Fonterra and Xero may be affected by G7 proposal on digital services tax, according to a tax expert.

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A tax expert has warned that the G7 proposal to levy a digital services tax might have ramifications for some of New Zealand’s largest corporations.

 

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Being taxed in countries where they do business may impact on large exporters, such as Fonterra. Photo: 123RF

Finance ministers from several of the world’s largest economies convened in London to reach an agreement to prevent multinational corporations from evading taxes.

The strategy is divided into two components.

To begin, the G7 would seek to have firms pay more tax in the nations where their products or services are sold, rather than wherever their earnings are declared.

Second, they seek a worldwide minimum tax rate of 15% to prevent countries from undercutting one other with low tax rates.

“Not being drawn into a competitive downward spiral in corporate tax is a great thing,” Trade Minister Damien O’Connor remarked.

“That’s a good statement, I think it is a good day for trade and to ensure that we have some bottom lines here.”

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But PWC tax partner Geof Nightingale said the implementation of a tax whereby companies are taxed in the countries where they do business could have an impact on some New Zealand companies as well, such as Fonterra and Xero.

“We’ve got some big exporters, so it’s not all one-way traffic. It’s not just about the inbound multinationals into New Zealand, we also need to think about our own outbound.

“We’ll have to work out if that provides a net benefit for New Zealand, or a net detriment.”

Largely, however, Nightingale said the G7 announcement was “probably” good news for New Zealand.

In 2018, the government announced it was looking at introducing its own digital services tax, which would work in much the same way the new tax announced by G7 is aimed at doing.

“The problem with those is they tend to provoke trade retaliations, from the US in particular. So if we can avoid having to do a unilateral response, and get in behind this multilateral response, I think that’s a much lower-risk strategy.”

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The implementation of such a tax could still be some way off, however. The agreement will next be discussed in detail at a meeting of G20 finance ministers in July in Venice.

It could also hinge on any policy set out by the OECD, an intergovernmental economic organisation, which has been working on updating global tax rules for a number of years.

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