a single forest from Sicily in southern Italy to the North Cape in Norway, before human intervention... More>>

Sydney Mockdown: The Delta Variant Strikes

It is proving to be an unfolding nightmare. For a government that had been beaming with pride at their COVID contract tracing for months, insisting that people could live, consume and move about with freedom as health professionals wrapped themselves round the virus, the tune has changed... More>>