In principle, Goods and Services Tax (GST) should apply to all consumption that occurs in New Zealand, as this ensures that the system is fair, efficient and simple. Under the current rules, however, GST is not typically collected on cross-border services and intangibles that are purchased from offshore suppliers.
When GST was introduced in 1986, few New Zealand consumers purchased offshore services, and online digital products were not available. At that time, the compliance and administrative costs that would have been involved in taxing imported services outweighed the benefits of taxation.
The growth of e-commerce means the volume of services and intangibles on which GST is not collected is becoming increasingly significant. 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 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.
The new rules would apply GST to a broad range of “remote” services, rather than targeting the rules at specific digital services. This avoids complexity in the design of the rules and is more consistent with the broad base of New Zealand’s GST system. A “remote” service is defined as a “service where, at the time of the performance of the service, there is no necessary connection between the physical location of the recipient and the place of physical performance.” Non-digital services, such as consulting, accounting and legal services, will be subject to the proposed rules when they are supplied as remote services.
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. Furthermore, offshore suppliers will only be required to register and return GST when their supplies of remote services to New Zealand resident consumers exceed NZ$60,000 in a 12-month period. This is consistent with the registration threshold that applies to domestic suppliers.
The amendments are intended to maintain the broad base of New Zealand’s GST system and to create a level playing field between domestic and offshore suppliers of services and intangibles. The effect will be to reduce the extent to which differences in GST treatment distort consumers’ purchasing decisions.
Non-collection of GST on cross-border services and intangibles is an international challenge faced by countries that have a GST or Value Added Tax (VAT) system. The Organisation for Economic Co-operation and Development (OECD) has released guidelines that establish an international set of principles for determining when countries should have the right to tax these supplies.
The guidelines suggest that, for remotely provided services and intangibles, the consumer’s usual place of residence is the predominant test for determining which country has the right to tax. They also suggest that offshore suppliers could be required to register and return the GST on remote supplies to consumers.
The proposed amendments broadly follow the OECD 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. Australia has announced plans to introduce similar rules that will apply from 1 July 2017.
Other features of the proposed rules include:
- Supplies of remote services by non-resident suppliers to New Zealand GST-registered businesses will not be subject to GST unless the supplier and recipient agree otherwise, in which case the supply will be zero-rated (taxed at a rate of zero percent). The supplier would then be able to claim back any New Zealand GST costs incurred in making the zero-rated supplies.
- 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). The Commissioner of Inland Revenue will be able to prescribe an alternative method of determining whether a customer is resident, in circumstances when sufficient information is not commercially available to apply the test.
- Offshore suppliers will be required to presume that a New Zealand-resident customer is not a GST-registered business unless the customer has provided their GST registration number, New Zealand Business Number or notified their status as a registered business. The Commissioner of Inland Revenue is also able to agree to an alternative method of determining whether the supply is made to a GST-registered person.
- If a GST-registered business is inadvertently charged GST, it will have to seek a refund from the non-resident supplier. However, if the payment for the supply (including GST) is $1,000 or less, a non-resident supplier will have the option to provide a tax invoice to the purchaser to allow them to claim a deduction, rather than to refund the GST charged.
- When certain conditions are satisfied, an operator of an electronic marketplace (such as an app store) will be required to register and return GST on supplies made through the marketplace instead of the underlying supplier.
- General insurance and gambling services are subject to special GST rules that apply GST on a net basis. Amendments will extend and modify these rules to apply where non-resident suppliers provide these services to New Zealand-resident consumers.
- The Commissioner of Inland Revenue will have the discretion to require a person to register and pay the GST in cases 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.
- A simplified “pay-only” registration system should be made available to offshore suppliers that are only required to return GST and who do not have any New Zealand GST costs to claim back.
- For the period from 1 October 2016 to 31 March 2017, non-resident suppliers of remote services will have a default taxable period of six months (or an optional taxable period of two months). After this transitional period, these suppliers will have quarterly taxable periods.
- A new rule will prevent double taxation from arising on supplies of remote services performed in New Zealand to a non-resident consumer, by allowing a deduction against the supplier’s liability for New Zealand GST to the extent that the supply has already been taxed in another jurisdiction.
The proposed amendments follow proposals outlined in the discussion document GST: Cross-border services, intangibles, and goods released in August 2015. Submissions generally supported the proposals in the discussion document. The new rules will apply to supplies made after 1 October 2016. All references are to the Goods and Services Tax Act 1985 (GST Act) unless otherwise specified.