Digital Services Tax – keeps a seat at the table
On its last sitting day (31 August 2023), the 53rd Parliament introduced the Digital Services Tax Bill (DST Bill). The controversial Bill proposes to apply a 3% tax on digital services revenue earned from New Zealand customers by large digital services companies. We have details of the Bill in our earlier article.
Digital Services Taxes (DSTs) are controversial, as they level a tax on revenue rather than the profit of a business. The intended targets of DSTs are often United States (US) based technology companies, and consequently, the US has yet to respond favourably to such taxes, instead they have threatened trade retaliations against countries with a DST. Trade retaliation from the US remains a real risk if New Zealand goes ahead with a DST. When advising on the DST Bill, the Ministry of Foreign Affairs and Trade (MFAT) strongly recommended waiting for a multilateral solution.
With the Bill having been tabled before the election, the anticipated revenue of $129 million in 2026 and $93 million in 2027 was ‘banked’ in the Pre-Election Economic and Fiscal Update (PREFU), and it has been sitting in the Government books since as a looming issue to deal with. Budget 2024 seemed like the right time to make a decision.
When the current Coalition Government was formed, Bills that had lapsed due to the election were reinstated. This means that the DST Bill has been hovering on the Parliamentary order paper, not progressing, but not going away either. Before Budget 2024, the Minister of Revenue was quoted indicating the future of the Bill is still up in the air:
‘A multilateral solution remains our preferred approach. While we have reinstated the Digital Services Tax Bill, we have made no decisions about whether it should progress at this time.’
Budget 2024 confirmed the cautious approach to wait and see:
“The current Government is still deciding whether or how to progress the DST. The forecasts currently assume a 1 January 2025 implementation and include revenue of $320 million over the forecast period in relation to the DST, with an additional $98 million per annum expected beyond the forecast period. The OECD solution might be agreed and adopted (or otherwise make satisfactory progress towards implementation) instead of the proposed DST, which would generate different revenue than a DST.”
This means that the Government will still need to decide whether to forge ahead with a DST, as revenue from the proposal remains booked into the accounts from 1 January 2025. This is optimistic given the number of steps still required to legislate and implement a new tax within the next seven months.
Introducing a DST may seem straightforward, but there are some nuances to consider, particularly around multilateralism and the risk of trade retaliation from the US.
The OECD has been trying to build consensus around its solution – Amount A of Pillar One – which reallocates taxing rights to where users are based (rather than physical presence) and would replace unilateral DSTs.
As introduced, the Bill is intended to start taxing revenue from 1 January 2025, the day after a moratorium on such taxes expires. While New Zealand agreed to the moratorium in July 2023 (shortly before introducing the DST Bill), five countries did not sign up, including Canada, who said they “cannot support the extended standstill”.
With the Government signalling that a DST remains potentially in play, New Zealand exporters will continue to hold their breath, hoping not to have tariffs imposed on exports to the US.
New Zealand joins several countries in proposing a DST (or equivalent). Deloitte maintains a tracker of these taxes, so if they are of interest, please get in touch with your usual Deloitte advisor.
