On 18 August the Government released a public discussion document, “GST: Cross-border services, intangibles and goods” which proposes substantial changes to the GST treatment of certain cross-border transactions. In particular, the paper discusses two proposals:
The possibility of lowering or removing the low value threshold for collecting GST on physical imports along with changes to collection processes; and
Bringing cross-border services and digital content into the scope of the GST net and requiring offshore suppliers to register for GST in New Zealand and account for any GST payable.
The first of these issues is still being considered and a further discussion document is expected to follow a report to Ministers in October.
The second issue is broadly aligned with OECD draft guidelines that have been released and is also similar to measures recently adopted in other countries, including Australia. This proposal is being treated with urgency and there have been suggestions that new laws could be introduced before the end of the year. By comparison, the equivalent measures in Australia will only apply from 1 July 2017, despite draft legislation having already been introduced.
There is an opportunity to make submissions on both of these issues until
25 September. There will be further opportunities for submissions on the lowering of the GST threshold on physical imports when the second discussion document is released.
GST and Low Value Imports
The New Zealand Customs Service does not collect GST and other duties levied on imports where the total duty payable would be less than $60 (for goods that are only subject to GST, this equates to a value less than NZD $400, inclusive of shipping costs). The rationale for this practice has been that the cost of collecting any duty and enforcing compliance outweighs the additional revenue.
Given the growth of e-commerce and the increasing volume of low value goods being imported into New Zealand, it is now proposed to reconsider the collection of GST and other duties on low-value imports. The amount of revenue currently not collected because of this low-value threshold is estimated at $140 million per year.
Because this issue is still being considered, the current proposals are general in nature. One important question already raised is whether GST and other duties on low-value imports would be payable by New Zealand purchasers (probably through a voluntary compliance scheme) or whether those taxes would be paid by intermediaries – such as NZ Post or even the offshore operators of ‘electronic marketplaces’.
While the Government considers that this measure is needed to ensure local retailers can compete on an equal footing with offshore suppliers, a key consideration will be the extent to which the costs of collection and enforcing compliance would outweigh any increased revenue collected.
Imported Services and Digital Content
Currently, GST is only charged on services provided by non-residents where those services are physically provided in New Zealand1. With the growth of e-commerce and digital goods sales there are now substantial purchases being made by New Zealanders which fall outside the GST net – it is suggested that this equates to a potential revenue loss of $40 million per year. In particular, media attention has focused on digital video “streaming” services from offshore providers such as Netflix.
It is now proposed that GST should be charged on certain “remote services” provided by offshore suppliers to New Zealand tax residents. The paper gives examples of remote services as including not only digital content (video services, music files, software etc) but also more traditional services such as legal advice, insurance and consultancy services. As such, the measures proposed are wider than simply being a tax on digital content – this mirrors the approach of the draft legislation recently introduced in Australia.
Offshore suppliers that make sales falling within the scope of these proposed rules would need to register for GST, collect GST from sale proceeds and account for that GST liability. This would likely require prices to be calculated taking into account that amount of GST and the supplier would need to put in place appropriate systems to determine whether customers are New Zealand tax residents.
The discussion paper also proposes that “electronic marketplaces” would be required to register for GST and return GST on digital sales made through that marketplace, even where the legal seller is a third party developer. It is expected that any new legislation would need to carefully define the meaning of an “electronic marketplace” for this purpose – relevant considerations will likely include the extent to which the marketplace operator interacts with the customer and collects sale proceeds.
These proposals raise a number of questions and the discussion paper seeks submissions on certain points, including:
Whether there should be a threshold of annual sales to New Zealand tax residents at which registration is not required – such a threshold could either be set at a very low value (e.g. NZD $10,000) or could match the threshold for New Zealand based suppliers (NZD $60,000).
Whether there should be an exclusion for sales made to New Zealand GST registered businesses. Such an exclusion would avoid the need for those businesses to recover GST as a credit from Inland Revenue but there would need to be appropriate measures to ensure that non-resident suppliers could confirm that customers claiming that exclusion are genuine businesses.
The appropriate requirements for suppliers to undertake certain checks to determine whether a customer is tax resident in New Zealand – one suggestion is that to minimise compliance costs it might be sufficient for suppliers to rely on certain proxies, such as a New Zealand IP address or credit card details;
The mechanism by which offshore suppliers could register for GST. Three options are proposed:
The usual GST registration process available to New Zealand businesses;
A simplified “pay only” registration where the supplier would only pay GST and could not claim GST credits against that liability;
A “one-stop shop” regional registration whereby a single state would collect GST on behalf of many countries, and then distribute the proceeds to each country – such a mechanism has been utilised by the European Union for the collection of VAT.
It is not yet clear how enforcement could be achieved against non-resident suppliers with no presence in New Zealand. However, substantial penalties could be imposed against New Zealanders who misrepresent themselves to an offshore supplier in a way that results in no GST being charged. These sanctions may raise some issues for New Zealanders who utilise “virtual private networks” to access digital content from offshore streaming suppliers that would otherwise not be available to New Zealand customers.
If implemented, these measures would give rise to one of the most significant expansions to the GST base since GST was introduced in 1985. Given the possibility of some of these changes being legislated fairly quickly, affected parties should consider their current position and ensure their systems, contracts and pricing structures take into account the possible changes.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.