The proposal to collect GST on imported services and digital content (such as music, movies and streaming) is consistent with global trends and best practice.
GST on low-value goods is harder. It involves a judgement on costs of collection vs revenue. That said, the current $400 de minimis is well in excess of international norms and is likely to be reduced.
The Government has released proposals to collect GST on imported services and digital content. New Zealand Customs report to government in October on potential options.
The issue is how to collect GST, not whether GST should apply. This needs to be done without imposing prohibitive costs on both Government and taxpayers.
The easier issue is GST on imported services. The proposal here is to require offshore suppliers to register for GST. The issue is more complicated with low value goods as a solution needs to be found to reduce the costs of collection so that it is lower than the GST.
The proposals are not a surprise, given the calls for GST neutrality between offshore and New Zealand businesses selling to local consumers.
There is also the additional revenue forgone by Government which, in an increasingly digitally connected world, is no small matter. The OECD’s proposals on taxing the digital economy and similar GST changes being proposed in Australia have also forced the Government to act.
What are the proposed changes?
The proposal is to follow the OECD’s proposed approach for taxing cross-border services and intangibles. GST would apply to ‘remote services’ such as online supply of software, digital content and other services where the consumer is a New Zealand tax resident.
Services which are physically performed or provided offshore (overseas accommodation for instance) will not be subject to GST.
The discussion document asks for feedback on whether business-to-business supplies should be excluded from the new rules. A New Zealand GST registered business can claim the GST paid so there is little point in it being charged.
Non-resident suppliers and electronic marketplaces would be required to register for GST in New Zealand. An electronic marketplace is a person who charges the New Zealand customer, arranges delivery of the content, or sets the terms and conditions of the transaction. Payment providers (such as Credit Card companies) will not generally be required to GST register.
For consumers, the real question will be whether imposing GST will change the ‘customer experience.’ In particular, this may limit the willingness of some offshore suppliers to supply content to New Zealand consumers.
Non-resident suppliers: The cost of complying with New Zealand GST (Registration, Collection and Payment) must be considered. This will require the systems of Non-Resident Suppliers to be identify New Zealand resident customers and to collect and pay GST to Inland Revenue Department (IRD). This may be easier for suppliers operating cross border where similar requirements apply in other jurisdictions (European Union for example).
For smaller suppliers, however, where costs of New Zealand GST compliance may be high, there may be a reluctance to supply to New Zealand.
Electronic marketplaces: Online marketplaces (such as app stores) will also need to gear up for the new requirements. This will include both electronic marketplaces hosted offshore and in New Zealand, that provide a platform for non-resident sellers to sell to New Zealand consumers. For New Zealand electronic marketplace websites in particular this may impose GST compliance obligations which do not exist at present.
The proposal to collect GST on imported services and digital content has been expected for a long time. From a policy perspective, for a comprehensive GST system such as the one in New Zealand, there is no reason to exclude imported services and goods from the base.
The reason for not doing so has been the cost of collecting the GST.
For digital services that trade-off appears now to favour collection.
The focus of OECD on the taxation of digital services as part of its work on base erosion and profit shifting has given the issue impetus.
Similarly, the move by Australia earlier this year to tax offshore suppliers of services and digital content, which has also provided a model to consider.
New Zealand is simply following the global trend.
While the government is non-committal in the discussion document, we believe that there is a growing desire for the $400 threshold to be reduced.
Internationally, a much lower de minimis is the norm £10 in the UK and C$20 in Canada, €22 in most European Union countries.
New Zealand and Australia (with its A$1000 threshold) are significant outliners and there are strong indications that the Australian government is considering a significant reduction in their GST.
Dinesh Naik is Tax Partner at KPMG New Zealand, Sponsor of the ‘Best Accountant of the Year’ Category of the Indian Newslink Indian Business Awards 2015.