The rise of massive digitally-based multinational businesses like Google, Facebook and Airbnb has created an as-yet unsolved problem for governments worldwide: how can they be made to pay their fair share of tax?
These companies and other digital giants pay little tax in the countries they do business in, mainly because they ply their trade exclusively on the worldwide web, with little or no taxable presence within national borders. As a result, governments are missing out on most of the tax revenue available from the estimated US$7.7 trillion global digital economy.
Efforts to produce solutions nationally and multilaterally, through the OECD, have so far produced little. A recent European Union report estimates that the average multinational digitalised business pays an effective tax rate of 9.5%, much lower than other non-digital multinationals.
But Auckland University Professor Craig Elliffe is not daunted: he aims to research and develop new solutions to the challenge of taxing digital business, aided by New Zealand’s leading legal research award, the New Zealand Law Foundation International Research Fellowship Te Karahipi Rangahau ā Taiao.
Professor Elliffe was awarded the 2018 Fellowship, worth up to $125,000 for study in New Zealand and overseas, on a topic that will make a significant contribution to an area of law in New Zealand. A leading international tax expert and member of the Government’s tax working group, he has taken on a huge, complex task: “It’s a moving feast. I know I have bitten off a big topic.”
He aims to review alternatives being tried worldwide, but he acknowledges that meaningful change will require a coordinated global solution and, potentially, radical new approaches.
“Technology has outpaced the way we have traditionally taxed businesses. The divergence was initially very slow, now it’s very fast. But in responding, we have to be mindful of the established order – it’s important to quarantine any changes to the digital economy, but then what belongs to the digital economy?”
A possible solution he says is to change the definition of “permanent establishment” – that is, the degree of connection that a non-resident has to a country. Traditionally this is determined by physical presence, such as a fixed place of business or warehousing, factors largely absent for web-based digital businesses.
“We would need a new, much broader, more sophisticated definition of things like creation of value so we could deem a permanent establishment in order to have taxing rights. Some countries are moving towards this – for example, the UK is looking at a new withholding levy regime. But no one country can do that, it has to be the OECD to propose a global solution. The EU was planning a digital services tax but has scrapped it because it can’t get agreement – Ireland, Germany and the Scandinavian countries were opposed.”
Craig Elliffe says care must be taken so that countries like New Zealand are not disadvantaged: “We don’t want the international order to change so rapidly that we would find exports taxed in the country of importation. That risks opening up a Pandora’s box that could extend beyond digital services to disrupt the international order of tax treaties and global taxation.”
He will work with politicians, tax policy officials and academics, and he aims to produce a monograph with Cambridge University Press, symposia and a public conference to discuss solutions.
For more information on the Law Foundation’s Fellowship head to the Law Foundation website.
Lynda Hagen is Executive Director of the New Zealand Law Foundation:lynda@lawfoundation.org.nz