International tax at the crossroads

International tax is going through a transformation that hasn’t been seen for approximately 100 years, writes Professor Craig Elliffe in the opening chapter of his new book International Tax at the Crossroads.

The tax law expert says this shift, driven by the fast-moving evolution of digital technologies, has given rise to increasingly complex tax challenges.

“We are still in a position where multinationals do vast amounts of business in this country but get away with paying very little tax.

“The media has been greatly affected by their operations, and the bottom line is that these e-commerce and tech giants are disrupting traditional advertising businesses and models, making enormous sums of money, and paying very little tax.”

Elliffe’s latest book, which features several world-leading authorities on international tax, explores options for reform.

Contributors dissect topics including the Organisation for Economic Co-operation and Development (OECD’s) role in leading reform, the impact of US domestic policies on global tax practices, the movement towards destination-based taxation, the role of digital services taxes and the use of data as a tax base.

A significant milestone in international taxation over the past decade was the creation of the OECD Inclusive Framework, which has seen around 140 countries come together to implement long-term solutions to taxing the digital economy.

One element of the Framework seeks to re-allocate some taxing rights from the countries of the most profitable multinationals to the markets where they earn profits, whether they have a physical presence there or not.

It was hoped that this would enable a fairer distribution of profits among countries, but progress has stalled, partially due to blocks put up by the US.

Across several chapters in the book, contributors including University of Auckland law academics Professor Michael Littlewood and Professor Chris Noonan discuss the Framework’s advantages and disadvantages and look at whether the OECD is the right organisation to drive these tax reforms.

International tax expert and visiting University of Oxford professor Philip Baker KC, who will be interviewed at the book’s launch this week, argues that the OECD should be replaced with new structures in the United Nations.

Elliffe says this could enable progression and stop the US from hampering the ability of other countries to tax its digital giants.

Developing an international tax framework under the UN would likely give smaller and developing countries a bigger say, says Elliffe.

“Under current political settings, it seems the US is never going to agree to OECD countries taxing their e-commerce companies. That means looking at other options.”

One option explored in the book is the implementation of a digital services tax.

In August last year, the Labour government introduced legislation that would enable a digital services tax (DST) on multinational companies, but there are a lot of risks that come with these kinds of taxes, says Elliffe.

“It’s a political and economic risk, because if the US says this is a breach of trade agreements, they could impose a tariff on New Zealand goods. Other countries, including France and Canada, that have introduced DST’s have come up against resistance from the US.”

When it comes to digital services taxes, countries should consider operating collectively, he says. “If our approach is consistent with other countries, trade sanctions might be lessened and compliance costs for businesses reduced.”