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Griffin on Tech: Policy u-turns, tax and the digital economy

Peter Griffin, Editor. 02 September 2022, 11:39 am

Did you know that the Uber ride you took last week probably didn’t include GST?

Neither did I, until this week and the Government’s embarrassing u-turn on attempting to apply GST to Kiwisaver investment fees.

Why Labour MPs didn’t recognise that tax proposal as the political powderkeg it was seems to be beyond most political commentators who have spent the last few days scratching their heads at the poor judgement shown.

Nevertheless, the tax rule changes included in the same proposal will go ahead and represent a further step in the Government’s efforts to create parity between the physical and the borderless digital world when it comes to tax.

The Netflix tax

A couple of years back, the Government required online service providers like Netflix and Google to begin adding GST to their services, closing a loophole that made buying products on overseas marketplace websites like Amazon and eBay more attractive.

The latest rule change will mainly hit Uber and Airbnb because drivers and property owners will now have to apply GST to the bills of passengers and guests on all transactions. Previously, they only had to do so if they earned over the $60,000 threshold that GST kicks in at. Most Uber drivers don't meet the revenue threshold to charge GST. That's the nature of the gig economy after all, for many it's just a way to earn some extra money, not derive a primary income.

The tax change will raise an estimated $47 million a year for the Government when it goes into effect from 2024 and will likely see the cost of taking an Uber ride or renting a house via Airbnb increase as a result. But there was no wailing and gnashing of teeth over that, because most Kiwis rightly see the application of GST to all online transactions as being fair.

The rise of the gig economy has raised a number of challenging questions when it comes to tax all over the world. It has really taken a decade for governments to come to grips with them and bring about some harmonisation between the physical and digital world.

But more uniform application of goods and services tax pales in comparison to the difference that could be made if the Big Tech companies are finally forced to pay their fair share of income tax in the country where they do business.

For years, the big online platform providers, Google, Facebook, Amazon and Uber included, have booked much of their annual revenue in other countries where they enjoy a much lower tax rate than they do here in New Zealand. It has seen countries like Ireland thrive as low-cost destinations to funnel billions of dollars to.

Hungary holds out

Disgruntled European Union nations who have missed out massively on tax revenue, as a result, have pushed for major changes to international tax law as a result. Under the banner of the OECD, 136 countries last year agreed a massive programme of tax reform. They undertook to implement a minimum global company tax rate of 15% and the requirement that multinationals book revenue in the country where it is generated and pay tax on it there.

That’s only fair and would see Big Tech companies contribute in a more meaningful way to the New Zealand economy that they have profitably served for years.

But a couple of spanners have been thrown in the works of this proposed tax plan. Hungary, an EU nation that seems to relish in antagonising its fellow block members, has opposed the plans. That has seen negotiations drag on so that legislation in the EU enshrining these changes is unlikely to happen this year.

Over in the US, the base of many of the tech companies these tax changes are aimed at, President Joe Biden has had to water down proposed tax law changes that were facing stiff resistance in the Senate.

As the FT explains:

“Instead a corporate tax minimum of 15 per cent will only apply to the ‘book income’ — the amount reported in financial accounts — of companies with revenue of over US$1 billion. It will also only apply at a group level, rather than on a country-by-country basis — falling short of the deal’s goal of eliminating the practice of setting up subsidiaries in tax havens.”

We need a fair tax regime

At worst, the OECD’s plan could end up being delivered as a complex mess of differing rules that ultimately aren’t much better than the status quo. That would be a very disappointing outcome. The global digital economy is growing rapidly but is dominated by a handful of companies that enjoy economies of scale that allow them to deliver services worldwide at a low marginal cost. 

I'm happy to pay extra on my Uber bill for GST. But I want Uber, Airbnb and the rest of them to pay their fair share of tax in this country too.  


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