Chapter 4 - Enhanced registration system – design features

4.1 Under section 51 of the GST Act, a person is liable to be registered for GST when their supplies in New Zealand from their taxable activity either exceed $60,000 over the last 11 months (plus the month in question), or are anticipated to exceed $60,000 in the following 11 months (plus the month in question). Once liable to be registered, a person must charge output tax on their taxable supplies and will be entitled to deduct input tax to the extent that the goods or services received are used for making taxable supplies.

4.2 A person whose supplies are lower than the $60,000 threshold may voluntarily register if they are carrying on a taxable activity.[6] This voluntary registration provision, in the first instance, allows non-resident businesses to register for GST on the basis that they carry on a taxable activity, although not necessarily in New Zealand.

4.3 However, as mentioned previously, there is little benefit to a non-resident from registering in New Zealand because the ability to claim input tax is linked to supplies the person makes in New Zealand. If a non-resident makes very few or no New Zealand supplies, their ability to claim input tax is either proportionately very low or non-existent.

4.4 A further disincentive for a non-resident to register is the cancellation of registration provisions.[7] If the Commissioner is satisfied that a registered person is not carrying on a taxable activity, the Commissioner may cancel that person’s registration. Crucially, for non-residents only, “taxable activity” for this purpose means a taxable activity carried on in New Zealand.[8] This means that, even if a non-resident registers in New Zealand, they operate under the possibility of their registration being cancelled if they cannot satisfy the Commissioner that they carry on their taxable activity here.

Outline of the proposed system

4.5 The fundamental changes necessary to design an enhanced registration system relate to the ability to claim input tax, the rules around deregistration and the need to reduce the potential for other tax consequences to arise from registration.

Input tax

4.6 An enhanced registration system would link a non-resident’s ability to claim input tax to their worldwide supplies. This should result in GST incurred on any genuine business expense incurred in New Zealand being able to be deducted, and refunds being made available when deductions exceed GST payable on taxable supplies.

4.7 There are two options for doing this. Either the ability to claim input tax could be linked to a registered person’s “taxable activity”, or a special rule could be created for non-residents to deem “taxable supplies” in the deduction provisions to include all supplies that would be taxable if made in New Zealand.[9] We prefer the second option because it would make it clearer that input tax could not be claimed in respect of exempt supplies, either within New Zealand or offshore.

Deregistration

4.8 There would be little point in expanding the ability to claim input tax without also amending the deregistration provisions. To do so would effectively invite non-residents to register, but still allow for their deregistration if they did not conduct their taxable activity in New Zealand. We consider that section 52(7) of the GST Act that allows for the deregistration of non-residents who do not carry on a taxable activity in New Zealand would need to be at least amended in order to provide non-resident businesses with some certainty over the long-term viability of their registration. Whether some form of deregistration power specific to non-residents should still exist is discussed later in this chapter.

Unintended consequences

4.9 One of the concerns a non-resident business could have in registering for New Zealand GST is that the GST law may have unforeseen consequences for other parts of its business. Experience in Australia suggests that non-residents may be reluctant to register for fear of GST attaching to supplies that would not logically form part of the business’s involvement with Australia. The difficulties in the Australian context appear to stem from the breadth of the “connected with Australia” test (in Australia, supplies are “connected with Australia” if a supply is done in Australia, including supplies performed by a subcontractor).[10] Although New Zealand does not have a comparable test, it is nevertheless important to ensure that similar problems do not arise.

4.10 The intention is that any rules expanding a non-resident’s ability to claim input tax would not further extend New Zealand’s taxing right or give rise to possible double taxation.

4.11 Concerns in this area are most likely to centre on supplies that are deemed to be made on the cessation of registration.[11] Some clarification of the effect of these deemed supply rules would be useful if an enhanced registration system were to be implemented. In particular, we consider that output tax should only apply to supplies made when goods are physically located in New Zealand at the relevant time. In other words, if there are goods in New Zealand, as with any other registered person, there should be an assumption that they are being used for making taxable supplies. If a non-resident is only the recipient of services in New Zealand, it is not anticipated they would have any New Zealand-based goods to which GST could attach.

4.12 Goods and services that are due to be supplied to New Zealand customers but (in the case of goods) are located outside New Zealand should logically not be subject to GST at the time because, if they were actually delivered to the customer, they should in any event be subject to GST under section 12. Services should not attract GST unless the non-resident has made a taxable supply to a New Zealand customer. Equally, goods and services that are located offshore for non-resident customers also should have no bearing on a non-resident’s output tax liability on deregistration.

Other key changes

4.13 An enhanced registration system fits well within the existing legislative and administrative systems in place for GST. However, given the inherent difficulty in recovering tax from non-resident defaulters, some legislative protection is inevitable.

4.14 This section discusses possible measures to provide more certainty to non-resident businesses, ensure administrative efficiency and protect the revenue base. We consider that all of these options should apply in any enhanced registration system.

Home registration

4.15 A non-resident would be able to register in New Zealand if they are registered under a comparable transaction tax to GST, or for sales tax purposes, in the jurisdiction where their main taxable activity is based. Providing a tax registration number from the taxpayer’s home jurisdiction is generally a pre-requisite to obtaining a VAT refund from EU member states. Evidence that the business is carrying on an “enterprise” is required for a non-resident to register for GST in Australia.

4.16 As most of New Zealand’s major trading partners and over 120 countries operate VAT or GST, and others have at least a sales tax system, we consider that requiring a non-resident business to provide certification from their home tax authority that they are registered for the relevant tax is reasonable. The global incidence of taxes of this sort would mean that residents of New Zealand’s major trading partners should not be prejudiced by the requirement. However, to cater for circumstances when there is no direct comparison, the rules should be suitably flexible to allow non-residents from such a jurisdiction to register by providing certification of their tax registration number as a business for income tax.

4.17 In addition, as part of the registration process, the non-resident business should be required to separately certify:

• that they are currently carrying on a taxable activity. This would provide confirmation of their status as a business in addition to the certification provided by the relevant tax authority;
• that the supplies made in the course of furtherance of that activity are of such a scale that they would, if made in New Zealand, require them to be registered. This requirement would ensure that only businesses that were relatively well-established could register;
• that the taxable activity is expected to continue for the course of the relevant tax period. This may allow the Commissioner to refuse registration in the event that a special purpose vehicle was set up temporarily solely for the purpose of obtaining a refund in New Zealand; and
• to advise Inland Revenue if the non-resident business ceases to carry on a taxable activity at any time or if their worldwide taxable activity falls below the registration threshold.

Minimum refund threshold

4.18 As the name suggests, a minimum refund threshold would only allow refunds to non-residents when the amount of the refund was over a certain amount. This would allow for recovery of the administration costs of providing refunds and the amount would therefore be relatively small.

4.19 Most EU member states have a minimum threshold for refunds. In the UK, a claim for VAT must be made in respect of supplies made during a period of not less than three months and not more than 12 months. However, a claim can be made in respect of a period shorter than three months if that period represents the final part of the prescribed year. If the period to which the claim relates is less than 12 months, the VAT claimed must not be less than £130. When the claim relates to a full 12-month period, the minimum refund drops to £16.[12] Germany operates thresholds of €500 and €250 respectively.[13] A refund threshold in New Zealand could be set somewhere between these – at, say, $500 of GST.

4.20 From an administrative perspective, a refund threshold might be difficult to monitor because the nature of an enhanced registration system means that each return would have to be scrutinised not only in its own right, but also for refund threshold implications. However, there may be a need to ensure that businesses that only have a limited time during which expenses are incurred in New Zealand do not stay in the system indefinitely.

4.21 We consider that a refund threshold should apply for the first year of registration. From that point on, a non-resident should be entitled to remain registered for as long as they are not filing nil, or very low returns. If there is a consistent period of, for example, five years of returns showing no or very little activity in New Zealand, the Commissioner should have the discretion to deregister the business at that time.

4.22 Having a threshold on the amount of expenditure potentially creates a distortion between resident and non-resident businesses and, therefore impacts on B2B neutrality. However, this is a recognised trade-off for the additional administration costs that would necessarily be incurred in processing returns.

Time for refund processing

4.23 Under section 46, the Commissioner is required to refund an amount owing to a registered person no later than 15 working days after receipt of the relevant return. There are exceptions to this if the Commissioner requests further information or intends to investigate the circumstances of the return.

4.24 Despite the Supreme Court’s recent clarification of the scope of this provision,[14] 15 working days would be a relatively short time to process significant refund returns by non-resident businesses. Although Inland Revenue can extend this period by investigating such returns, business confidence could be undermined if non-residents’ returns were investigated as a matter of course in order to verify the contents. Any amendment in this area therefore becomes a balancing act between providing Inland Revenue reasonable time to verify returns − in circumstances where information may be more difficult to acquire − against the need for businesses to have some certainty around when a refund will be confirmed.

4.25 We note that EU member states tend to allow themselves a longer period for processing refund claims from “third country” taxable persons, compared with refund claims from taxable persons in that member state or from within other member states.[15]

4.26 Although we do not consider New Zealand would need a six-month window, as operates in some EU member states, a three-month period should allow sufficient time for any preliminary enquiries to be conducted, and a decision made on whether a broader investigation is warranted. A three-month timeframe would reflect the inherent difficulties associated with obtaining information from offshore, where issues such as language barriers may present themselves.

Non-compliance with filing requirements

4.27 The effective operation of an enhanced registration system will be dependent on the non-resident business complying with its filing requirements. Generally, if a greater level of compliance is needed, this is generated through the statutory penalty and use-of-money interest provisions. However, a non-resident business that is registered for GST may not be in a “tax payable” position, meaning that penalties and interest are unlikely to apply. Even if they did apply, enforcement against non-residents can be difficult.

4.28 It is therefore proposed that the Commissioner should have one or both of the following powers to help ensure ongoing compliance:

• the power to withhold refunds until filing requirements have been met, and any necessary payments made, for all previous periods. A similar measure operates in Canada;[16] and/or
• a deregistration power for persistent non-compliance.

Payments or hybrid basis

4.29 Ensuring that non-resident businesses must account for GST on a payments basis could be an effective means for further protecting the tax base. This would limit refunds to GST that had actually been paid by the non-resident, rather than GST that had merely been invoiced.

4.30 An invoice system provides greater scope for a non-resident business to access substantial refunds without actually parting with any money. In the event of non-payment, the supplier could reverse the transaction through the bad debt provisions in section 25, but there would be limited means for ensuring that a non-resident repaid any refund provided.

4.31 As with other persons that account for GST on a payments-basis, eligibility for input tax would need to be documented by providing invoices and receipts from the New Zealand supplier.

Private consumption in New Zealand

4.32 It is important that in making any changes to the GST rules, the policy outcome of ensuring that private consumption in New Zealand is taxed here is not undermined.

4.33 The UK has a specific exclusion for “VAT charged on a supply to a travel agent [or tour operator that purchases and resupplies services of the kind enjoyed by travellers] which is for the direct benefit of a traveller other than the travel agent or his employee”.[17] This rule appears designed to prevent non-residents from gaining refunds on supplies that are ultimately enjoyed by tourists. A similar provision could also be useful in the New Zealand context. However, given that one of the positive aspects of an enhanced registration system is that genuine business expenses such as hotel costs should be able to be claimed, any rule would ideally focus on the nature of the final consumer rather than the nature of the supply itself.

4.34 One approach may be to deny the registration if the taxable activity of the non-resident is predominantly the supply of goods and services that are received in New Zealand by non-residents who would not be eligible to register. In this context, such rules could treat all supplies by the non-resident as if they were made in New Zealand, so the non-resident would not be able to circumvent the rules and register on the basis that New Zealand only accounts for a small proportion of an international operation.

4.35 This would mean that, for example, a non-resident whose business is to on-sell tourism products would not be eligible to register if those tourism products are ultimately enjoyed by non-resident (and non-registered) individuals. The change would ensure the policy intent of section 11A(2), which denies zero-rating for services when the receipt of the performance of those services is in New Zealand, remains effective.

Other measures considered

4.36 In looking at possible additional features of an enhanced registration system, the following ideas were also considered. They are not being progressed at the current time, as discussed below.

Exchange-of-information agreements

4.37 Another option would be to restrict registration to businesses that are primarily based in jurisdictions with which New Zealand has an exchange-of-information agreement. This would allow Inland Revenue the opportunity to confirm that the registration application was genuine and also periodically to check the continuing registration status in the other jurisdiction. Without an exchange-of-information agreement with the home jurisdiction, these checks are unlikely to be possible.

4.38 Although New Zealand has a wide network of double tax agreements (DTAs) that contain exchange-of-information articles, and numerous independent exchange-of-information agreements, not all cover GST. Historically, these articles in treaties are limited to the taxes covered by the treaty itself – in New Zealand’s case, this is often only income tax. Despite more recently negotiated treaties tending to include GST, the coverage is still not comprehensive.

4.39 Although GST coverage in our DTA and independent exchange-of-information agreement network incorporates some of New Zealand’s major trading partners, it excludes other important trading partners. Having an exchange-of-information agreement in place as a pre-requisite to registration may therefore be too restrictive to be a genuine aid to B2B neutrality on a large scale.

4.40 The OECD has other initiatives that may, in the future, provide fuller coverage in exchange-of-information agreements, including multi-lateral agreements. However, even if New Zealand were to adopt these initiatives, it may not be of immediate assistance if they are not universally accepted. If significant developments in this area are made, they could be considered at a later stage to buttress an enhanced registration system.

Reciprocity

4.41 The ability for non-resident businesses to register could be made contingent on the business’s home jurisdiction allowing registration of New Zealand businesses, or providing them with a refund for GST or VAT incurred in that jurisdiction. European VAT officially has a reciprocity requirement for traders from outside the EU although practices among member jurisdictions appear to vary.[18]

4.42 If all jurisdictions operating a GST/VAT were to recognise the need for full B2B neutrality, there would be no need to legislate for reciprocity because that recognition would incorporate the removal of any double tax impost in cross- border trade. New Zealand’s GST system should apply best practice principles wherever possible. As a result, we do not consider that reciprocity should be a prerequisite to New Zealand registration.

Conditions on registration

4.43 In the UK, if there is insufficient evidence to refuse an application for registration, Her Majesty’s Revenue & Customs can impose conditions on registration.[19] In practice, these restrictions could include a financial guarantee being provided or a shortened first filing period to enable a relatively quick assessment of the person’s compliance. There may be merit to the “bond”-type arrangement, in that non-residents would need to provide money upfront as a sign of good faith. However, we consider that requiring non-residents to register on a payments or hybrid basis would have a similar economic outcome, without the need to pay initial GST twice in order to access a refund.

Only paying refunds to New Zealand bank accounts

4.44 Limiting the payment of refunds to New Zealand dollar-denominated accounts in New Zealand banks would mean that any refund would be held in New Zealand (temporarily at least) in the event that the non-resident was not actually entitled to the refund processed. It would also provide an additional information source for Inland Revenue for audit purposes.

4.45 However, in our view, a wider consideration of the benefits of such a measure is needed as, if implemented, its effect would not be confined to an enhanced registration system for non-residents.

6 Section 51(3).

7 The deregistration provisions are contained in section 52.

8 Sections 52(5) and 52(7).

9 The relevant deduction provision being section 20(3C).

10 See Australian Government: Implementation of the recommendations of the Board of Taxation's review of the GST cross-border transactions, 15 February 2011. (http://archive.treasury.gov.au/contentitem.asp?ContentID=1959).

11 See section 5(3).

12 European Commission, Taxation and Customs Union website: http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/traders/vat_refunds/uk_en.pdf.

13 See above: http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/traders/vat_refunds/de_en.pdf.

14 Contract Pacific Limited v Commissioner of Inland Revenue [2010] NZSC 136.

15 Council Directive 2008/9/EC (applying to refunds with other EC jurisdictions), at Article 19, provides that a member state must accept or refuse a refund application within four months. By contrast the 13th VAT Directive (86/560/EEC), Article 3(1), leaves the time period for processing refunds up to the individual member. Article 3(2) supplements this by providing that “refunds may not be granted under conditions more favourable than those applied to community taxable persons.”

16 OECD Forum on Tax Administration Compliance Sub-Group, Developments in VAT Compliance Management in Selected Countries, August 2009, page 25.

17 The Value Added Tax Regulations 1995, Part XXI, Regulation 190(1)(b).

18 Article 2(2) of the 13th Council Directive 86/560/EEC.

19 See, for example: Value Added Tax Act 1994, Schedule 1; Value Added Tax Act 1994, Schedule 2, section 4; and The Value Added Tax Regulations 1995, Regulation 25(1)(c).