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Inland Revenue

Tax Policy

Chapter 2 - Background

2.1 In principle, GST should apply evenly to all consumption that occurs within New Zealand as this helps to ensure GST is fair, efficient and simple. However, GST is not typically collected on cross-border services and intangibles (including internet downloads and online services) purchased from offshore websites.

2.2 The growth in online purchases means that the volume of imported services on which GST is not collected is becoming increasingly significant. This raises the question of whether the existing tax rules will remain suitable and sustainable in the future.

Implications of non-collection

2.3 In general, the growing ability to easily purchase services online has benefited New Zealand. It has given consumers greater access to a wider range of services from around the world and increased competition in the domestic retail market. Increased competition tends to encourage the efficient use of resources, which can result in lower prices, greater innovation, and better quality goods and services for consumers.

2.4 Despite these benefits, when GST does not apply evenly, it may bias consumer and business decisions, which could lead to unfair and inefficient outcomes. Many domestic providers feel the current tax settings place them at an unfair disadvantage compared with offshore businesses supplying products with no GST added to the price. This is having the greatest impact on sellers that provide services that are similar to services provided from offshore (or substitutable products).

2.5 There are a number of reasons why New Zealand consumers purchase services online from offshore, such as overall cheaper prices, product availability and convenience. However, ideally, the tax treatment should not be a factor in consumers’ purchasing decisions.

2.6 Furthermore, the growing e-commerce market means the amount of GST not being collected on services, intangibles and goods supplied from offshore, but consumed in New Zealand, is increasing. It is likely that around $180 million of GST is forgone on cross-border services, intangibles and goods per year (of which about $40 million relates to services and intangibles). The growth of imported goods and services is a relatively recent development and the amount is expected to continue to grow – estimates vary but the growth could be around 10 percent a year.

2.7 Government revenues pay for important public services such as education, healthcare, roads and superannuation. Given that 18 percent of total Government revenue is collected from GST,[1] an increasing gap in that revenue base is a concern for the Government. A shortfall in GST revenue may eventually have to be paid for by tax increases or spending cuts.

New Zealand’s GST system

2.8 New Zealand’s GST is a “consumption tax”. Consumption taxes seek to tax consumer spending on goods and services. The country that has the right to tax this consumer spending is generally the country in which the good or service is consumed. This is known as the “destination principle”.

2.9 Conversely, goods and services that are exported, and therefore consumed offshore, are generally untaxed (under GST, exports are zero-rated, meaning GST is charged at a rate of zero percent and businesses can claim GST back on their inputs). Allowing exporters to claim back GST on their inputs ensures that GST is not a cost on business or offshore consumers.

2.10 If countries apply the destination principle and also recognise that GST is a tax on consumers not businesses, double taxation and non-taxation in cross-border trade should largely be averted.

2.11 New Zealand’s GST system is regarded throughout the world as a model consumption tax. This is because our GST system is very broad-based – it applies to a wide range of goods and services and there are very few exemptions. When GST applies broadly it ensures that consumer decisions to purchase particular goods or services are not influenced or driven by tax considerations. This improves its efficiency and fairness, and provides simplicity.

2.12 Despite New Zealand’s broad-based GST system, GST does not generally apply to cross-border services and intangibles consumed in New Zealand. This is contrary to the destination principle and means that these services are not taxed in any country.

2.13 The Goods and Services Tax Act 1985 (the GST Act) defines “services” as anything other than goods or money, and therefore includes intangibles like digital content. GST generally only applies to services which are:

  • performed by New Zealand tax residents;[2] or
  • supplied by a non-resident, but physically performed in New Zealand.[3]

2.14 When GST was introduced in 1986, few New Zealand consumers purchased services from offshore, and online digital products were not yet available. At that time, the compliance and administrative costs involved in taxing cross-border services potentially outweighed the benefits of taxation.

2.15 Since the introduction of GST, steps have been taken to apply GST to some cross-border services consumed in New Zealand:

  • Since 2003, offshore suppliers of telecommunications services have been required to return GST on telecommunications services initiated by consumers in New Zealand.[4] Note, however, that the definition of “telecommunications services” excludes the content of the telecommunication so would exclude services such as internet downloads that are delivered electronically.[5]
  • Since 2005, the GST reverse charge was made applicable to imported services by businesses making exempt supplies and other non-taxable supplies. A reverse charge treats the purchaser as having made the supply and therefore being liable for the GST. The reverse charge also applies to unregistered persons who acquire imported services that bring them within the $60,000 taxable supplies threshold for registration.

International developments

2.16 The OECD work on GST and cross-border services and intangibles is connected with the work on “base erosion and profit shifting” (BEPS). BEPS refers to tax planning strategies employed by multinational companies that exploit gaps and mismatches in international tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.

2.17 In the consumption tax context, the focus is on which country has the right to impose consumption tax on imported goods and services. In the case of goods, the place of consumption will be clear – the consumption occurs in the country of import.

2.18 There is less certainty when applying GST to cross-border services and intangibles supplied remotely. In many cases it is not clear where the consumption occurs and therefore which country has the taxing right. For example, a New Zealand resident could purchase and download a movie while overseas on holiday. Without international consensus on taxing rights, it is possible that the download could be taxed in New Zealand, the country where the download took place, neither or both.

2.19 The OECD has been working on a set of guidelines addressing these issues of double taxation and non-taxation that may arise from inconsistencies in the application of VAT/GST to international trade. The first stage considered VAT-neutrality and place of taxation rules for cross-border business-to-business supplies of services and intangibles. These guidelines have now been finalised and the OECD recommended that the country in which the business customer is located has the right to tax.

2.20 New Zealand adopted this approach in 2014 with the introduction of rules governing when a non-resident business can register for GST and claim input tax deductions for GST charged in New Zealand. These rules ensure GST is neutral for cross-border business-to-business supplies in the same way as for domestic businesses.

2.21 As noted in Chapter 1, the OECD is developing guidelines that establish international best practice for determining taxing rights in regard to cross-border business-to-consumer supplies of services and intangibles. The draft business-to-consumer guidelines can be found at (PDF 185 KB)

2.22 The draft business-to-consumer guidelines broadly divide cross-border services into “on-the-spot” services and “remote” services. In relation to remote services, the draft suggests the consumer’s usual place of residence as the predominant test for determining where the consumption occurs. It also suggests requiring offshore suppliers of services to register in the country of consumption as a suitable method of taxing these supplies.

2.23 The offshore supplier registration model has already been adopted for cross-border services and intangibles by the European Union, and a number of countries including Norway, Switzerland, South Africa, and will be followed by Japan and South Korea. The countries that have implemented a system report some success in collecting the GST/VAT.

2.24 Australia has also recently announced measures to apply GST to cross-border services and intangibles from 1 July 2017. Following consultation, the measures will apply to a broad range of services and intangibles received by Australian-resident consumers.

2.25 For more information on how other countries tax, or propose to tax, cross-border services and intangibles, see the attached appendix.


[1] A Snapshot of the 2014 Financial Statements of the Government.

[2] Section 8(2) of the GST Act – Supply in New Zealand.

[3] Section 8(3)(b) of the GST Act – Deemed supply in New Zealand by non-resident.

[4] See section 8(6) of the GST Act. Assuming they are registered for GST or are required to register for GST because they have more than $60,000 of supplies to New Zealand customers.

[5] The definition of telecommunications services in the GST Act under section 2 states that telecommunications services means the transmission, emission or reception, and the transfer or assignment of the right to use capacity for the transmission, emission or reception, of signals, writing, images, sounds or information of any kind by wire, cable, radio, optical or other electromagnetic system, or by a similar technical system, and includes access to global information networks but does not include the content of the telecommunication.