University of Auckland: Brave move to tax digital economy

As the digital economy has proliferated, and e-commerce companies such as Google, Airbnb and Facebook have made trillions, tax laws have failed to keep pace. As such, taxing the digital economy is an issue more than 140 countries are working together to respond to.

But the response, named the Inclusive Framework, a groundbreaking global plan designed to help member countries clamp down on digital companies, many that have avoided paying sufficient taxes for decades, could be on fragile ground, says Professor Craig Elliffe, the winner of a 2022 Research Excellence Medal for his work exploring global tax problems and potential solutions.

Although the tax law specialist says the Inclusive Framework is an evolutionary step forward, he doesn’t think it’s the final step, or that it’s entirely stable.

Elliffe, who was supported by the New Zealand Law Foundation with an international fellowship that allowed him to travel and write his Cambridge Press book Taxing the Digital Economy while living at Oxford University in 2019, says the global two-pillar plan to reform international tax rules and ensure that multinational enterprises pay a fair share of tax wherever they operate, could be upended by the United States’ political landscape.

There’s a definite possibility that there will be some sort of upset before we get to the final destination, but I really hope we get there.
Professor Craig Elliffe
Faculty of Law
Working together on the Inclusive Framework, member countries are hoping to finally cohesively tackle tax avoidance, improve the coherence of international tax rules, ensure a more transparent tax environment and address the tax challenges arising from the digitalisation of the economy.

Developing these landmark international tax rules is an enormous task involving politics of the highest level among the most influential countries, acknowledges Elliffe.

“I see it as a brave, but sensible course of action. However, the uncertainty of the political landscape in the US could result in delays, or worse.

“The political system in the US right now is fragile, and as we head towards the midterms, the big question is: will the Democrats lose some control? And if the Americans don’t move ahead with the framework, we are back to a world where countries will have to go it alone for some time.”

This could mean a waiting game to see whether the European Union might take the lead on an inclusive international agreement. Or it could mean Aotearoa New Zealand would need to take a second look at implementing a Digital Services Tax (DST), something Elliffe refers to as a very ugly tax due to a number of potential issues including World Trade Organisation objections and US trade-related retaliation.

“In the meantime, there’s not a great deal holding some of these e-commerce multinationals in check, and they’re doing pretty nicely,” says Elliffe.

“We do have a provision in our income tax act here which can deem digital companies permanent establishments – so we can tax them. This gives us some protection, but it’s fair to say that we have witnessed quite a few years of successful arrangements for multinationals.”


The Inclusive Framework is a groundbreaking global plan designed to help member countries clamp down on digital companies, many that have avoided paying sufficient taxes for decades.
Although the Inclusive Framework could be jeopardised by a change in the political situation in the US, the New Zealand government’s current approach makes a lot of sense says the taxation expert.

“It’s about trying to bring about the big change we need in a consensus-based, multi-country way.”

Like turning around an enormous ocean liner, Elliffe says creating and realising new tax rules to suit a global environment in which the digital landscape has evolved rapidly, is a slow process but one that is about fundamental reform, which will hopefully create much-needed change.

“It’s probably only now, as we near the end of the political process around the Inclusive Framework and details are coming out, that we’ll really find out whether any of the serious players decide not to go ahead with it, particularly the US.

“There’s a definite possibility that there will be some sort of upset before we get to the final destination, but I really hope we get there.”