EY Tax Monthly News Update – July - August 2023

EY Tax News Update: July - August 2023

Welcome to the third edition of EY’s tax news for 2023, covering July - August 2023. Here you can stay on top of key tax developments for the month. You can also find details of upcoming events, along with links to EY insights.

July - August 2023 in brief

Inland Revenue updates

• Current draft consultation items:
  • Taxation of trusts
  • Amortisation rates for listed horticulture plants
  • When gifts are assessable income
  • GST grouping
• New finalised guidance, including:
  • GST – Directors and board members providing their services through a personal services company
  • GST – Court awards and out-of-court settlements
  • Investing into a US limited liability company – New Zealand tax consequences
  • Income tax – Government payments to businesses (grants and subsidies)
  • GST – Payments in the nature of a grant or subsidy
  • Technical Decision Summary – Distributions from private foundation on dissolution
    
• Other items recently consulted on:
  • Disposals of trading stock at below market value
  • Research and development loss tax credits
• Focus on tax governance
• Changes to use-of-money interest and other rates

Government and political updates

• New Digital Services Tax Bill introduced
• Changes proposed to ‘bright-line’ test for certain taxpayers
• Taxation Principles Reporting legislation enacted
• Business Payment Practices Act to require disclosure of payment practices

International updates

• Updates from Australia:
  • Intangibles integrity measure
  • Consideration of Carbon Border Adjustment Mechanism
• BEPS 2.0

EY Webcasts

• EY Global Webcast – Finance and treasury: how to navigate the changing global tax landscape
• EY Global Webcast – How to prioritise governance in your organisation’s environmental, social and governance strategy

EY Insights

• Tax Guides – various matters covering over 150 jurisdictions
• Global Tax Policy and Controversy Watch, August 2023 edition
• EY Global Tax Controversy Flash Newsletter (Issue 61) | Companies should begin Pillar Two preparations to prevent double taxation, tax disputes
• The latest on BEPS and Beyond, July 2023 edition
• PE Watch: Latest developments and trends, August 2023 edition
• BEPS 2.0 Pillar Two Developments Tracker
• The CEO Outlook Pulse, July 2023 | CEOs’ faith in artificial intelligence benefits tempered by concerns about unknown consequences
• EY’s inaugural Space Tech report | How can the vantage of space give you strategic advantage on Earth?
• European Commission adopts final Implementing Regulation for transitional phase of CBAM
• How tax departments should prepare for CBAM

Other items recently consulted on

Other items consulted on by Inland Revenue during July - August 2023 include:

• Disposals of trading stock at below market value: By way of background, section GC 1 of the Income Tax Act 2007 contains rules that apply when trading stock is disposed of at below market value; and in many circumstances will deem a sale at market value, including a profit component. Temporary changes were made to these tax rules as part of the Government’s COVID-19 response. An Officials’ Issues Paper gives further consideration to the rules with a view to finding a permanent solution to the issues currently posed by section GC 1. We have a number of concerns with the current proposals. If you would like to discuss this topic further, please contact your usual EY tax advisor.
  
  
• Research and development loss tax credits: Draft Interpretation Statement PUB00435 provides guidance on who is eligible for research and development (R&D) loss tax credits (including the type of company that is eligible, the expenses that are relevant for particular calculations, and the qualifying types of R&D activity). The statement also considers a company’s ongoing obligations once it is eligible to receive the R&D loss tax credit.

Focus on tax governance

Inland Revenue has announced the results of their 2022 tax governance questionnaire. The questionnaire collects data on the overall state of tax governance in New Zealand by sampling large taxpayers and asking them to complete a series of questions. In relation to “significant enterprises”, the questionnaire was sent to 279 entities in 2022, up from 143 in 2021. A “significant enterprise” (SE) may be either an inbound company with annual turnover of more than $30m or an outbound company with annual turnover of more than $80m.

Importantly, Inland Revenue also indicated that their work on governance is being expanded during 2023 and 2024. Inland Revenue has recently written to all SEs not covered to date, setting out its continuing expectations regarding tax governance and including a copy of the questionnaire. This questionnaire was sent to the remaining SEs on a voluntary basis, with the remaining SE population under no legal obligation to return it to Inland Revenue. The same process is expected to apply in 2024.

The scrutiny of tax strategy and tax control frameworks will become common practice in future SE compliance reviews and audits, starting in 2024. If deficiencies are identified through these reviews, taxpayers should expect to experience more serious consequences because they have already been alerted that this is a key Inland Revenue focus area. Conversely, if adjustments arise as a result of future Inland Revenue compliance activities, the adequacy of tax governance will feature in penalty considerations.

For more details, see the EY Global Tax News Alert on ey.com here or contact your usual EY or EY Law tax advisor.

Changes to use-of-money interest and other rates

Keep in mind the following changes:

• Use-of-money interest rates: from 29 August 2023 the underpayment rate increased to 10.91% (previously 10.39%) and the overpayment rate increased to 4.67% (previously 3.53%) – see Inland Revenue’s Special Report here.
  
  
• Rate for calculating FBT on low-interest employment-related loans: the new prescribed rate of interest is 8.41% (previously 7.89%) for the quarter beginning 1 October 2023 and following quarters – see Inland Revenue’s Special Report here.

New Digital Services Tax Bill introduced

A Digital Services Tax Bill (DST Bill) has recently been introduced into Parliament. If passed, it will allow the Government to implement a digital services tax (DST) to be administered by Inland Revenue. The proposed DST will tax the gross digital services revenue of large multinational groups (MNE groups) with highly digitalised business models where the revenue is attributable to New Zealand users or New Zealand land.

The proposed commencement date is 1 January 2025, however this date could be deferred by up to five years. This allows for deferral of the DST if the Government sees sufficient progress toward implementation of Pillar One of the OECD’s Two-Pillar multilateral solution.

The Government has indicated it remains committed to the OECD process. Accordingly, the DST Bill does not represent a definitive commitment to impose a DST. Rather, it is intended as a backstop in the event that an acceptable multilateral solution cannot be implemented within a reasonable timeframe. If sufficient progress is made at an international level, the Government may defer implementation of the DST or abandon the measure entirely. If the DST is imposed, the intention is that it will be repealed if an acceptable multilateral solution is implemented.

The proposed DST includes many of the design elements of a 2019 consultation document and is conceptually similar to DSTs introduced or proposed in other countries, including Canada and the United Kingdom. Broadly, key aspects of the proposed DST include:

• DST will be charged at a rate of 3% on an in-scope MNE group’s gross “taxable digital services” revenue attributable to New Zealand users or New Zealand land.
• “Taxable digital services” principally includes the provision of intermediation platforms, social media and content sharing platforms and internet search engines. Other in-scope activities include certain advertising activities and activities in relation to user-generated data.
• Applicable where the MNE group has global annual gross “taxable digital services” revenue ≥ €750 million and ≥ NZ$3.5 million annual gross taxable digital services revenue is attributable to New Zealand users or New Zealand land.
• DST would be paid and reported via self-assessment by the due date in the following revenue year, with members of the in-scope MNE group jointly and severally liable for the DST.

For a more detailed look into the proposed DST, refer to the EY Global Tax Alert on ey.com here.

Changes proposed to ‘bright-line’ test for certain taxpayers

Additional provisions have been proposed to the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill (“Multinational Tax Bill”) in a new Supplementary Order Paper.
As a reminder, the Multinational Tax Bill includes draft legislation for the implementation of Pillar 2 of the OECD BEPS rules in New Zealand, as well as the proposed increase in the trustee tax rate from 33% to 39% and other remedial matters.

Broadly, the Supplementary Order Paper proposes the introduction of the following new measures into the Multinational Tax Bill to provide relief to flood/cyclone impacted taxpayers:

• Relief from the 5-year and 10-year bright-line tests (along with certain other land-based timing tests in the Income Tax Act 2007) may apply where the Crown or a local authority purchases a property affected by a “North Island adverse weather event”. These changes are proposed to be effective from the 2022-23 income year and may be relevant in relation to a buy-out of a rental property or other properties where the main home exclusions are unable to apply. The proposed ‘turning off’ of the timing tests for the buyouts would mean not only that there would be no taxable gains, but also no losses for tax purposes.
• Under current rules for the 10-year bright-line test, the main home exclusion can still apply where the owner has been away from their home for part of the period, provided they are away for no more than 12 months. The Supplementary Order Paper proposes to extend the main home exclusion from the 10-year bright-line test to any reasonable period where a person vacates their property affected by a North Island flooding event to enable repairs to take place. The proposed amendment would be retrospective to 8 January 2023. Inland Revenue expects this amendment is unlikely to have wide application, as a number of criteria need to be satisfied for it to apply.

While these changes will provide welcome relief to those who satisfy the requirements, they do not address the potential wider overreach of the bright-line test which may occur under Inland Revenue’s draft interpretation of how absences affect the main home exclusion under the current law.

Under Inland Revenue’s draft interpretation of the current law, anyone who is away from their house for 12 months or more may be caught under the bright-line test, even if their family is still living there. The Beehive release accompanying the Supplementary Order Paper states that “Officials will continue to look at other areas of the main home exemption to ensure it is still working as it should and people affected by the weather events aren’t being caught by the test.” However, it is currently unclear whether any broader relief outside of flood/cyclone affected properties will be introduced in the future.

Taxation Principles Reporting legislation enacted

Further to the coverage in our previous EY Tax News Update, the Taxation Principles Reporting legislation has now been enacted.

The Taxation Principles Reporting Act (“the Act”) proposes a set of “generally accepted tax principles” and requires the Commissioner of Inland Revenue to prepare an annual report on how the tax system is tracking against those principles. The reporting required by the Act is intended to help the public better understand how the tax system is performing and inform public consultation on tax policy.

While the commencement date was pushed out from 1 July to 31 August 2023, this change does not alter the fact that the Commissioner’s first report under the Act will be due by 31 December 2023. This leaves limited time for the Commissioner to formulate how the report will look in practice and to collate the necessary information for the first report.

We are pleased to see that some positive changes were made to the legislation prior to enactment, including some changes to the descriptions of the tax system principles. However, we are still concerned that the principles are not adequately defined, and we have some reservations around whether the Act strikes the correct balance between the desire for reporting and the potential compliance costs to taxpayers.

Business Payment Practices Act to require disclosure of payment practices

The Business Payment Practices Act (“BPP Act”) received Royal assent on 26 July. The BPP Act will require large businesses to publicly disclose their payment terms and how long they take to pay their bills on a public register. This increased transparency is intended to help small businesses manage their cashflow.

Entities that are both “large” and meet the “payment threshold test” will be subject to the new rules. Broadly:

• An entity will be “large” where total revenue of the entity and any subsidiaries is > $33m in each of the two preceding accounting periods.
• The “payment threshold test” will be met where total expenditure of the entity is ≥ $10m in each of the two preceding accounting periods (excluding wages and salaries and goods and services supplied by related parties).

The regime begins on 26 May 2024, with the first disclosure period being for 1 July 2024 – 31 December 2024. Only very large entities (revenues > $100m in each of the two preceding accounting periods) need to report their payment practices in the first disclosure period. After the first disclosure period, the regime will bring in all other “large” entities that meet the payment threshold test.

Disclosure of payment practices will be required every six months, with details on what needs to be reported contained in newly finalised regulations.

There is a risk the rules could be repealed before they come into effect, in the event of a change in government following the general election in October 2023. Nevertheless, impacted businesses should start thinking about how to prepare for the new rules.

Australia

Key updates from Australia include:

• Intangibles integrity measure: The Australian Treasury released updated draft legislation to amend Australia's tax rules to limit deductions for certain payments related to intangible assets that significant global entities make, directly or indirectly, to associates in a low corporate tax jurisdiction. The measure is still proposed to apply to payments or credits made, or liabilities incurred, from 1 July 2023. For more information, see the EY Global Tax News Alert on ey.com here.
  
  
• Consideration of CBAM to address carbon leakage: The Australian Government has announced a review on whether to introduce a Carbon Border Adjustment Mechanism (CBAM) in Australia. The CBAM would apply a "carbon tariff" to imports from overseas in certain circumstances. An evaluation of policy options and the feasibility of an Australian CBAM are likely to be finalised by October 2024, and businesses should start considering the potential implications. You can find out more in the EY Global Tax News Alert on ey.com here.

BEPS 2.0

On 17 July, the OECD released several technical documents on Pillars One and Two of the OECD/G20 project on addressing the tax challenges of the digitalisation of the economy (the BEPS 2.0 project). An EY Global Tax News Alert is available on ey.com here, with more specific Alerts also available in relation to:

• Additional Administrative Guidance on Pillar Two GloBE Rules – see here
• Subject to Tax Rule model treaty provision and commentary – see here
• Public Consultation Document on Pillar One Amount B on baseline distribution – see here
• G20 Finance Ministers welcome progress made on BEPS 2.0 project – see here

EY Global Webcast – Finance and treasury: how to navigate the changing global tax landscape register here on ey.com to watch on-demand

EY Global Webcast – How to prioritise governance in your organisation’s environmental, social and governance strategy register here on ey.com to watch on-demand

Refer to the below guides, thought leadership articles and regular newsletters available on ey.com:

• Tax Guides – browse our in-depth guides covering corporate tax, indirect tax, personal taxes, transfer pricing and other tax matters in more than 150 jurisdictions
  
  
• Global Tax Policy and Controversy Watch, August 2023 edition
  
  
• EY Global Tax Controversy Flash Newsletter (Issue 61) | Companies should begin Pillar Two preparations to prevent double taxation, tax disputes
  
  
• The Latest on BEPS and Beyond, July 2023 edition
  
  
• PE Watch: Latest developments and trends, August 2023 edition
  
  
• BEPS 2.0 Pillar Two Developments Tracker
  
  
• The CEO Outlook Pulse, July 2023 | CEOs’ faith in artificial intelligence benefits tempered by concerns about unknown consequences
  
  
• EY’s inaugural Space Tech report | How can the vantage of space give you strategic advantage on Earth?
  
  
• European Commission adopts final Implementing Regulation for transitional phase of CBAM
  
  
• How tax departments should prepare for CBAM