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Inland Revenue

Tax Policy

Chapter 2 - GST and business-to-business supplies

This chapter looks at the desirability of GST neutrality in cross-border B2B transactions and discusses how this is dealt with currently.

2.1 New Zealand recognises the importance of avoiding double taxation in international trade. However, the method for ensuring that double taxation is avoided differs for income tax and GST purposes.

2.2 Income tax operates on the basis that countries will cast a wide net – taxing on the basis of both source and residence – and then surrendering taxing rights or providing a credit for foreign tax paid through the double tax agreement (DTA) network.

2.3 If GST operated on a similar basis, it would in theory require output tax to be collected on both imports and exports, with the surrender of some export taxing rights and provision for foreign output tax to be claimed as input tax through treaty agreements. However, other than for exchange-of-information purposes in some cases, DTAs do not generally cover GST. The OECD’s guidance on consumption tax thus far has instead focussed on an internationally recognised system for allocating taxing rights across jurisdictions.[2]

2.4 As discussed in Chapter 1, GST works on the destination principle of taxation. If this principle were to be applied strictly, it would only look at the location of the relevant contractual parties. This means that goods and services provided by a New Zealand business to an Australian customer would always be zero-rated, irrespective of where the service was actually received. Under such a strict approach, GST would never be a burden on business and B2B neutrality would be achieved. Businesses would only pay GST (or its equivalent) in their own jurisdiction, irrespective of where the goods and services were received or where the supplier was physically located.

2.5 The destination principle works well for imported and exported goods, because items physically pass through Customs’ control and are relatively easy to identify. However, cross-border supplies of services are more difficult to monitor because of their intangible nature; it is often difficult to pinpoint exactly when and where a service is consumed or even when it crosses a border and, therefore, which country has the taxing right.

2.6 GST laws for both goods and services received by non-residents must ensure that non-residents are treated on an equivalent basis to resident businesses or consumers, taking into account any significant risks to the tax base. For the reasons given, this document assumes that the supplies that cause the most difficulties from a B2B neutrality perspective will be supplies of services.

Problems with current system

2.7 A traditionally problematic area in applying GST to cross-border transactions has been when the contractual recipient is a non-resident, but the physical receipt of the services takes place in New Zealand.

2.8 Under the destination principle, the standard method for ensuring that no tax is collected in the originating jurisdiction is to zero-rate the supply. Zero-rating does not impose output tax on the supply, while ensuring that the domestic supplier can claim back the input tax they incurred in making the supply. To do otherwise would be to effectively penalise exporters by either increasing the cost of their exported products or forcing them to absorb a tax cost not imposed on domestic suppliers.

2.9 In determining the location of the recipient, New Zealand has, since the Wilson & Horton decision, looked to the location of the contractual recipient.[3] The Wilson & Horton decision created problems for the New Zealand tax base because in some cases, contractual relationships may not reflect the fact that consumption takes place in New Zealand. In areas such as the tourism and education sectors in particular, the potential arose to create contractual relationships with non-residents before they arrived in New Zealand, so that goods and services consumed in New Zealand could be zero-rated.

2.10 To deal with this situation, section 11A(2) of the GST Act was enacted to ensure that services received in New Zealand attract GST at the standard rate. Section 11A(2) is seen as an essential base maintenance provision. However, it is recognised that its role needs to be further considered in the context of supplies received by non-resident businesses in New Zealand.

2.11 Section 11A(2) results in a broad range of services (other than exempt services) received in New Zealand being standard-rated. If the non-resident business is not making “taxable supplies” in New Zealand, this GST cannot be claimed as input tax.

2.12 The result is that New Zealand GST forms an irrecoverable cost to the non-resident business. Although an irrecoverable tax cost is not a problem if it is applied universally, it can create distortionary effects when it represents a real economic cost to a non-resident business and a resident business incurring the same cost would be able to claim the amount as an input tax deduction. In these circumstances, the cost of consuming services in New Zealand is higher for a non-resident solely on the basis of the GST treatment. All things being equal, this may have the effect of deterring a non-resident from consuming services in New Zealand altogether or limiting the market share that New Zealand businesses can realistically compete for.

2.13 An example of how section 11A(2) might apply is in the aviation training industry. A non-resident airline may contract with a New Zealand- resident training institute to instruct trainee pilots in certain skills. The pilot is, upon graduation, bonded to the relevant airline for a number of years. The trainee receives the services in New Zealand, so output tax is charged, even though the beneficiary of the training may be the non-resident airline – which acquires a fully qualified pilot for a considerable length of time. If the airline was carrying out a taxable activity in New Zealand, the GST incurred is likely to be available as an input tax credit.

2.14 The disparity between resident and non-resident businesses can to some extent be resolved if the non-resident business registers for New Zealand GST purposes. Currently, New Zealand allows any person that carries on a taxable activity to register for GST. As a “taxable activity” is not geographically confined, this means that any non-resident business can theoretically register for GST.

2.15 However, a person can only claim input tax as a deduction if they use the goods or services acquired for making “taxable supplies”. The concept of “taxable supplies” is geographically limited to supplies of goods or services in New Zealand. In order to claim a deduction for input tax, a non-resident business must therefore use the goods and services acquired for the purpose of making supplies in New Zealand. This limits somewhat the use of registration as a means for non-residents to obtain neutrality.

2.16 Section 20(3C) of the GST Act also ensures that input tax is only available “to the extent” that the relevant goods and services are used for making taxable supplies. This rule restricts the ability of a non-resident to make token supplies in New Zealand and claim all input tax incurred as a deduction, because it is difficult to argue that all goods and services acquired in New Zealand are done so for the purpose of generating a very limited amount of taxable supplies.

2.17 In addition, under sections 52(5), (5A) and (7), the Commissioner has reasonably broad powers to (retrospectively in some instances) deregister a person that is not carrying on a taxable activity in New Zealand. These sections may act as a disincentive for non-resident businesses to register in the first place.

2.18 In determining what supplies are to final consumers and what supplies are to businesses, there are fine margins at play, even in our aviation training example. Pilot training is broadly “education”, and most international students that come to New Zealand do so for their personal betterment. There is no sound policy reason for services consumed in New Zealand that have a private benefit to be outside the scope of GST, even when the recipient is a non-resident.

2.19 If a change is to be made, the challenge is to strike the right balance between addressing some lack of neutrality between resident and non-resident businesses and ensuring that GST is not easily avoided in New Zealand. This would be achieved by setting an appropriate business and consumer boundary.

2.20 There is a counter argument which says that the cost of GST is not always fully borne by a non-resident business. This would arise when the tax is not recoverable but is nevertheless incurred as a business expense. In these circumstances, the non-resident is likely to receive an income tax deduction for the New Zealand tax cost in their own country. The remainder of the tax burden may also be recovered by the non-resident business through the pricing of its products to its own consumers. We have therefore considered how important an issue GST is for a non-resident business, when these issues and other pricing factors such as exchange rate fluctuations are taken into account.

2.21 While difficult to measure, it is reasonable to assume that businesses would perceive the GST cost to be a significant factor when comparing New Zealand's GST treatment with that of other jurisdictions in which they may alternatively consume services. The following chapters therefore proceed on this assumption.


2.22 We consider that, if a solution that is workable for both government and taxpayers can be found, it may increase the attractiveness of New Zealand for non-resident businesses that consume services away from their main place of operation. This may result in a greater number of non-residents choosing to consume services in New Zealand, to the benefit of the New Zealand economy more generally.


2 See OECD Committee on Fiscal Affairs, Working Party No 9 on Consumption Taxes: OECD International VAT/GST Guidelines, Draft Guidelines on Neutrality, December 2010.

3 Wilson & Horton v Commissioner of Inland Revenue [1996] 1 NZLR 26; (1995) 17 NZTC 12,325; (1995) 20 TRNZ 111.