GST: Cross-border business-to-business neutrality
Clauses 91 and 92
(Corporate Taxpayers Group, CTC Aviation, Deloitte, Ernst & Young, KPMG, New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)
The proposal to prevent residents from forming GST groups with non-residents should not go ahead. (Corporate Taxpayers Group, CTC Aviation, Deloitte, Ernst & Young, KPMG, New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)
As an alternative, non-residents that are required to be registered should be allowed to group. (CTC Aviation)
The proposed rule that allows the disbanding of current groups should be clarified so that it only applies to groups formed after introduction. (CTC Aviation)
The bill proposes to prevent the establishment of cross-border groups to allow Inland Revenue to accurately assess the level of refunds paid to non-residents. If cross-border groups were allowed, when a representative member filed a GST return on behalf of the group, it would be possible for what are effectively GST refunds to non-residents to be “masked” by the activities of a broader group that included New Zealand residents. Grouping with a New Zealand resident could also be used by non-residents as a method of accounting for GST on an invoice basis – a basis that is more susceptible to fraud because GST refunds are provided on invoices issued, rather than cash paid.
However, there are sometimes legitimate reasons for forming cross-border groups and officials accept that the changes should not impose undue barriers in the way of standard business arrangements.
Officials consider there is a solution that will allow for the formation of cross-border groups but still provide an adequate degree of protection to the revenue base. The suggested changes should affect not only cross-border grouping, but provide more clarity around the scope of the rules more generally.
Officials therefore recommend that clauses 91 and 92 be amended so that:
- Only non-residents that make no taxable supplies in New Zealand can register for GST under proposed section 54B.
- Non-residents that make taxable supplies in New Zealand under the compulsory registration threshold would not be able to use section 54B but would be able to voluntarily register under the existing registration provisions. This voluntary registration option would also apply to a non-resident that either did or did not make taxable supplies and wished to form a group with companies that made taxable supplies.
- If a non-resident registered under section 54B starts making taxable supplies, they will be treated as being registered under the existing “domestic” rules.
This would give a non-resident the option of either registering under section 54B or joining a group with a New Zealand resident and that group would be subject to the “standard” rules. The advantage of this solution is that non-residents that chose to group-register with a New Zealand company would have to show that any input deductions claimed were linked to taxable supplies made in New Zealand (rather than their worldwide business) in order to access refunds. This is consistent with the current situation and officials do not consider there is a significant revenue risk attached to it. On the flip side, the solution still allows non-residents in a “pure” refund position to register under the proposed rules and claim input deductions based on their worldwide supplies.
Non-residents registered under proposed section 54B would still only be able to group-register with other companies registered under that section (in other words, form wholly non-resident groups).
This solution has been discussed with representatives of Deloitte and the Corporate Taxpayers Group. Both agree it strikes a reasonable balance.
By recommending the main submission be accepted, the concerns raised by the secondary submissions are also addressed.
That the submissions be accepted.
Issue: Registration rules as a code
(Ernst & Young)
The word “only” in proposed section 54B(1) should be deleted because it reads as a code for all voluntary registrations of non-residents.
Officials consider the registration criteria rules should be a code, subject to officials’ recommendation on the previous issue. The consequence of the recommendation is that a non-resident that makes no taxable supplies in New Zealand should only be able to register under the proposed rules. Non-residents making taxable supplies will be able to continue to voluntarily register.
That the submission be declined on the basis that, if previous officials’ recommendations are accepted, having the rules act as a code provides the right outcome.
Issue: Relationship with current rules
Further consideration should be given to how the existing GST rules and proposed registration rules should work in tandem. In particular, an exclusion similar to that in proposed section 54B(1)(c) should be introduced in relation to goods.
If the Committee accepts the recommendation to clarify the scope of the proposed rules, those changes would address the concerns in this submission. By applying different rules to non-residents making taxable supplies in New Zealand and those not making taxable supplies, it should be apparent where the dividing line between the two sets of rules is drawn. That being the case, no exclusion such as that suggested in the submission would be necessary.
That the submission be declined on the basis that, if officials’ previous recommendations are accepted, the right outcome should be achieved.
Issue: Cessation of registration
(Ernst & Young)
- Proposed section 5(3B) should not go ahead.
- Proposed paragraph 5(3B)(b) should be revised to apply only to services “forming part of the assets” or deleted.
- Section 10(7A) should refer to section 5(3B) so that market value rules apply.
Proposed section 5(3B) is intended to be concessionary. Without it, officials consider there is an argument that a non-resident that registered for GST and then deregistered would need to account for output tax on the value of all its worldwide assets. Clearly this would be an inequitable outcome. The purpose of proposed section 5(3B) is therefore to limit New Zealand’s taxing right to goods and services that logically form part of the non-resident’s New Zealand activities (if there are any).
However, officials agree there is scope for uncertainty regarding the proposed wording of paragraph (b). Output tax on services that have already been supplied in accordance with the time of supply rules should be returned, even though the non-resident will only be registered on a payments basis. We therefore consider that the services caught by this provision should be the services performed in New Zealand prior to deregistration.
Officials also agree that applying the market value rule in section 10(7A) to supplies treated as being made under proposed section 5(3B) is appropriate.
That submission 1 be declined, submission 2 be accepted in part, subject to officials’ comments, and submission 3 be accepted.
Issue: On-supply of services
(Ernst & Young)
Proposed section 54B(1)(c) should be clarified in its scope so that it refers to “the performance of services”, rather that the “a supply of services”. This would make it consistent with section 11A(2).
Officials agree that consistency between proposed section 54B(1)(c) and current section 11A(2) is desirable.
That the submission be accepted.
Issue: Input tax ratio
(PricewaterhouseCoopers, New Zealand Institute of Chartered Accountants)
Allowing input claims only to the extent of its taxable supplies is not practical in the case of larger businesses. (PricewaterhouseCoopers, New Zealand Institute of Chartered Accountants)
Either the restriction should not be introduced or the bill should include a safe-harbour recovery ratio of, say, 25%, which would apply unless the taxpayer can demonstrate that a higher ratio is appropriate. (New Zealand Institute of Chartered Accountants)
GST deductions should be calculated under the existing rules for GST recovery and based on actual supplies made by the non-resident business in New Zealand. (PricewaterhouseCoopers)
Claiming input deductions on the basis of worldwide supplies, as if all supplies were made and received in New Zealand, provides an appropriate outcome. Given the broad base of New Zealand’s GST system, it is anticipated that almost all industries outside the financial services sector would be entitled to claim on a near 100 percent basis. For those within the financial services sector, officials accept that compliance costs will be incurred. However, it is considered preferable to require estimates to be made, given any alternative may result in a non-resident financial services provider being in a more favourable position than a comparable New Zealand-resident business.
One way of providing some parity between resident and non-resident financial services providers would be to allow a rule that permitted a non-resident to agree a fair and reasonable apportionment method with the Commissioner of Inland Revenue. Resident financial service providers can make the type of arrangement under section 20(3E) of the GST Act, and officials consider that compliance costs for a non-resident financial service provider could be lowered by allowing a similar rule to be made available to them.
Although officials can see the attraction of a safe-harbour recover ratio, as suggested by NZICA, this has the potential to impose compliance costs on the vast majority of businesses that would have to displace the onus of proof to claim a higher ratio.
Basing input claims on the actual New Zealand supplies made would, in officials’ view, defeat the purpose of these rules. If claims could only be made on the basis of New Zealand supplies, a non-resident that made no supplies in New Zealand would not be able to access GST refunds.
That the submissions be accepted to the extent that a rule be introduced allowing non-resident financial service providers to agree an input ratio with the Commissioner.
Issue: Time period for refunds
(New Zealand Institute of Chartered Accountants)
The time period under proposed section 46(1B) should be reduced to 63 working days.
Officials consider the 90-day period to be appropriate. There is an increased fraud risk associated with providing refunds to non-residents. This risk exists because, unlike residents, Inland Revenue has limited ability to accurately track down and recover money from non-residents when a refund is released in error.
Having a longer timeframe for releasing refunds is considered preferable to having a shorter timeframe that the Commissioner may be more inclined to extend if doubts exist over the legitimacy of a claim. Officials consider that 90 days is a more realistic timeframe to allow the Commissioner to adopt a considered opinion on whether a refund will be released.
That the submission be declined.
Issue: Registration criteria
(New Zealand Law Society, Russell McVeagh)
There is a potential unintended gap in the registration criteria because it assumes all consumption taxes are as broad based as our GST. The words “if the country or territory in which the person is resident does not have a consumption tax”, should be removed from proposed subparagraph 54B(1)(ii) so the registration criteria in paragraph (1) operate on an either/or basis.
Officials do not agree that the two alternatives set out in proposed section 54B(1) should be on an either/or basis. The purpose behind the registration criteria more generally is that only legitimate businesses should be able to register for GST in New Zealand. Officials consider that a good proxy for “legitimacy” in this instance is the fact that the person has satisfied their “home” government that they should be registered for a comparable tax in that jurisdiction.
However, officials agree with the submission to the extent that there is a potential unintended gap in the wording. The issue is that the person may live in a jurisdiction that has a consumption tax, but not be required to register for that tax because their activities are outside the tax base. On this basis, officials consider the wording should be amended so that paragraph (ii) applies to a person that is resident in a jurisdiction that does not have a consumption tax, or has a consumption tax that does not apply to the activities of the person.
That the submission be accepted to the extent it refers to “an unintended gap between proposed paragraphs (i) and (ii)”, but otherwise declined.
Issue: Cancellation of registration
(New Zealand Law Society)
Proposed section 54C(3)(b) is too inflexible. It should either not proceed or, in the alternative, should provide for some flexibility by incorporating an Inland Revenue discretion.
Proposed section 54C is included to provide a disincentive for non-residents that fail to comply with their filing obligations. It does this by providing that a person who fails to file or files late returns for three consecutive periods is deregistered and cannot re-register for a period of five years. This five-year period also applies to non-resident associates of the person to prevent the rules being easily circumvented.
The submitter considers this would be inequitable in situations such as when the non-resident company is bought by another non-resident (the prohibition on registration would attach to the new owner), or if the management of the affected non-resident changed.
Officials consider that providing a Commissioner discretion on these matters could lead to uncertainty over how and if that discretion will be exercised, and requests for detailed guidance. Officials do not consider the potential inequities raised outweigh the desirability of having clear rules in this area that are difficult to avoid.
That the submission be declined.
Issue: Direct refund scheme
The proposed system to allow non-resident businesses to register for GST should be replaced with a direct refund scheme.
The options for enhancing cross-border business-to-business neutrality were canvassed in a Government discussion document released in August 2011: GST: Business-to-business neutrality across borders. In that document, one of the options discussed was a direct refund model. However, one clear disadvantage of that approach was the need for a new electronic system to manage the refunds. The Government therefore stated a preference for the system this bill seeks to implement – whereby non-resident businesses can register for New Zealand GST and claim input tax deductions in a way broadly comparable with a similar New Zealand-resident business. Submissions on the discussion document overwhelmingly agreed with the Government’s preference.
That the submission be declined.
Issue: GST on “tooling costs”
(BusinessNZ, Deloitte, PricewaterhouseCoopers, Corporate Taxpayers Group)
- This initiative should proceed. (BusinessNZ, Deloitte, PricewaterhouseCoopers, Corporate Taxpayers Group)
- The rule should be effective from date of enactment, rather than 1 April 2014. (Deloitte, PricewaterhouseCoopers, Corporate Taxpayers Group)
Officials consider these changes form a “package” of cross-border initiatives with the proposed registration system for non-residents mentioned above. For that reason, it is considered desirable for both rules to be effective from the same date.
That submission 1 be noted and submission 2 be declined.