EY Tax Monthly News Update – September 2023

EY Tax News Update: September 2023

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

September 2023 in brief

Inland Revenue updates

• Current draft consultation items:
  • Forfeited deposits from cancelled land sale agreements
  • Taxation of Trusts
• New finalised guidance, including:
  • Professional directors and board members incorrectly registered for GST
  • Tax depreciation rate for gaming machines (electronic)
  • Technical Decision Summaries on (1) GST – input tax deduction and taxable activity; and (2) amalgamation and liquidation
• Digital transformation to Cloud services – Inland Revenue guidance indicates new expectations for taxpayers
• Review of donations tax credit regime

Government and political updates

• Game Development Sector Rebate
• Pre-election Economic and Fiscal Update

International updates

• Australia: Tax integrity Reform draft legislation released
• New OECD report – Tax Policy Reforms 2023
• Other updates:
  • European Commission issues two proposals for Directives
  • Canada moves ahead with its own digital services tax
  • US Treasury economist states US preference on BEPS 2.0-related transfer pricing rules

EY Webcasts

• EY Global Webcast – BEPS 2.0 recent developments and practical considerations
• EY Global Webcast – What effective EU Carbon Border Adjustment Mechanism compliance looks like

EY Insights

• Tax Guides – various matters covering over 150 jurisdictions
• Global Tax Policy and Controversy Watch, September 2023 edition
• EY Global Tax Controversy Flash Newsletter (Issue 62) | Companies should examine their tax governance and data as focus on tax controversy grows
• The latest on BEPS and Beyond, September 2023 edition
• PE Watch: Latest developments and trends, September 2023 edition
• BEPS 2.0 Pillar Two Developments Tracker
• How can government harness system value where it matters most?
• How do brands redefine value in tough economic times?
• Are you harnessing the growth and resilience of private capital?
• How can a rebalance of power help re-energize your workforce?

New finalised guidance

Key Inland Revenue guidance items finalised during September 2023 include:

Digital transformation to Cloud services – Inland Revenue guidance indicates new expectations for taxpayers

Inland Revenue has issued Interpretation Guideline IG 23/01 that aims to clarify the income tax treatment of Software as a Service (“SaaS”) Configuration and Customisation (“C&C”) costs for taxpayers. The guidance acknowledges the complexity of this issue, given the diverse contractual arrangements and services involved in SaaS arrangements. It does not address foreign, related party recharges for SaaS C&C costs or other types of cloud service arrangements (e.g., Platform- or Infrastructure-as-a-Service).

Broadly, the guidance finds that taxpayers have two options – they can:

• Take immediate deductions under the development expenditure provision in section DB 34 of the Income Tax Act 2007 (where they apply IFRS accounting standards, meet the criteria in section DB 34 and can support the position as expected by Inland Revenue), or
• Capitalise and then depreciate the SaaS C&C costs as part of the cost base of depreciable intangible property.

In our view, the guidance will create increased compliance costs under either approach, for what is largely a timing issue. We anticipate there will be process, evidence and management impacts for most taxpayers with significant SaaS spend.

Taxpayers wishing to take immediate deductions under section DB 34 will need to consider whether they have sufficient, contemporaneous support to ensure that the relevant considerations are met. Inland Revenue expect meticulous compliance with financial reporting standard NZ IAS 38, and in some cases, application of the standard beyond what was required for external audit purposes.

For those who capitalise and then depreciate the costs, depreciation can only be claimed when the related software asset is “ready for use” and not when the SaaS asset is “under construction.” Timing of deductions for tax depreciation will require consideration of software testing, phases or functionality availability. The guidance also considers cases where traditional “opex” costs (e.g., relating to software licence fees) should be capitalised for tax.

Although the guidance is helpful, its’ effectiveness will depend on how Inland Revenue’s Significant Enterprises compliance teams now approach the issue from a review, audit and challenge perspective. Given the size of expenditure involved, we expect Inland Revenue will engage in significant review activity where SaaS arrangements are disclosed in audited financial statements.

Whether you choose to deduct immediately or capitalise and depreciate costs, there are opportunities to navigate the new compliance challenges. The work required to triage the SaaS C&C costs should be planned out ahead of time, to reduce the compliance burden and provide more certain outcomes. Commercial factors such as dividend policies, budgets and bonuses may be tied to the accounting and/or tax treatments so there are also wider factors to guide your approach. If your business is shifting to cloud-based SaaS requiring C&C work, or you would like more information on the new guidance, please get in touch with your usual EY tax advisor.

Review of donations tax credit regime

Inland Revenue is undertaking a review of the donations tax credit regime. The review will assess whether the regime is operating effectively, efficiently, is achieving its intended outcomes and remains fit for purpose and the future. The review is part of the regulatory stewardship programme required of all state agencies for the rules they administer and is expected to be completed by mid-2024.

The review is not a reform of the rules and may not necessarily result in any changes. Upon completion, Inland Revenue’s review team will publish a report setting out their findings as well as any recommendations. If any recommendations for change are made in the final report, these will need to be considered against other Inland Revenue priorities. For more information, see Inland Revenue’s website here.

Game Development Sector Rebate

The Government has finalised the design of the Game Development Sector Rebate (GDSR), a new $40 million per annum scheme to support the ongoing development and growth of New Zealand's game development sector. The Beehive release is available here.

The scheme is effective as of 1 April 2023 and comprises a rebate on eligible expenditures of eligible firms, at a rate of 20%. Broadly, eligible businesses who undertake certain expenditure on digital games that are intended for general public release for entertainment or educational purposes (including serious games), will be able to apply for the rebate.

Further criteria and application deadlines apply. For more information on the GDSR, please get in touch with your usual EY tax advisor.

Pre-election Economic and Fiscal Update

Treasury has published the Pre-election Economic and Fiscal Update 2023 (PREFU) ahead of the election, giving a picture of the state of the New Zealand economy. Key points to note include:

• While Treasury is not forecasting a recession, slow economic growth is expected to continue over the next eighteen months as high inflation necessitates high interest rates.
• Treasury expects annual inflation to return to within the Reserve Bank of New Zealand’s target by December 2024 and interest rates to gradually ease from late-2024.
• Forecast average annual growth is expected to be around 2.6% between 2023 and 2027.
• Forecast tax revenue is lower than previously expected by $3.5 billion over the 2023 - 2027 period.
• The operating balance before gains and losses (OBEGAL) deficit is expected to return to surplus in 2026/27, a year later than previously forecast.
• Net debt is projected to peak at 22.8% of GDP in 2024/25 and fall to 21% of GDP by the end of 2026/27.

Further information can be found on the Treasury website here and in the related Beehive release here.

Australia

The Australian Treasury has released four Draft Bills for consultation which propose to make a series of tax and other law amendments intended to strengthen the integrity of Australia’s tax system. The four Draft Bills cover: expansion of Promotor Penalty Laws; Tax Practitioner Board (TPB) Reforms; Information Sharing (between the Australian Taxation Office, TPB and Treasury); and extension of Whistle-Blower Protections.

OECD

A new OECD report, Tax Policy Reforms 2023, contains details of tax reforms announced and enacted in 2022 across a number of member jurisdictions of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, including all OECD countries. The report provides an overview of the macroeconomic environment and tax revenue context in which these tax reforms were made, highlighting how governments used tax policy to respond to high inflation and address structural challenges.

The report finds that tax reforms have been one of the key policy tools used by governments to shield households and businesses from decade-high levels of inflation. See the media release on the OECD website here for more information.

Other updates

Other international updates include:

• European Commission issues two proposals for Directives: including a Transfer Pricing Directive as well as the Business in Europe: Framework for Income Taxation (BEFIT) Directive. The BEFIT Directive will introduce a common framework for tax-base determination and aggregated corporate income taxation in the European Union for in-scope multinationals. More information is available in the EY Global Tax News Alert on ey.com here.
• Canada moves ahead with its own digital services tax (DST), releasing draft legislation: it is anticipated that Canada’s DST will be enacted by 1 January 2024, with retroactive effect to 1 January 2022. Affected entities will need to be registered for Canada’s DST by 31 January 2025 and file returns and remit DST for both 2022 and 2023 by 30 June 2025. See the EY Global Tax News Alert on ey.com here.
• US Treasury economist states US preference on BEPS 2.0-related transfer pricing rules: refer to the EY Global Tax News Alert on ey.com here for more details.

EY Global Webcast – BEPS 2.0 recent developments and practical considerations register here on ey.com to watch on-demand

EY Global Webcast – What effective EU Carbon Border Adjustment Mechanism compliance looks like 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, September 2023 edition
• EY Global Tax Controversy Flash Newsletter (Issue 62) | Companies should examine their tax governance and data as focus on tax controversy grows
• The Latest on BEPS and Beyond, September 2023 edition
• PE Watch: Latest developments and trends, September 2023 edition
• BEPS 2.0 Pillar Two Developments Tracker
• How can government harness system value where it matters most?
• How do brands redefine value in tough economic times?
• Are you harnessing the growth and resilience of private capital?
• How can a rebalance of power help re-energize your workforce?