Chapter 3 - Offshore supplier registration: scope of the rules

3.1 An offshore supplier registration system applies a different approach to the one currently in place for taxing low-value imported goods. It is still consistent with the destination principle underpinning New Zealand’s GST system but no de minimis for collecting GST is required.

3.2 Under the Goods and Services Tax Act 1985, supplies of goods by non-residents are treated as being supplied in New Zealand (and therefore subject to GST) if the goods are in New Zealand at the time of supply. If the good is outside New Zealand at the time of supply it is generally not subject to GST. The GST on these supplies is instead collected at the border unless it is valued at or below the customs de minimis (usually $400). The taxing point under the current approach is therefore at the border.

3.3 Under an offshore supplier registration system, the taxing point for imported goods valued at or below $400 would shift to the point of sale. This means that non-resident suppliers (referred to as offshore suppliers in this paper) would be required to register for GST if their total supplies (sales) of services and low-value goods to New Zealand consumers exceed the $60,000 registration threshold. A supply of a good by an offshore supplier would be treated as supplied in New Zealand if the good is to be delivered to a New Zealand address and the good is valued at or below $400.

3.4 Under this approach the offshore supplier would add GST to the price charged to the New Zealand consumer at the point of sale. This means offshore suppliers of low-value goods would be required to register and return GST in the same way as New Zealand suppliers. It is also consistent with the offshore supplier registration rules that were recently implemented for cross-border services and intangibles. This would ensure that physical goods and competing electronic services (such as physical books and e-books or DVDs and video streaming services) are subject to GST in the same way.

3.5 The Government is not proposing that the offshore supplier registration system would apply to goods that exceed $400. Above $400 Customs has existing processes to collect GST on imported goods (along with cost recovery charges and tariffs).

3.6 To enable the proposed changes the Customs de minimis would be changed to $400 based on the value of the goods imported. This would mean that cost recovery charges and tariffs would not be collected on imported goods valued at or below $400 once the offshore supplier registration system is implemented.

Goods included and excluded

3.7 The definition of “goods” in the Goods and Services Tax Act 1985 is very broad. “Goods” is defined as meaning all kinds of personal or real property; but it does not include choses in action, money or a product that is transmitted by means of wire, cable, radio, optical or other electromagnetic system or by means of a similar technical system.[15]

3.8 The term “low-value goods”, as used throughout this paper, refers to imported goods that have a value of $400 or less. The proposed rules will not apply to shipments of alcohol or tobacco products. The existing rules, including excise-equivalent duties and other charges that are required to be collected at the border, will continue to apply to these products.

3.9 It is proposed that the new rules would cover all other goods except those that are currently exempt or zero-rated. The main exception would be for supplies to New Zealand-registered businesses. This is discussed in more detail below.

Exempt and zero-rated goods

3.10 New Zealand has a very broad-based GST system, with very few exemptions. The main exemptions in the Goods and Services Tax Act 1985 relate to certain types of services, such as financial services and residential accommodation.[16] The only exemption that applies to goods that could be physically imported by consumers concerns supplies of “fine metal”.[17] It is unlikely that there would be very many individual consumers who would import fine metal with a value below $400; these supplies are more likely to be business-to-business and would most likely have a value above $400. However, where a consumer imports fine metal supplied by an offshore supplier with a value of $400 or less, it is proposed that these goods should remain exempt from New Zealand GST.

3.11 Having such limited exemptions and a single standard rate of GST (15%) should make it easier for offshore suppliers of goods to comply with the New Zealand GST system, compared with countries that have multiple exemptions or several different rates of VAT/GST.

Supplies of multiple low-value goods

3.12 When a consumer purchases multiple goods from a supplier, the supplier of the goods may bundle and ship these goods to consumers in one consignment or as individual consignments. The following rules outline how GST would apply to these multiple supplies.

Total value of the consignment is $400 or less

3.13 As a default rule, offshore suppliers would be required to collect and return GST if they supply a low-value good to a New Zealand consumer. This includes supplies of a single low-value good (valued at or below $400) or multiple low-value goods that total $400 or less in one transaction.

Total value of the consignment exceeds $400

3.14 The default rule also means that offshore suppliers would be required to collect and return GST on the supply of multiple low-value goods in a single transaction, even if the total transaction exceeds $400 in value.

3.15 As discussed earlier in this chapter, the rules would move the taxing point for goods valued at or below $400 from the border to the point of sale. Current processes would, therefore, continue to apply for goods shipped in consignments exceeding $400.

Preventing double-taxation

3.16 There may be situations when a consumer has purchased multiple goods from a supplier – either as part of one single transaction or several individual transactions – and then these goods are subsequently packaged together and consigned as one parcel with a value exceeding $400. Because the value of this consignment is above $400, that parcel would be processed at the border by Customs for revenue.

3.17 To prevent GST being paid twice on the low-value goods in that single consignment, it is proposed that the consumer would need to provide Customs with appropriate evidence that GST had already been paid on the low-value goods portion in that consignment. For example, the consumer[18] would retain a record of delivery duty paid or other evidence that GST was paid at the point of sale.

3.18 When GST had not already been paid by the offshore supplier (for example, because the offshore supplier was not registered for GST or had not charged GST), GST would continue to be collected at the border on all the goods in a consignment valued above $400.

3.19 In other cases, the consignment could involve a mix of goods on which GST had been already been charged by the offshore supplier (goods valued at or below $400) and goods where GST had not yet been charged (goods valued above $400). In these cases, the consumer could provide evidence to Customs for GST relief in relation to those goods on which GST had already been charged, but would still be required to pay GST on any other (previously untaxed) goods in the consignment.

Australia’s approach to supplies of multiple low-value goods

3.20 Australia’s approach to supplies of multiple low-value goods exceeding $1,000 is similar to this proposal. That is, offshore suppliers should charge GST at the point of sale. However, Australia also applies a “reasonable belief” exception. The exception means that if the supplier reasonably believes that the multiple goods will be grouped together and shipped in one consignment, GST can be charged at the border instead of by the offshore supplier. A supplier’s reasonable belief can be based on common industry or commercial practices.

3.21 The Government is interested in feedback from offshore suppliers about the proposed approach to supplies of multiple low-value goods. In particular, whether Australia’s “reasonable belief” exception should be incorporated into New Zealand’s proposed rule. For example, would the test be appropriate in situations when the supplier knows the goods will be shipped in a single consignment, because the supplier of the goods is also responsible for its shipping, or is informed by the person who organises the shipping that it will be consigned as a single parcel.

Returns and refunds

3.22 When a consumer imports goods from offshore on which GST has been charged by the supplier and sends the goods back, the consumer would be able to get the GST refunded by the supplier if the terms and conditions of the supply allow for returns and refunds.

3.23 Offshore suppliers would be able to adjust their output tax in a GST return, subsequent to refunding the customer, to take into account the overpaid GST. Consistent with the general rules for claiming input deductions under section 20 of the GST Act, these adjustments would, subject to existing exceptions, be required to be made within two years of the original supply.

Supplies to consumers and GST-registered businesses

3.24 The Government is proposing that only supplies of low-value goods by offshore businesses to New Zealand consumers would be covered by the offshore supplier registration system. Supplies to GST-registered businesses would be excluded unless the supplier chose to zero-rate the supply.

Identification of New Zealand consumers

3.25 The test for determining who is a New Zealand consumer under the proposals is not based on residence or tax residence.[19] Under the proposed rules, supplies are made to New Zealand consumers if the parcel is addressed to a New Zealand delivery address. Goods intended to be sent to a New Zealand delivery address are likely to be consumed in New Zealand. Therefore, consistent with the destination principle, these goods should be subject to GST.

Supplies to businesses excluded

3.26 Goods supplied to New Zealand GST-registered businesses (referred to as “business-to-business supplies”) would be excluded from the proposed rules. This approach is consistent with the rules that apply to suppliers of cross-border services.

3.27 From a revenue perspective, there would be little value in requiring offshore suppliers to charge GST on low-value goods to New Zealand businesses. This is because in most situations New Zealand businesses, if registered, would be able to claim back any GST they incur.

3.28 Excluding business-to-business supplies has a number of benefits:

• It may reduce the number of offshore suppliers that would be required to register (as many suppliers may only supply to GST-registered businesses), and therefore would reduce compliance costs.
• Tax invoice requirements could be relaxed for offshore suppliers because no New Zealand consumers charged with GST would be in a position to claim back the GST. Relaxed invoice requirements would lower compliance costs for offshore suppliers.
• There are fiscal risks associated with applying GST to business-to-business supplies, as less reputable offshore suppliers may purport to charge GST but not return the GST, and GST-registered New Zealand businesses would be able to claim the GST back in the normal manner.

3.29 There are, however, some disadvantages in applying the rules only to business-to-consumer supplies:

• Excluding business-to-business supplies means offshore suppliers would be required to determine whether they were supplying to a business or an individual consumer. This could be difficult and may impose compliance costs on suppliers.
• Revenue could be foregone if consumers misrepresented themselves as a GST-registered business and were able to avoid the GST.

3.30 Simplified rules for identifying business-to-business supplies are therefore required to minimise compliance costs to offshore suppliers. The proposed requirements for offshore suppliers to identify business-to-business supplies are discussed below. Rules to address the risk of foregone revenue from consumers misrepresenting themselves as GST-registered businesses are detailed in Chapter 5. Situations when a supplier treats a registered business as a consumer and advertently charges that business GST are covered below.

Rules for identifying business-to-business supplies

3.31 In many instances, offshore suppliers of low-value goods would be able to assume their goods were being purchased by individual consumers given the nature of the supplies.

3.32 As with the approach to cross-border services, the Government proposes that offshore suppliers would be required to assume a New Zealand consumer is not a GST-registered business unless the customer has communicated to the supplier their GST registration number, New Zealand Business Number or self-certification as a GST-registered business.

3.33 It may not be practical for all suppliers to obtain or retain evidence that a customer is GST-registered. Under our cross-border services rules, the Commissioner of Inland Revenue is able to prescribe or agree to an alternative method of determining whether a supply is made to a GST-registered person. The Commissioner takes into account a number of factors, such as the nature and value of the supply, and the terms and conditions of the provision of services.[20] It is proposed that this discretion be extended to suppliers of low-value goods.

Ability to zero-rate business-to-business supplies

3.34 While excluding business-to-business supplies as a default rule is expected to minimise compliance costs for the majority of offshore suppliers of low-value goods, some offshore suppliers may have incurred New Zealand GST in making a business-to-business supply. The Government is therefore proposing to allow offshore suppliers to choose to zero-rate their business-to-business supplies of low-value goods (apply GST at a zero percent rate). This would allow offshore suppliers to deduct any New Zealand GST costs incurred in making the supply the same way as resident suppliers, thus ensuring that GST is not a tax on businesses.

Reverse charge for GST-registered businesses

3.35 GST should not be a tax on businesses. This is achieved by allowing GST-registered businesses to claim back GST charged on goods and services they receive to the extent the goods and services are used for, or available for use in, making taxable supplies.[21] When GST-registered businesses purchase goods and services for non-taxable purposes, such as for private or exempt activities, the business cannot claim back GST as the goods and services received do not relate to the making of taxable supplies. Effectively, the business is treated like a final consumer.

3.36 To account for GST in situations when a GST-registered business purchases goods for non-taxable purposes, a special reverse charge would be included. The reverse charge rule would treat the GST-registered business that purchased the low-value goods as the supplier of those goods, so that the business would be required to return the GST instead of the offshore supplier.

3.37 This rule would be an extension of New Zealand’s existing reverse charge rules in the Goods and Services Tax Act 1985, which apply domestically and in the cross-border services context. It would only apply when the GST-registered recipient of the goods intends to use the goods other than for making taxable supplies. This would include situations when they use the goods for a private purpose (as opposed to a business purpose) or for making GST-exempt supplies. The current five percent de minimis exemption would also be retained.

3.38 If the reverse charge applies, the GST-registered business would be required to return output tax on the full value of the supply (as the deemed supplier), but only claim an input tax deduction to the extent the good is used for making taxable supplies. The net result would be that output tax on the non-taxable use is paid by the GST-registered business.

New Zealand businesses being inadvertently charged GST

3.39 There may be instances when an offshore supplier treats a GST-registered business as an individual consumer and inadvertently charges that business GST.

3.40 For these situations, as with cross-border services, it is proposed that the New Zealand business contact the offshore supplier directly to rectify the mistake. The supplier would then have the option of doing one of two things:

1. It could provide the GST-registered business with a refund of the incorrectly charged GST.

If a refund is provided, the New Zealand business would not be able to claim an input tax deduction for the GST that was incorrectly charged. To take into account the overpaid GST, the offshore supplier would be able to adjust their output tax in their GST return, subsequent to the refund being made.

2. Alternatively, the supplier could choose to provide the GST-registered business with a full tax invoice.[22]

This could be a compliance cost saving for offshore suppliers, when the cost of issuing a refund would exceed the cost of issuing a tax invoice. If a full tax invoice is provided, the New Zealand business would be able to claim an input tax deduction under the general rules.

Special provisions under our cross-border services rules which turn a supply that should not have been taxed by the supplier (or taxed at zero percent) into a supply that is taxed at the standard GST rate of 15% would be extended to low-value imported goods. This would ensure that if the supplier exercised the full tax invoice option, they would not have to subsequently make an adjustment to their GST return as the correct GST result would have been reached.

Tariffs and cost recovery charges

3.41 Under the current system, GST and cost recovery charges for Customs and the Ministry for Primary Industries are collected at the border by Customs on goods valued above the de minimis threshold. For some goods, tariffs may also apply, depending on the product type and the country of origin where the good was manufactured. When tariff duties also apply, GST, tariffs and cost recovery charges may be collected at the border on goods with a value as low as $226.

3.42 The cost recovery charge of $49.24 collected by Customs at the border comprises two separate departmental levies: Customs’ Import Entry Transaction Fee of $29.26 and the Ministry for Primary Industries’ Biosecurity System Entry Levy of $19.98.

3.43 The Import Entry Transaction Fee is used to fund Customs’ border clearance activities, including screening for prohibited goods such as drugs and other dangerous goods or objectionable material. The Biosecurity System Entry Levy funds the Ministry for Primary Industries’ activities in relation to assessing and managing biosecurity risks at the border.

3.44 The offshore supplier registration system would require offshore suppliers to register for and return GST on goods imported by consumers valued at or below $400. Offshore suppliers will however not be responsible for collecting tariff duties and cost recovery charges under the proposed rules.

3.45 The Government considers that Customs collecting tariffs and cost recovery charges on goods valued at or below $400 would undermine the efficiency of the proposed system. The Government is therefore proposing to remove tariffs and cost recovery charges from all imported goods valued at or below $400.

3.46 Removing the need to collect tariffs and cost recovery charges at the border will simplify the process, avoid delays for consumers, and reduce barriers to importing low-value goods.

[15] See section 2 of the Goods and Services Tax Act 1985.

[16] Section 14 of the Goods and Services Tax Act 1985 contains the current exemptions from GST.

[17] “Fine metal” includes gold, silver and platinum with a purity of at least 99.5 percent, 99.9 percent and 99.0 percent, respectively.

[18] Or the consumer’s broker.

[19] Section YD 1 of the Income Tax Act 2007 contains the rules for determining when a natural person is a New Zealand resident for income tax. However, for GST purposes, the effect of section YD 1(4) and (6) is ignored for determining the residence or non-residence of a natural person. See the definition of “resident” in section 2(1) of the Goods and Services Tax Act 1985, paragraph (c).

[20] See section 8B(6) to (8) of the Goods and Services Tax Act 1985.

[21] See section 20(3C) of the Goods and Services Tax Act 1985 – Input tax may be deductible.

[22] Section 24(5B) allows suppliers of cross-border services to choose to provide a tax invoice where GST is incorrectly charged on a supply to a GST-registered business, provided that the payment for the supply is less than $1,000.