The New Zealand Tax Podcast - Has Trump blown up the international tax order? And is the ‘Netflix Tax’ under threat?

It has, to put it mildly, been a rather dramatic week in the geopolitical arena, with the United States appearing to basically abandon the security arrangements it established in Europe after World War 2, particularly the foundation of NATO.

Coupled with the US opening direct negotiations with Russia about the war in Ukraine, without the involvement of either Ukraine or NATO, it is now clear that a radical reshaping of the world order is underway after only a month of President Trump's second term. It’s also clear that this is very much America First.

The OECD Two-Pillar deal is dead

The same is true in the tax world. In my first podcast of the year, I discussed one of President Trump's initial executive orders, which in my view, pretty much meant the end of the Organisation for Economic Cooperation and Development’s (OECD) two pillar deal on international tax. My view was confirmed in a fairly bleak summary of the state of international tax by a Washington based presenter at this year's International Fiscal Association (IFA) conference.

More on the IFA conference later. But as our presenter noted, it now appears that Value Added Tax (GST) is in the Trump administration's crosses. On 13th February he issued another Executive Order on Reciprocal Trade and Tariffs.  The issue here is protectionism which is very much part of President Trump' economic policy agenda. He is particularly concerned about the decline in manufacturing and in particular about trade imbalances which he views as a consequence of the decline in manufacturing. Accordingly, many of the Executive Orders he has issued in this area are to redress these imbalances particularly those with Canada and Mexico. Hence the imposition of tariffs against both countries even if some are temporarily suspended. In the meantime, arguments continue.

In this vein Section 2 of the 13th February order noted

“It is the policy of the United States to reduce our large and persistent annual trade deficit in goods and to address other unfair and unbalanced aspects of our trade with foreign trading partners. In pursuit of this policy, I will introduce the ‘“Fair and Reciprocal Plan” (Plan).  Under the Plan, my Administration will work strenuously to counter non-reciprocal trading arrangements with trading partners by determining the equivalent of a reciprocal tariff with respect to each foreign trading partner.  This approach will be of comprehensive scope, examining non-reciprocal trade relationships with all United States trading partners, including any: 

1. tariffs imposed on United States products;
2. unfair, discriminatory, or extraterritorial taxes imposed by our trading partners on United States businesses, workers, and consumers, including a value-added tax;” 

A new and dangerous approach?

Note the word “each”. Value added tax is what we call GST. This is somewhat new and it's frankly quite alarming because as you can imagine the impact of VAT is separate to that of tariffs. This is obviously quite concerning and causing consternation around the world. Because, as I said, this goes further than simply saying we're going to impose retaliatory tariffs on you, because there is no equivalent to GST in the United States. There is no national sales tax. Every state imposes its own sales taxes at varying levels and sometimes local counties have separate sales taxes. It would actually take a constitutional amendment to introduce the equivalent of GST in the United States.

Another point that has been made in discussions around this, is that even if you added up the various state sales taxes that might be imposed, they’re nowhere same level of VAT that is often charged.  And so, the question is, when a US firm has VAT applied to exports it now appears that this would open the door for retaliatory action by the US.

What about Netflix?

This led to quite an interesting debate at the presentation around the question of whether our “Netflix tax” might be within the scope of these retaliatory actions now. Potentially no, because the Netflix tax is a tax on services - in GST/VAT terminology a “reverse charge”. It's imposed because otherwise no VAT or GST would be payable because the supply of services is outside the jurisdiction of the country providing the services. As Netflix is providing services from outside New Zealand to New Zealand residents, we’ve decided GST applies.

So, in fact it could be in scope. We really don't know. One of the recurring themes of the assessment we got from the Washington based presenter at IFA was we have no idea what's going on here, and we don't know whether this is just rattling the cage for the sake of hopefully obtaining better terms on a deal. President Trump is very much transactional in his approach because that's what he's been about all through his life and he is applying that approach on a global scale now.

Maybe that's the end of it, but it could also be that there is a genuine threat to impose tariffs where the US feels that GST has been unfairly imposed. We will have to wait and see.

What about a Digital Services Tax?

What I would say is that any hopes of a Pillar Two deal which has been moved forward (painstakingly slowly) by the OECD is probably dead in the water for now. This would probably extend to any digital services tax that we might consider introducing.

Remember that in President Trump’s Executive Order which withdrew the United States from of the OECD deal, there was also an instruction for the U.S. Treasury Department to investigate all potentially discriminatory taxes, and that would include a digital services tax. It would seem to me that our ability to impose that is quite restricted. So, we're now into completely unknown territory here. The risk of retaliation might be lower at our end, but you never know.

Higher defence spending?

One of the issues that has been pushed on President Trump's agenda (and it's actually not an unreasonable point) is that America had borne much of the cost of defence throughout the Cold War, and even after the end of the Cold War it still continues to have a very large military establishment.

President Trump therefore demanded NATO nations needed to increase their defence spending to at least 2% of GDP. That is happening rather rapidly. This week, for example, Denmark announced further increases to its defence budget.

Our defence budget will come under examination, and this week the Prime Minister commented "We will be getting as close to 2 percent [of defence spending on GDP] as we possibly can, we know that's the pathway we want to get to." That's probably not something Finance Minister Nicola Willis wanted to hear, but that's the way of the world at the moment. 

Could the sackings at the Internal Revenue Service have implications here?

The other thing of concern is what's going on at the US Internal Revenue Service (the IRS)? Apparently some 6000 workers were sacked the other day, and we have reports that Elon Musk’s Department of Government Efficiency, DOGE, has been trying to gain access to records held by the IRS.

What I hadn't been aware of is that the Commissioner of the IRS had resigned and will be replaced by a Trump appointee. I’ve previously commented about the risks that these actions represent to other tax jurisdictions. One would be in relation to all the information sharing agreements that exist, particularly FATCA.

I have no doubt whatsoever that IRS officials will do everything within their power to ensure the security of information shared under FATCA and other agreements is maintained. But if as is suggested DOGE personnel are able to gain access to that information what will that mean for our international agreements? Will we and other nations be willing to continue to share information with the United States if we have concerns that it may no longer be secure? That's a huge matter that there's probably no answer to at the moment. I imagine quite a few tax authorities, including our own, are probably considering this very point right.

Time running out for an important GST election

One of the issues we deal with on an increasing basis is the treatment of Airbnb properties. In particular the implications when the GST threshold of $60,000 is crossed. In some instances, the taxpayer have claimed GSTinput tax on the purchase of the property involved, only to find out that they face significant GST liability if they decide to sell at a later point. This is something which obviously comes as a shock.

It so happens that two years ago, with effect from 1st April 2023, a transitional rule was introduced in section 91 of the Goods and Services Tax Act, which enables a person to elect to take that asset out of the GST net if certain criteria are met. The four requirements are:

• if the asset was acquired before 1st April 2023, and
• it must not have been acquired for the principal purpose of making taxable supplies, and
• the asset was not used for the principal purpose of making taxable supplies, and
• a GST input tax credit has been previously claimed, or the asset was acquired of as a zero-rated supply. 

Note that ALL the above criteria must be met.

A good example would be a property which was acquired as a bach or holiday home but then rented out for short stay accommodation during the peak holiday period via Airbnb. Another example might be a business that has a residential property which was acquired as part of a larger land purchase.

Although primarily acquired for GST-exempt purposes the properties have been used to make GST supplies. Consequently, GST will be payable on sale. However, if you apply this transitional rule, you must make the election to take the asset out of the GST net before 1st April. If the election isn’t made in time, then the sale of any asset with business use, where GST was claimed on purchase, will be subject to GST on sale.

Basically, people have now just under five weeks to review their GST position and consider whether to make this transitional election and potentially bypass a large GST bill on a future sale.

Obviously in the run up to the end of the tax year on 31st March, there will be a number of other income tax and GST elections for people to consider if action is required.

An interesting conference

And finally, as I mentioned earlier, this year’s International Fiscal Association Conference was held on Thursday and Friday, hence why this podcast been delayed. It's a policy-focused conference whose attendees are mainly partners from the large accounting and law firms together with the heads of tax in major companies and very senior Inland Revenue officials.

This conference is subject to Chatham House rules, so while I can't say much about what specifically was discussed, I can say it was an extremely interesting conference as always, and my thanks to the organisers.

As I mentioned earlier, we had a very interesting and thought-provoking presentation on the state of international tax as viewed from America. Inland Revenue has been very busy working on a number of topics, so we ought to see some very interesting legislation coming through this year, around either the time of the Budget, or more likely, when the annual tax bill is released in August.

Growing problems with double tax agreements

In relation to international tax, we had an interesting presentation on the impact of very specific anti avoidance rules on double tax agreements. Now double tax agreements generally override domestic law. In other words, we might have legislation where we might say we're going to tax this. But then the double tax agreement says actually the taxing rights go to another country.

What is happening is there's been a steady growth of what's been called the general anti-avoidance rules, where it appears that companies have made what's seen as abusive use of these double tax rules to claim tax relief. Countries are increasingly updating their tax treaties to include this general anti avoidance provision overriding the double tax agreement.

For example if you look at how Netflix, Visa and MasterCard seem to have substantial income from New Zealand without apparently paying much income tax, the question arises are the double tax agreement rules being abused and should this be dealt with by way of a general anti avoidance rule overriding the tax treaties? 

Or you could also see these issues as being part of what we discussed at the top of the podcast is that the changes to the international tax order means more friction as basically tax authorities get more willing to get down and dirty and fight with each other over who has the taxing rights over income. We certainly live in interesting times.

And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day