Are you on-line with the proposed GST changes on imported services and digital content?
This week the Government released a discussion paper outlining their proposal to collect GST on imported services and digitally supplied content. The “Netflix tax” as it has been dubbed in the media, has created a stir here and across the Tasman given the unfair advantage overseas suppliers have over local suppliers, when it comes to charging GST. This, coupled with the estimated $180 million of revenue the Government are currently missing out on because online shoppers are not paying New Zealand GST on services and goods purchased from overseas suppliers, means it should come as no surprise that the Government are keen to close off this loophole.
Who will be affected?
Offshore suppliers who supply services or intangible products remotely to New Zealand resident customers are currently not required to register for or charge New Zealand GST on these sales, as the supplies are deemed to take place outside of New Zealand.
The proposed changes will treat imported services as being performed in New Zealand. Consequently, offshore suppliers and electronic marketplaces will be required to register for and charge and remit New Zealand GST on these supplies. The types of services affected include but are not limited to; downloaded music, films, e-books, apps, online subscriptions or software from an offshore supplier.
Non-GST registered consumers in New Zealand may be affected by higher prices for such supplies, where suppliers opt not to absorb the full cost of the additional GST component, which currently stands at 15% of the cost.
Overseas operators will obviously have to ensure they have their bases covered, ensuring they correctly identify where they have supplied services to New Zealand residents and that they have met their relevant GST obligations.
Why are the changes being introduced?
The changes will provide GST neutrality between supplies made by local and overseas suppliers providing a fairer platform for both to compete. The $40 million per annum in revenue that the Government estimates the change will generate won’t hurt either.
How will it work?
How the scheme will operate in practice is still subject to discussion. Whether the overseas company will register and pay GST by way of using the domestic registration system already in place or through a newly simplified return only GST output tax has yet to be decided.
New Zealand businesses can currently make taxable supplies up to $60,000 in a 12 month period before being required to register for GST. It is not yet decided if an overseas supplier would be able to avail of this GST threshold or if a lower threshold would apply requiring registration at a lower turnover.
New Zealand GST registered persons charged GST on these services will generally be able to claim back the GST, and the question whether they should be charged in the first place has been raised. As a comparative example, such supplies between two VAT (EU GST Equivalent) registered businesses in the EU are 0% rated for these purposes. The New Zealand Government will have to decide how they will deal with this issue.
The Government has invited suggestions as how best a supplier can determine if the customer they are supplying is resident in New Zealand however, it is likely that the supplier will be required to rely on the billing, home address or the bank details provided by the customer when purchasing online in order to determine if they have a liability to charge New Zealand GST.
Will it work?
Critics of the changes will suggest that the imposition of New Zealand GST on small overseas suppliers will deter them from making supplies to New Zealand residents and it is the consumer who ultimately loses out. However, the registration threshold suggested would put the overseas supplier more in line with New Zealand suppliers, depending of course on the ultimate level of the threshold. In addition, many other countries, notably within the EU, operate low or nil thresholds in relation to electronically supplied services to EU residents and it is put forward that this factor alone would not deter for example a U.S. company from making apps available for sale to EU consumers.
A similar scheme requiring overseas suppliers to register for VAT in respect of supplies made to customers resident in EU member states, has been in operation in the EU since 2003. The question of compliance with the scheme is another one. There will always be taxpayers who think they can fly under the radar. With increasingly sophisticated software, investigation techniques, information exchange agreements between countries been employed by Tax Authorities all over the world for all taxes not just GST, the advice is speak to your tax adviser, confirm your position and make sure your business is compliant as the costs and penalties for not doing so can be detrimental.
Interestingly, it is proposed that a New Zealand resident customer who knowingly supplies incorrect information regarding their GST status or their country of residence could face a fine of up $25,000 if convicted.
What about imported goods?
The above describes the situation in relation to imported services, but what about goods imported into New Zealand? The discussion paper also makes reference to the lowering of the threshold under which goods can be imported into New Zealand GST free. GST is not currently collected on goods with a total duty value of less than $60 which depending on freight, insurance or duty could potentially equate to a parcel worth $400.
Tackling this issue may prove a trickier task for the Government, as collection at the border, if chosen as the preferred method of collection, doesn’t come without increased compliance and labor costs. However, New Zealand and Australia have two of the highest goods import thresholds in the world, with other countries operating thresholds as low as $20. With other countries managing to balance the cost of collection with the benefit of charging the tax, it is likely the cost of collection alone will not prove a deterrent to reducing the threshold. A decision in this regard is not expected until October.
When do the changes take place?
The Government discussion document is just that. Submissions for feedback on the proposed changes can be made by interested parties up to the 25th September 2015. It is anticipated the changes will not come into play until next year. Nonetheless overseas suppliers should anticipate these changes will happen sooner rather than later and prepare themselves and their online sales systems in advance.
As all taxpayers know any potential errors with GST can ultimately prove extremely costly. As always independent professional advice should be sought in advance of taking any particular tax position.