GST: Cross-border business-to-business neutrality

(Clauses 68, 75(1), 79, 80(2), 83(2), (5) and (6), 89, 90, 91 and 92)

Summary of proposed amendments

The Goods and Services Tax Act 1985 (GST Act) is being amended to change the rules governing when a non-resident business can register for GST and claim input tax deductions.

As GST is intended to be a tax on final consumers rather than businesses, the amendments are intended to allow non-resident businesses to register and claim deductions in a broadly similar manner to a comparable New Zealand-resident business.

Non-resident businesses will, however, only be able to register if they are either registered for a consumption tax (such as GST, or value added tax in Europe) in the jurisdiction of which they are resident. If they reside in a country that does not have a consumption tax, the non-resident will need to satisfy the Commissioner that they carry on a taxable activity overseas with a turnover exceeding $60,000 per annum.

Other provisions are also being proposed to protect the revenue base from fraudulent refunds. These provisions include the Commissioner having the ability to deregister a non-resident in certain circumstances.

Application date

The amendments apply from 1 April 2014.

Key features

Registration

Under section 51(3) of the GST Act, the Commissioner has the discretion to register any person that carries on a taxable activity, even if their taxable supplies are below the compulsory registration threshold. This section currently applies to both residents and non-residents that carry on a taxable activity.

New section 54B will apply to a non-resident that wishes to voluntarily register in New Zealand. New section 20(3L) will allow non-residents to claim input deductions without the need to be making taxable supplies in New Zealand.

Section 54B sets out that a non-resident can only register if they satisfy the Commissioner that:

• they are registered for a consumption tax in the jurisdiction they are resident in. This would include, for example, GST in other jurisdictions or VAT in Europe; or
• if they are resident in a jurisdiction that does not have a consumption tax, they carry on a taxable activity in another country that would require them to register for GST if that activity were carried out in New Zealand.

This means the person must be able to demonstrate that they make taxable supplies of greater than the $60,000 registration threshold. The second criterion is necessary because not every country operates a GST or similar consumption tax. To protect the tax base, non-resident businesses who wish to register in New Zealand should have a significant offshore business presence.

In either case, the person must satisfy the Commissioner that their input tax in New Zealand for the first period of registration will be more than $500. This measure recognises that the registration and return processing procedures require the Commissioner to incur administration costs. Having a minimum input tax amount, removes the ability to claim very small amounts, which are disproportionate to the administrative costs of processing the claim.

There is a further limitation on a non-resident’s ability to register, proposed in section 54B(1)(c). This section provides that a non-resident is ineligible to register if they on-supply services when it is reasonably foreseeable that those services will be received in New Zealand by a non-registered person. An example of this is tourism, where tourism products (such as coach tours and accommodation) are received in New Zealand by individual non-residents who are not themselves registered for GST. Given that these products are ultimately enjoyed in New Zealand by individuals, the policy is that GST applies to them. Although allowing registration would require the non-resident business to charge GST to the tourist, this would be difficult to enforce.

For migrating registered persons, section 54B(2) will require the person to treat the day of change of residency status as the end of a taxable period. This means that returns filed by the person will be either as a resident or a non-resident, with no requirement for a return reflecting both statuses.

Groups of companies

As a supplement to the registration rules, proposed section 55(1B) sets out that a GST group established after the date of introduction of this bill cannot include both resident and non-resident members. This is a departure from the current rules, but is considered necessary as a base protection measure. When a group comprises both resident and non-resident members, the input tax attributable to the activities of the non-resident members cannot be distinguished in the amalgamated return provided by the representative member. A tax advantage could be provided through offsetting input claims of a non-resident with the output liabilities of resident group members, which would be more apparent for non-residents with no economic activity in New Zealand. It would be preferable from a tax administration perspective to have some visibility on the level of input deductions being claimed by non-residents so that any tax base risk can be more readily identified. Having this change apply only from the date of introduction will save existing groups from having to separate.

If a cross-border group does form after the date of introduction, sections 55(9) and (10) will require it to split into its resident and non-resident components – with the Commissioner having the ability to limit the group to its resident members if such separation is not volunteered.

Claiming deductions

New section 20(3L) will provide the main deduction rule for registered non-residents. It effectively mirrors the main deduction rule in subsection (3C), but clarifies that the non-resident’s ability to claim deductions is based on an assumption that all of their supplies were both made and received in New Zealand. This means that, for example, if a person makes worldwide supplies, some of which would be taxable and some exempt under New Zealand’s domestic GST system, their ability to deduct will depend on the ratio of their taxable supplies. Such a system ensures that the non-resident is placed in roughly the same position as a New Zealand resident that provided a similar range of services.

A proposed amendment to section 20(3K) will also clarify that the input deduction rules that apply to non-profit bodies are limited to New Zealand resident non-profit bodies.

Registration status and administration

It is proposed that non-residents will only be able to be registered on a payments basis. New sections 19(1A) and 19A(1)(iv) will facilitate this. The provision is designed to limit the possibility of a non-resident claiming a refund on the basis of invoices provided by registered residents on which no payment is made and, therefore, no GST is paid. This is a tax base protection measure.
Similarly, proposed section 46(1B) will extend the timeframes for the Commissioner under section 46 from 15 days (as applies to residents) to 90 days for non-residents in certain circumstances. These are:

• issuing a refund;
• requesting further information; and
• investigating the circumstances of a return.

Extending the timeframes in these circumstances will afford the Commissioner more time to establish that a refund claim by a non-resident is valid. The extended period will allow the Commissioner time to establish contact with and engage the non-resident – recognising that there could be language barriers and other unforeseen delays in this communication. Where there is a more significant risk, it may also allow the Commissioner time to reconcile the claim with the GST return of the counter-party to a particular transaction.

A related change to section 120C of the Tax Administration Act 1994 also switches off use-of-money interest for the purposes of providing GST refunds to non-residents.

No special rules are proposed for the taxable periods of non-residents, so they will be registered on a monthly, two-monthly or six-monthly basis, as appropriate.

Cancellation of registration

Currently, section 52(7) allows the Commissioner to cancel the registration of a non-resident if they are not carrying out a taxable activity in New Zealand. This rule is incompatible with the aims of the changes in the bill, so this section is being repealed and replaced with a specific set of deregistration rules for non-residents in section 54C.

The Commissioner may cancel the registration of a non-resident if:

• The Commissioner is satisfied that the person no longer meets the requirements of section 54B(1)(a). This means that if the Commissioner is satisfied that the person is no longer registered for consumption tax in their resident jurisdiction or does not make taxable supplies of greater than the New Zealand registration threshold (as applicable), their registration may be cancelled.
• The non-resident fails to file a return, or files late returns for three consecutive periods. If a person is deregistered under this rule, they are deregistered effective from the first day of the third period and cannot apply for re-registration for five years. This exclusion also applies to non-resident associated persons to avoid effective re-registration under another name.
• The non-resident registers between the date of introduction of this bill and 1 April 2014, or migrates offshore at a later date, and does not satisfy the Commissioner that they are entitled to remain registered. This is to ensure consistent treatment across all non-residents that register after the announcement of the proposed rules.

Effect of cessation of registration

New section 5(3B) will apply to non-residents that cease to be registered. Similar to the general deregistration rule in section 5(3), this provides that output tax is payable on the relevant assets of the person’s taxable activity. However, section 5(3B) recognises that it would not be appropriate to tax the worldwide assets of a non-resident at the time of deregistration. Instead, it provides that only goods present in New Zealand and services that would be supplied in New Zealand at the time of deregistration are subject to the deemed supply rules.