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Inland Revenue

Tax Policy

Chapter 2 – Background

2.1 New Zealand’s GST is a broad-based consumption tax based on the destination principle. This means that GST applies at the standard rate of 15% to most goods and services that are consumed in New Zealand (with very few exemptions). This ensures that the tax is fair, efficient and simple.

2.2 Most other jurisdictions with GST or Value Added Tax (VAT) systems also apply the destination principle for determining the place of consumption. Under this principle, a good or service should be taxable in the jurisdiction in which it is consumed.

2.3 Another key principle of GST is tax neutrality. Tax neutrality in GST means that as a consumption tax, GST is borne by the final consumer and should not be a tax on businesses.[2] It also means that GST should be applied evenly across all businesses in similar circumstances carrying out similar transactions, including similar transactions by resident and non-resident businesses. When different groups of suppliers are treated the same for GST purposes, it ensures that one group is not competitively advantaged over another group. It also means that consumer behaviour is not driven by tax considerations in situations where goods and services supplied by different suppliers are readily substitutable.

2.4 The “place of supply” rules in the Goods and Services Tax Act 1985 (the GST Act)[3] determine where consumption of goods and services occurs and, therefore, whether they are subject to New Zealand GST. For the supply of services, we generally look to the supplier’s location and the place of physical performance to determine consumption. Traditionally, these proxies for consumption could easily be applied to services, as the consumption of services would typically occur in the same place the services were performed. For example, a haircut performed in New Zealand would be subject to New Zealand GST.

2.5 The emergence of imported telecommunications services (such as call-back services and international roaming) in the early 2000s, however, gave rise to concerns about how our GST rules at that time applied to these services. The concept of physical performance used to determine consumption and, therefore, which country had the right to tax a service did not fit well with the nature of telecommunications services. Unlike traditional services, telecommunications services were (and still are) highly mobile, often involve many different supplies or “connections”, and can be supplied across borders, which meant it was not always clear where the consumption of the services occurred.

2.6 As a result, in 2003 special GST rules for cross-border supplies of telecommunications services were introduced. Under these special rules:

  • A supply of telecommunications services is generally subject to GST if the supply is made to a person physically in New Zealand at the time the service is initiated.
  • A supply of telecommunications services is not subject to GST if the supply is made to a person physically outside New Zealand at the time the service is initiated.
  • Telecommunications services supplied by a non-resident to a GST-registered business are not subject to GST.
  • Telecommunications services supplied by a resident are zero-rated if supplied to a non-resident supplier of telecommunications services.
  • A non-resident supplier of telecommunications services is not required to register if their only taxable supplies are supplies of telecommunications services to non-resident consumers.

2.7 The special rules for telecommunications services use the location of the person who initiates the supply from a telecommunications supplier as a proxy for determining the place of consumption of these services. It is not always clear who has initiated a supply of telecommunications services. Section 8(9) provides three tests for determining the person who has initiated a supply. Furthermore, for certain telecommunications services it can be difficult to determine the location of the person who initiated the supply. Section 8A allows suppliers to use the customer’s billing address to determine the place of supply if the actual location of the initiator of the supply cannot be determined. The “initiator” test is unique to New Zealand’s GST system.

2.8 When these special rules were introduced in 2003 the place where the service was initiated was considered the best proxy for determining the place of consumption. However, New Zealand’s approach to applying GST to telecommunications services is now out-of-date and inconsistent with international best practice.

2.9 The International VAT/GST Guidelines (the Guidelines) developed by the OECD recommend taxing these services based on the consumer’s usual place of residence. Many other countries (with the notable exception of Australia) adopt approaches consistent with these guidelines for applying GST/VAT to telecommunications services.

OECD VAT/GST Guidelines

2.10 Over time, the rise of the global economy, technological advances, and trade liberalisation have led to growth in digital supplies of services and intangibles. These developments have allowed businesses to supply services to customers remotely from anywhere in the world, so that customers no longer need to be in the same location as the supplier to consume the services. It was considered internationally that the traditional proxies for determining consumption did not work for the supply of these “remote services” (including telecommunications services) as it was often unclear where the consumption of these services occurred and, therefore, which country had the right to tax the supply. This led to growing uncertainty globally about how GST/VAT should apply to these services.

2.11 As a result, the OECD developed best practice guidelines which provided proxies for determining consumption for supplies of services and intangibles.[4] For “on-the-spot” services, where the nature of the service requires the supplier and the consumer to be in the same place (for example, a haircut), the Guidelines suggest a place of performance test for determining the place of consumption. For remote services and intangibles, where it is not necessary for the supplier and the consumer to be in the same place (for example, a digital download), the Guidelines suggest the consumer’s usual place of residence as the test for determining the place of consumption.

2.12 The Guidelines adopt a broad definition of what is a remote service and include supplies of telecommunications services.[5]

2.13 The consumer’s usual place of residence has been broadly accepted as the best proxy for determining the place of consumption for remote services and intangibles. It is relatively easy to determine and less open to manipulation than other proxies such as the location of the consumer at the time of supply (which gives rise to problems of both determining the location of the consumer and how to treat a supply consumed in multiple locations). It is also considered a relatively simple proxy for suppliers to apply in practice.

2.14 In line with the Guidelines, since 1 October 2016, GST has applied to remote services (such as online services and digital downloads) supplied by offshore suppliers to New Zealand-resident consumers at the standard rate of 15%. While our remote services regime covers a broad range of services, telecommunications services are not covered by the regime.

Other countries’ approaches

2.15 Many jurisdictions with comparable GST/VAT systems use the residency of the consumer as a proxy for consumption of telecommunications services. The most notable exception is Australia, whose rules for telecommunications services are similar to New Zealand’s current rules.

United Kingdom

2.16 The United Kingdom (UK) is the most recent example of a country which has moved to a residency-based test for consumption of supplies of telecommunications services. Before 1 November 2017, the UK applied a “use and enjoyment” rule to telecommunications services, which meant that if telecommunications services were consumed outside the EU, they were treated as being outside the scope of UK VAT. This approach had the same effect as New Zealand’s current rules in the GST Act for supplies of telecommunications services.

2.17 However, as part of its 2017 Budget, the UK Government announced changes to their VAT place of supply rules for telecommunications services – specifically, supplies of telecommunications services by UK suppliers to UK non-business users (that is, UK consumers). The changes mean that since 1 November 2017, these services, when supplied to UK residents, are subject to UK VAT regardless of where they are consumed. In practical terms, it means that UK VAT now applies to roaming services when UK consumers use their mobile devices outside the UK and the EU. Equally, supplies to visitors from countries outside the EU are no longer subject to UK VAT.

2.18 In making the change, the UK Government noted it would align the UK treatment of telecommunications services with the internationally agreed approach for taxing these services.

European Union

2.19 Under the EU’s rules, since 1 January 2015, supplies of telecommunications, broadcasting and electronic services have been subject to tax in the Member State in which the customer is resident. VAT applies regardless of whether the customer is a business or a final consumer, and regardless of whether the supplier is based in the EU or outside.

2.20 The definition of telecommunications services in the EU VAT Directive[6] is similar to the definition in New Zealand’s GST Act, except that it does not specifically exclude content.


2.21 Norway’s VAT on electronic services (e-services) has applied since 1 July 2011. Under Norway’s rules, e-services include electronic communication and telecommunications services. The definition of these services is based on the EU VAT Directive and the EU VAT Regulation No 282/2011.[7]


2.22 Similarly, since 2010, Switzerland’s “remote services” rules cover both telecom and electronically supplied services.


2.23 Telecommunications supplies of global roaming services outside Australia by an Australian-resident supplier are treated as GST-free (zero-rated) when:

  • the customer is outside Australia when the service is supplied; and
  • the effective use and enjoyment of the supply by the customer takes place outside Australia.

2.24 Telecommunications supplies made by an Australian-resident supplier to a non-resident supplier are GST-free if the supply enables a non-resident customer (who has a subscription to a telecommunications network outside Australia) to roam in Australia. In effect this means that no Australian GST applies to either outbound or inbound roaming services.

Effect of the current rules for telecommunications services

2.25 The GST rules for telecommunications services (based on the physical location of the consumer) are out-of-date and inconsistent with both international best practice and with our rules for taxing supplies of remote services. The current rules result in the following outcomes:

Resident suppliers

2.26 Supplies of telecommunications services by a resident to a person who initiates that supply outside New Zealand are zero-rated (subject to tax at a rate of zero percent). In practical terms, this allows a resident telecommunications supplier to zero-rate roaming services provided to New Zealand-resident consumers who are temporarily offshore (outbound roaming). The principle on which this rule is based was that the consumption of roaming services occurred offshore as the recipient of the services is offshore when these services are physically performed.

Example 1: Current GST treatment of outbound roaming services

Nell is a New Zealand resident visiting her Aunty in Brussels. Nell uses her New Zealand mobile phone during her visit to Brussels. GST is charged at the rate of zero percent on the roaming services supplied by the New Zealand telecommunications services provider to Nell.

Non-resident suppliers

2.27 Supplies of telecommunications services by non-residents to both resident and non-resident consumers physically in New Zealand are subject to GST provided the non-resident supplier meets the threshold for GST registration. This means that under current rules, inbound roaming services to non-resident consumers who are temporarily in New Zealand could technically be subject to New Zealand GST. However, a special rule for suppliers of telecommunications services means these suppliers are not required to register if their only taxable supplies are supplies of telecommunications services to non-residents physically in New Zealand.[8]

Example 2: Non-resident supplier of inbound roaming services not required to register

Britphones is a British telecommunications company that supplies $100,000 worth of roaming services to British tourists on holiday in New Zealand. Britphones does not make any other taxable supplies in New Zealand. Britphones is not required to register for GST as their only taxable supplies in New Zealand are telecommunications services supplied to non-residents.


[2] In New Zealand, although GST is collected at each stage of the supply chain, businesses can deduct the GST costs of their inputs through an input tax credit mechanism. This ensures that the tax flows through businesses to tax supplies made to final consumers.

[3] Unless otherwise stated, all legislative references in this issues paper are to the Goods and Services Tax Act 1985.

[4] OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris

[5] International VAT/GST Guidelines, page 69

[6] Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax

[7] Council Implementing Regulation (EU) No 282/2011 of 15 March 2011, Article 7

[8] Section 51(1)(e) of the GST Act