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Riding the “E” wave while they sleep

Press release
15 November 2012
Riding the “E” wave while they sleep

The recent unexpected rise in unemployment statistics together with fiscal forecasts of a growing budget deficit reinforce the problems faced by the New Zealand Government, and those all over the world - how to obtain sufficient revenue to undertake the widerange of services expected by the voting public, and how to generate wealth for its citizens.

The plan for most countries is that economic growth solves both problems, with its citizens being gainfully employed. Unfortunately, manipulation of various economic levers has yet to have the desired effect.

The impact of e-commerce on both tax take and employment highlight the problem, but also present a possible solution.

E-commerce enables a business transaction to occur without a physical presence or event. Examples include on-line auction sites, music, book and movie downloads, and services purchases such as travel and insurance. E-commerce has huge advantages in terms of market efficiency and effectiveness, and the encouragement of entrepreneurial behaviours.

However, e-commerce compromises the principle of neutrality when considering traditional market delivery structures and taxation effects i.e. the structure and means of delivery of a business or its products should not affect the commercial and tax outcomes.

The best way of explaining the issues is through an example. If a book is sold through a shop in any main street in New Zealand, it is easy to identify who the seller is, how they connect with their market and the taxation of the transaction both through GST applying to the sales value and income tax applying to the seller’s profits.

However, if the same book is sold over the internet to a New Zealand customer by an overseas supplier, the sale isunlikely to attract income tax or GST in New Zealand (assuming the value isbeneath the level applied by Customs when the book arrives in New Zealand by post). The sale is transacted more efficiently (compared with the costs of postage and delay in delivery) if the book is downloaded in electronic form and read through an electronic reader, again with no tax cost.

The direct impact of the electronic transaction is that New Zealand based jobs and associated fiscal stimulus through having a physical presence in New Zealand is removed, together with a loss of revenue with no tax being collected, a double blow for the New Zealand economy.

The issue is not new, and has been vexing the minds of the international community for some time without any obvious solutions. Generally, the focus has been on business to consumer (or B2C) transactions given that is where consumption occurs. Proposed solutions generally favour countries where the consumer is not located, for example, where a party such as eBay acts as the intermediary and can be a collector of tax on the transaction settlement. Historically this has been of little use to New Zealand which is generally an importer of e-commerce transactions to the end consumer. And with the ability for vendors to be located anywhere in the world (electronic or physical), identifying and taxing them is an impossible task.

So is there a solution, both to collect taxes and create jobs?
The adage “if you can’t beat them, join them” comes to mind as this is something which is within our control. New Zealand should become an exporter of e-commerce. Take for example our time zone advantage. New Zealand can provide services to the world while they sleep, including IT programming, advertising, design, translation services, the list is endless. All are able to be delivered remotely, supporting businesses on the other side of the world with a seamless and continuous service.

New Zealand needs to look at how it can take advantage of its ability to deliver services by remote, and thus profit from the e-commerce dilemma. We can create jobs in New Zealand and tax the profits arising from the delivery of e-commerce transactions from New Zealand.

The Government’s Business Growth Agenda delivered its report on Building Export Markets in August 2012 and has the potential to deliver the framework for impetus in this area. Critically, just as much time and effort needs to be devoted to the growth of exports as the focus on physical goods. With the potential for e-commerce transactions to explode world-wide, and the potential to access far greatermarkets than that of physical supplies, a “virtual” export of New Zealand to the world is waiting to be explored.
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