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A parting gift: Digital Services Tax Bill

Tax Alert - September 2023

By Viola Trnski & Robyn Walker

The New Zealand Government introduced the Digital Services Tax Bill (Bill) on 31 August, Parliament’s last sitting day before the 2023 General Election.

Given this timeframe, the Bill won’t pass into law until after the election. It is unclear whether a Digital Services Tax (DST) will be implemented if there is a change in government, as other parties’ election policies have remained silent on the issue.

A DST has formed part of Labour’s tax policy since at least 2020, although there has been a preference for a multilateral DST to be developed and implemented by the OECD first. Consultation on a DST was undertaken by Officials in 2019.

The Government’s press release stated on 29 August stated:

“We have been actively participating in negotiations at the OECD for a multilateral agreement to address these issues. This work is making slow progress. As part of these negotiations, we have agreed not to bring in a unilateral measure such as DST until 1 January 2025.

While we will keep working to support a multilateral agreement, we are not prepared to simply wait around until then to find out. That is why we have prepared legislation that is ready to go if the OECD process does not succeed.”

What is the proposed DST?

The DST will apply to companies with global digital services revenue greater than €750 million per year and at least NZ$3.5 million a year from digital services provided to New Zealand users.

“Digital services revenue” includes revenue relating to intermediation platforms, social media and content-sharing platforms, internet search engines, digital advertising, and user-generated data.

The Bill will determine whether a digital service is provided to a New Zealand user by reference to the person’s billing address, delivery address, IP address, bank details, phone area code, or geolocation. However, if the transaction is on an intermediation platform and also relates to a user in a foreign country with a similar DST, the DST amount will be reduced by 50%.

The DST will be imposed at a rate of 3% on the gross taxable digital services revenue connected to New Zealand users or land that is derived by groups within the threshold. By comparison, the United Kingdom imposes a 2% DST, and France, Italy and Spain have a 3% DST. New Zealand’s DST is expected to raise NZ$222 million in revenue over the four-year forecast period.

The intended commencement date is 1 January 2025; however, the Bill contains a provision for Parliament to defer the commencement of the DST if the OECD makes sufficient progress towards the implementation of Pillar One within a satisfactory timeframe.

Broader context

DSTs have not been widely adopted. The United Kingdom, France, Spain, and Italy have implemented a DST and Canada has proposed one. A number of other countries have implemented various other measures to tax digital services. Australia and the European Union considered and subsequently abandoned DST proposals.

If New Zealand implements a DST, it will only apply to a very small group of multinationals. By comparison, the Regulatory Impact Assessment (‘RIA’) accompanying the Bill notes the UK’s DST captures 18 entities. The RIA also noted there may be a risk of retaliatory tariffs from host countries of these entities if New Zealand goes ahead with a DST before the OECD framework is implemented.

As with all tax questions, whether a DST should be introduced in New Zealand is debatable. A DST is targeted towards large multinational tech companies that have historically paid low rates of tax in New Zealand. However, there is a possibility that New Zealand consumers will ultimately bear the cost of the DST, particularly if other countries do not implement one.

With the New Zealand Parliament dissolving for the election, it will be a question for the new Government to decide whether to reinstate the Bill and continue with the legislative processes. If so, the public will have the opportunity to comment on the legislation.

If you have any queries, please contact your usual Deloitte advisor

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