GST on online services - levelling the playing field
Hon Todd McClay
Minister of Revenue
16 November 2015
GST on online services - levelling the playing field
Revenue Minister Todd McClay says measures proposed in a tax bill introduced today are about fairness and equity.
“It is about creating a level playing field for collecting GST and putting New Zealand businesses and jobs ahead of the interests of overseas suppliers”, says Mr McClay.
These measures are an important first step in the Government’s efforts to deal with increasing volumes of online services and other intangibles purchased from overseas suppliers that should, under New Zealand’s tax rules, be subject to GST.
“GST should apply to all consumption that occurs in New Zealand. This is what makes our GST system fair, efficient and simple,” says Mr McClay.
“The growth of online digital and overseas services means the volume of services on which GST is not collected is an increasing challenge – for the Government in terms of the GST revenue foregone, and as a matter of fairness for New Zealand suppliers of services and intangibles who must account for GST in their pricing structures.”
Mr McClay says the proposed measures will apply GST to cross-border “remote” services and intangibles supplied by offshore suppliers (including e-books, music, videos, and software purchased from offshore websites) to New Zealand-resident consumers, by requiring the offshore supplier to register and return GST on these supplies.
“To reduce compliance costs, offshore suppliers will not be required to return GST on supplies to New Zealand-registered businesses, nor will they be required to provide tax invoices.”
Non-resident suppliers will be required to register and return GST when their supplies of remote services to New Zealand residents exceed NZD$60,000 in a 12 month period.
Mr McClay says the proposed measures are intended to maintain the broad base of New Zealand’s GST system and to create a level playing field between domestic and overseas suppliers of online services and intangibles.
“The proposed changes would broadly follow the OECD’s recommended guidelines, as well as the rules that apply in other jurisdictions, such as Member States of the European Union, Norway, South Korea, Japan, Switzerland and South Africa,” says Mr McClay.
Australia has announced plans to introduce similar rules that will apply from 1 July 2017.
Mr McClay says that while the measures in the bill relate to online services, the fact that GST is not charged on low-value imported goods that are below the Customs’ de minimus threshold is also of concern to the Government.
“The growing volume of imported goods means the amount of foregone GST is continuing to increase and raises concerns for domestic suppliers,” he says.
This should be seen as a two-step process to also focus on low value goods.
The Government realises this is an important issue for New Zealand retailers, however we are not willing to move unreasonable cost or inconvenience on to consumers. For this reason Customs has been asked to work through a number of logistical issues with stakeholders.
“The New Zealand Customs Service is expected to release a consultation document in April 2016 that will seek public feedback on the practical implications of options to streamline the collection of duty, including GST, on low-value imported goods.
“In the meantime, the measures proposed in the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill are about providing a robust, simple and easily administered set of rules for overseas suppliers of services to New Zealanders.”
The proposed new rules would come into force on 1 October 2016, following enactment of the bill.
Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill
Q&As – GST on cross-border services and intangibles
What are the GST changes in the bill?
The amendments proposed in the bill apply GST to cross-border “remote” services and intangibles supplied by offshore suppliers (including e-books, music, videos and software purchased from offshore websites) to New Zealand-resident consumers, by requiring the offshore supplier to register and return GST on these supplies.
Currently, GST is not collected on cross-border services and intangibles that are purchased from offshore suppliers. Many are concerned that the current tax settings distort consumer and business decisions, placing New Zealand suppliers of services and intangibles at a competitive disadvantage relative to offshore suppliers. The non-collection of GST on cross-border services and intangibles has also resulted in a growing gap in New Zealand’s GST revenue base (estimated at around $40 million per year).
The amendments are intended to maintain the broad base of New Zealand’s GST system and create a level playing field between domestic and offshore suppliers of services and intangibles.
GST is also not collected on low-value imported goods that are below the “de minimis” threshold (typically goods below the value of NZ$400). The bill does not impact the collection of GST on these goods. Instead the measures in the bill are intended to be the first step in the process of collecting GST on overseas purchases.
The Government realises this is an important issue for New Zealand retailers. However we are not willing to move unreasonable cost or inconvenience on to consumers. For this reason, Customs has been asked to work through a number of logistical issues with stakeholders and is expected to release a consultation document in April 2016 that will seek public feedback on the practical implications of options to streamline the collection of duty, including GST, on low-value imported goods.
Why doesn’t the Government currently tax imported goods and services?
When GST was introduced in 1986, few New Zealand consumers purchased services from offshore, and online digital products were not yet available. At that time, the compliance and administrative costs that would have been involved in taxing cross-border services outweighed the benefits of taxation.
In terms of imported goods, New Zealand and other countries apply “de minimis” thresholds below which no duty, including GST, is collected on the imported goods. De minimis thresholds are applied to facilitate the flow of goods and to ensure that the cost of collecting GST on low-value goods does not outweigh the benefits of doing so.
New Zealand’s de minimis is set at a level under which it is estimated that the costs of collecting the duty begin to exceed the revenue the duty generates. It is a higher threshold than that set by many countries but lower than the Australian threshold of AU$1,000.
Why is the Government seeking to tax goods and services purchased from offshore suppliers?
The principal issue is about fairness. Domestic suppliers return GST on goods and services they sell to New Zealand customers whereas offshore suppliers are not required to return GST. This puts domestic retailers at a competitive disadvantage compared with offshore suppliers.
The growing e-commerce market also means the amount of GST not being collected on imported goods and services is increasing. Current estimates put the amount of GST foregone on these purchases at approximately $180 million a year (of which about $40 million relates to services and intangibles), and growing at around 10 percent each year. Government revenues pay for important public services such as education, healthcare, roads and superannuation.
What are the main features of the proposals?
• Offshore suppliers of services would be required to register and return GST on remote services purchased by New Zealand-resident consumers.
• To ensure compliance costs are minimised, offshore suppliers will not be required to return GST on supplies to New Zealand GST-registered businesses, nor will they be required to provide tax invoices.
• Offshore suppliers would be required to register and return GST if their supplies of services to New Zealand residents exceed NZ $60,000 in a 12-month period.
• A broad definition of “remote” services is proposed, which includes both digital services (such as video, music and software downloads) and more traditional services (such as legal and accounting services received remotely).
• In some situations, an electronic marketplace may be required to register instead of the principal offshore supplier.
Why would offshore suppliers comply with the proposed rules?
When similar rules have been applied in other countries, offshore suppliers – particularly large international suppliers that account for the majority of cross-border services and intangibles – have demonstrated a willingness to comply. For many of these companies, failure to comply with their obligations would pose a significant risk to their reputation.
To generate a similar level of compliance for New Zealand, the proposed rules would be consistent with the rules that apply in other countries. For offshore suppliers that do not comply, the normal enforcement rules and penalties that apply to New Zealand suppliers are expected to apply.
New Zealand is able to obtain tax-related information from other jurisdictions under both bilateral agreements (such as double tax agreements or tax information exchange agreements) and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, as amended by the 2010 Protocol ("the Convention"), which expands its information exchange network to a wider, and continually growing, network of jurisdictions. These agreements establish a network of jurisdictions from which New Zealand can request, collect and provide information, assist in service of documents, and collect unpaid GST.
The OECD is also working on further detailed guidance for the effective exchange of information and other forms of mutual assistance between tax authorities in the field of indirect taxes.
When will the proposed rules come into force?
The rules will come into force on 1 October 2016.
How do the proposals compare with what other countries are doing?
The proposed amendments are consistent with the Organisation for Economic Cooperation and Development (OECD) International VAT/GST Guidelines, and broadly follow the rules that apply in other jurisdictions, such as Member States of the European Union, Norway, South Korea, Japan, Switzerland and South Africa. Australia has announced plans to introduce similar rules that will apply from 1 July 2017.
How will an offshore supplier determine if a customer is a New Zealand resident?
Offshore suppliers will be required to determine whether a customer is a New Zealand resident on the basis of two non-conflicting pieces of commercially available evidence (for example, a billing address and the country code of their mobile phone SIM card). As many suppliers to the global market have put systems solutions in place to comply with similar rules in the European Union, it is likely that implementing similar rules in New Zealand will result in lower compliance costs for offshore suppliers.
The Commissioner of Inland Revenue will be able to prescribe an alternative method of determining whether a customer is resident, which will assist offshore suppliers by providing flexibility in circumstances where sufficient information was not commercially available.
How will an offshore supplier determine if a customer is a GST-registered business?
Offshore suppliers will be required to treat a customer as not being a GST-registered business unless the customer has provided their GST registration number, New Zealand Business Number or notified them of their status as a registered business. To provide additional flexibility, the Commissioner of Inland Revenue will be able to agree to an alternative method of determining whether the supply is made to a GST-registered person.
What if a customer provides incorrect information to avoid paying GST?
The new rules provide the Commissioner of Inland Revenue with discretion to require a person to register and pay the GST in cases such as when a person provides false or misleading information about themselves in order to avoid GST, if the GST amount involved is substantial or the behaviour is repeated. The existing “knowledge offences” are also expected to apply when a person deliberately supplies incorrect information to avoid GST.