Chapter 6 - Requirement for suppliers to register

6.1 This chapter discusses the proposed registration threshold that could be applied to offshore suppliers, and situations when an electronic marketplace might be required to register instead of the principal supplier.

Registration threshold

6.2 Currently, domestic businesses are required to register and return GST if their turnover exceeds $60,000 in a 12-month period. They are also able to voluntarily register if their turnover falls below that amount. While the registration threshold could be considered as an exception to New Zealand’s broad-based GST policy, as some suppliers would not be required to register and return GST, it is intended to reduce compliance costs for very small businesses.

6.3 For similar reasons, a registration threshold is also likely to be favoured by offshore suppliers and could be either based on supplies to New Zealand residents or on worldwide supplies.

6.4 The main benefit of a registration threshold for offshore suppliers is that it will lower the compliance costs for small suppliers and suppliers that do not supply many services to New Zealand residents. For some suppliers, the compliance costs of registering and returning GST may outweigh the revenue collected in supplying services to New Zealand residents. As far as possible, given their objectives, any new rules should be designed in a way that does not pose a barrier to trade with New Zealand.

6.5 There are, however, some disadvantages with a threshold that is too high:

• It would be possible for some offshore suppliers to break up their supplies into different entities in order to stay under the registration threshold. This behaviour is likely to be easily identified in the domestic context but may be more difficult to identify abroad.
• If a non-resident is making supplies into New Zealand, it is likely that this is just part of their global market. If each country was to have a high registration threshold, this may mean some reasonably large businesses (in terms of their global supplies) could escape having to register anywhere. This may result in them having a competitive advantage over similarly sized domestic businesses and larger international businesses.
• Our proposals are intended to ensure that domestic suppliers compete on a level playing field with offshore suppliers. However, a threshold based on that which applies to domestic suppliers may not necessarily result in competitive neutrality. This is because in some countries offshore suppliers may not incur GST or VAT, or will be able to claim any GST or VAT costs back in their home country in the process of exporting services to New Zealand residents. In contrast, domestic businesses below the registration threshold that are not registered are not able to claim back their GST costs. Similarly, domestic suppliers that have voluntarily registered would be able to claim back GST costs but would also be required to return GST on any supplies they make.

6.6 The countries that have introduced offshore supplier registration systems have typically adopted low or nil thresholds. European Union countries have no thresholds, South Africa has a threshold of R50,000 (around NZD$6,000), and Norway has a threshold of NOK50,000 (around NZD$9,000).

6.7 Submissions are sought on the level of the registration threshold, specifically whether a lower threshold (such as NZD$10,000) or a threshold based on the domestic registration threshold (NZD$60,000) is preferred.

6.8 If business-to-business supplies are excluded from the proposed rules, submissions are also sought on whether supplies to New Zealand-resident businesses should count towards this threshold.

Electronic marketplace

6.9 In some instances, offshore suppliers would not directly supply services to their customers. Instead they may use an electronic marketplace to market and sell their services or intangibles. For example, an app developer may make their app available on a mobile app store. In these situations, it is proposed that the electronic marketplace would be treated as the supplier and be required to register.

6.10 The electronic marketplace is generally in a better position to register and return GST on supplies compared with the underlying supplier. Typically, the electronic marketplace would be larger, better resourced and have a closer relationship with the customer. Requiring the electronic marketplace to register may also reduce compliance costs, as potentially, a large number of smaller suppliers may not be required to register. It is anticipated that the marketplace and the underlying supplier will have commercial arrangements in place that could take any GST costs into account.

6.11 Requiring intermediaries to register for GST in this context has been a relatively recent international development. Australia announced proposed rules that would require an operator of an “electronic distribution service” to register and return the GST. This will occur when the operator controls any of the key elements of the supply such as delivery, charging or terms and conditions. These proposed rules are broadly modelled on similar rules currently in operation in the European Union and Norway.

6.12 To ensure these rules are easily applied in practice, it is important to clearly define the circumstances in which the electronic marketplace would be required to register, and therefore, the underlying supplier would not be required to register. Without this clarity there is a risk that both parties may register or fail to register.

6.13 It is proposed that an electronic marketplace would be required to register when customers would normally consider the marketplace to be the supplier, and this is reflected in the contractual arrangements between the parties. This is likely to be when the marketplace:

• authorises the charge to the customer;
• authorises delivery to the customer; or
• sets the terms and conditions of the transaction.

6.14 It would be expected that an offshore supplier simply using a payment service provider to organise the payment from the customer would still be required to register. In this situation, the payment service provider would have a limited role in the supply chain. However, if for example an offshore supplier listed services or intangibles on a third-party website and that website interacted directly with the customer, and organised payment and delivery for any purchases, that website would be required to register, charge and return GST, instead of the principal supplier.

6.15 It is important to note however that the underlying suppliers may still be required to register in relation to supplies to New Zealand residents not connected with the electronic marketplace.