Chapter 3 - Low-value imported goods

3.1 The non-collection of GST on low-value imported goods raises similar concerns as with cross-border services and intangibles. In particular, domestic suppliers of goods are concerned they are at a competitive disadvantage compared with offshore suppliers that are able to transport low-value goods directly to their customers without the imposition of GST.

3.2 Ideally, GST should be collected on all imported goods, as these goods are likely to be consumed in New Zealand. However, New Zealand and other countries apply de minimis thresholds below which no duty, including GST, is collected on imported goods. De minimis thresholds are applied to facilitate the flow of goods and to ensure that the cost of collecting GST on low-value goods does not outweigh the benefits of doing so.

3.3 The growth of e-commerce and the practice of supplying goods directly to customers have meant that the volume of low-value goods imported by final consumers has significantly increased. Given the nature of the current methods of collecting GST on imported goods, the growing volume has meant the cost of collecting GST on these goods, and the GST revenue forgone, have both increased.

3.4 Since customs authorities, including New Zealand’s, apply similar processes for collecting GST/VAT on imported goods, the high cost of collection is an international challenge. Many countries are seeking lower cost methods of collecting GST/VAT on imported goods, however, no country has yet developed a low-cost alternative to traditional collection systems.

3.5 While low-value imported goods are not considered in the OECD draft guidelines (discussed in the previous chapter), the OECD does recognise the impact of the growth of e-commerce is having on the volume of imported low-value goods. In particular, the administrative costs of collecting GST on these goods and competitive distortions de minimis thresholds may create are recognised.[6]

3.6 The Government is engaging in international discussions about lowering the cost of collecting GST on imported goods to determine whether any developments have the potential to lower the cost of collecting GST in New Zealand.

3.7 This document outlines current processes for collecting GST and tariffs on low-value imported goods, and the work that the New Zealand Customs Service (Customs) has underway to look at how processes might shift over time. Readers with an interest in the collection of GST on low-value imported goods and the de minimis are invited to include concerns about this issue in their submission. This document is the first step of a wider review of the GST treatment of imported goods and it is expected that there will be further opportunity to make submissions in a subsequent consultation paper, specifically focusing on the GST treatment of low-value imported goods.

Current imported goods rules

3.8 GST on imported goods is collected by Customs at the border. However, GST is not collected if the total duty value (including GST, tariffs and other duties) is less than $60. This is known as the “de minimis” threshold.

3.9 Depending on freight costs, the $60 de minimis threshold can roughly equate to a parcel worth $400 if GST is the only duty applying. It can equate to a parcel with a much lower value when tariff duty applies or the freight and insurance costs are high. A 10 percent tariff duty applies to a range of goods, including some apparel and footwear.

3.10 The de minimis does not apply to shipments of alcohol or tobacco products.

3.11 Customs has an online calculator by which people can estimate how much duty (including GST) they may need to pay. The calculator can be found using the link below: http://www.whatsmyduty.org.nz/

3.12 New Zealand is required to have a de minimis threshold to comply with international obligations.[7] The rationale behind the de minimis is to facilitate trade and achieve a balance between the cost of collection and the revenue received. In the New Zealand context, the de minimis is set at a level under which it is estimated that the costs of collecting the duty begin to exceed the revenue the duty generates.

3.13 While collecting revenue for the Government, Customs looks to ensure that the flow of goods across the border remains as smooth and uninterrupted as possible, while still managing the risks that these goods may pose to our borders. Risks include the entry of banned or prohibited items such as drugs or objectionable material.
Government consideration of the cost of collection

3.14 The Government is looking at how the collection of GST on low-value imported goods can be improved. In particular, the Minister of Customs has asked Customs to report back by October this year on:

• options to strengthen and streamline GST collection on low-value goods while maintaining current levels of risk assessment;
• a recalculation of the future costs of collecting GST on low-value goods; and
• options to change the level of the de minimis and simplify it.

3.15 Following this report, a consultation document is anticipated to be released that will seek public feedback on options to improve the collection of GST on low-value goods, with a view to making changes to the current system of collecting GST on these goods. This could also look at the de minimis. Below is a summary of how current collection systems work and how these could be strengthened in the near future.

Existing collection systems

3.16 The most common approach for collecting GST on imported goods internationally is assessment and collection by government customs authorities. This may be because GST/VAT collection by customs authorities complements their roles in processing and inspecting goods for border security purposes and in applying other duties such as tariffs (where applicable). The customs authority calculates the GST (and other duties such as tariffs) on goods entering the country and then collects the GST from the recipient of the good.

3.17 New Zealand does have elements of this approach depending on whether goods are sent via the courier or postal stream. In regard to the courier stream, courier organisations collect GST on the goods they handle and remit it to Customs. Whereas, New Zealand Post bills recipients for the GST owing on postal parcels on behalf of Customs, which is then either paid directly to Customs or via a broker. Manual processing post-border is expensive and delays delivery. New Zealand Post is now also operating a model closer to the courier approach with their YouShop business stream.

3.18 One barrier to developing more cost-effective GST collection systems for imported goods is that, unlike goods that arrive by couriers, electronic information is not currently supplied in relation to most postal mail packages or is not supplied in a format that would enable automated risk assessment and revenue collection. The information provided on mail packages and its format is set by an international organisation known as the Universal Postal Union (UPU).

3.19 Since customs authorities around the world apply similar processes for collecting GST/VAT, and are under similar information constraints, reducing the cost of processing postal parcels is an international challenge.

3.20 The UPU is currently considering ways of providing advanced electronic information on postal consignments to customs administrations before the goods arrive at the border. Advanced electronic information is being considered mainly for border security purposes. However, the receipt of this information could also enable more streamlined GST/VAT collection processes to take place before the good’s arrival.

3.21 If improved mechanisms for electronic data transfer on the mail stream can be implemented, New Zealand Post’s business model could shift to more closely resemble the courier business model. Customs and New Zealand Post are exploring what this might mean in the future and looking at how this approach might be progressed.

Changes to the de minimis threshold

3.22 Some New Zealand businesses have requested that the Government reduce the current level of the de minimis threshold to reduce the competitive distortions it creates. As a result, Customs has been asked to look at options for simplifying and changing the level of the threshold, with a report to Ministers later in the year. This is anticipated to be followed by public consultation.

3.23 In providing this advice, the impact of additional costs for consumers (for example, brokerage fees) and the compliance implications for courier companies and New Zealand Post will need to be taken into consideration. So too will factors such as the potential increased revenue relative to the costs of collection, and the possible economic benefits for the New Zealand economy.

Potential future changes to collection mechanisms

3.24 In addition to strengthening or streamlining current collection mechanisms, other collection mechanisms will need to be developed.

3.25 There has been some interest internationally in whether offshore suppliers could be required to return GST/VAT on imported goods given the success of offshore supplier registration models in relation to services and intangibles, in particular the success of the “one-stop-shop” registration systems operating in Europe.

3.26 Given that this document is proposing that offshore suppliers be required to register and return GST in relation to services and intangibles, it is currently the Government’s intention to align, where possible, the collection of GST on imported goods with the proposals in the paper relating to the collection of cross-border services and intangibles. Electronic marketplaces supplying goods could also be required to register and return the GST and tariffs as suggested for services and intangibles.

3.27 There are inherent advantages and efficiencies with applying similar systems to both services and goods, particularly for those suppliers that sell both services and goods. However, we are not aware of any country having yet applied the offshore supplier registration model to low-value imported goods and, therefore, the success of its application to goods is currently uncertain.

3.28 Another option could be for New Zealand consumers to voluntarily pay the tax ahead of goods arriving in the country. However, self-assessment approaches applied in other countries have typically resulted in low compliance rates.

3.29 Looking ahead, it would appear that a combination of approaches to collecting GST would likely be required. Further work is also required to determine the viability of the options and whether they would in fact lower the cost of collection. Some key issues to be resolved are:

• the extent to which the goods could be traced in a way that allows Customs, courier companies or New Zealand Post to be assured that the revenue has been collected, without a significant increase in administrative costs;
• the extent to which administrative changes would be required for current government information technology systems;
• how information could be shared between Inland Revenue and Customs, where GST on the goods is collected by GST-registered suppliers; and
• the willingness of intermediaries – such as offshore suppliers of low-value goods to collect the tax.

3.30 As previously mentioned, readers with an interest in the collection of GST on low-value imported goods and the de minimis are invited to submit on this issue. However, it is expected that there will be further opportunity to make submissions in a subsequent consultation paper, specifically focusing on the GST treatment of low-value imported goods.

[6] The OECD, Addressing the Tax Challenges of the Digital Economy.

[7] Protocol of Amendment to the International Convention on the Simplification and Harmonization of Customs Procedures.