Tax Focus with Maggie Jaques: GST in the Digital Age
I attended the Nexia International conference earlier this month and one of the highlights was having an opportunity to get together with my tax colleagues from around the world. Tax authorities have an uncanny tendency to follow suit, so understanding what other jurisdictions are focusing on and what is causing our fellow colleagues headaches is well worth taking note of!
Technological change challenging tax systems worldwide
The theme of the conference was “leading change” and the Nexia indirect taxes group met to discuss how our respective jurisdictions were coping with technological change, particularly around the issues associated with e-commerce. I provided an insight into the issues faced by New Zealand, along with presentations from my colleagues from Australia, the UK and the US. What was striking was that despite the differences in countries, rules and systems, common themes were emerging.
The problems faced by governments around the world largely stems from the fact that our tax laws were designed to tax traditional “bricks and mortar” businesses. Most countries, including New Zealand, have a plethora of rules around when you have enough of a presence to be liable for income tax or GST. Most of these definitions focus on a “place” – such as an office, a branch or a warehouse. Even the tests which focus on a “person” boil down to whether the person is physically present in the country in question (so basically, are they working from a “place” in the country).
Tax systems struggling to keep up with technology
When our tax laws were introduced it was incomprehensible that a business could earn millions in dollars of revenue from our local New Zealand market with no physical presence (and therefore be outside New Zealand’s tax reach). Because of this rapid change in technology, what was previously incomprehensible has now become reality - and our tax laws haven’t kept pace.
New Zealand’s response – “Netflix tax” or GST on remote services
You may remember the fuss that the introduction of New Zealand’s version of the so called “Netflix tax” caused. In a nutshell, from 1 October 2016 where a non-resident earns at least $60,000 from supplying remote services to New Zealand consumers, they have an obligation to register for GST and account for GST to the Government on their New Zealand sales. New Zealand was by no means alone in its decision to tax non-resident suppliers in this manner – it has followed in the footsteps of many other countries including Australia, South Africa, Japan, Switzerland, Norway, South Korea and certain members of the EU.
The biggest criticism of these rules (prior to their introduction) is that New Zealand had no way of enforcing them. The suppliers were outside our jurisdiction and it is unlikely that say, the IRS or HMRC would serve as a debt collector for the New Zealand Inland Revenue, should they decide not to comply. However, the New Zealand government implemented the rules anyway and anecdotally, a large majority of non-residents supplying remote services to New Zealand consumers appear to be complying.
Similar response worldwide
It was interesting to note amongst my Nexia colleagues that their respective governments had either implemented a similar regime, or were in the process of introducing rules to ensure GST was being collected from offshore suppliers, and in the vast majority of cases, the suppliers are complying with the rules. The exception was the US, where there is no overarching GST regime, but rather a series of state sales taxes which rules vary state by state. However, a recent Supreme Court sales tax decision (South Dakota v. Wayfair Inc.) ruled that sellers with no physical presence in a state could be liable for sales tax in that state where their online sales exceeded certain thresholds. Naturally, because each state’s rules are different, the threshold and criteria for accounting for sales tax varies. To compound the confusion, not all states recognise digital downloads as transactions that are liable for sales tax and the definition of a transaction that is caught differs by state. It is an interesting ruling and will likely impact on any person or business that is selling to US customers. I defer to my US colleagues in respect of the specifics of state sales taxes, however the case serves as a further example of tax systems attempting to keep up with current technology.
Low value imported goods
The next hot topic in the world of GST was how to address GST on low value imported goods (coined the “Amazon tax”). The problem again, being that Governments could not have foreseen the dramatic rise in online shopping when the low value GST and duty thresholds were implemented. Again, the issues were similar across jurisdictions with most countries having tightened the rules or looking to modify existing thresholds to ensure those large online retailers are having to account for GST where they exceed a particular sales level in the country of destination. New Zealand is no different, with rules proposed to be brought in from 1 October 2019 where offshore suppliers are making sales of at least $60,000 per annum.
There has been at least some backlash from the equivalent rules in Australia, with Amazon US announcing that it will no longer be shipping goods to Australian customers and that they will instead have to purchase via the Amazon Australia website (which anecdotally is considered inferior in terms of product offerings to the US website). I understand that some of the difficulty (and likely cause of the backlash) is how non-compliance with the rules by an individual offshore supplier will impact on an online marketplace provider, such as Amazon or Alibaba. This could be difficult if the likes of Amazon are ultimately liable for GST on the goods sold on its website. It will be interesting to see how the rules are received in New Zealand and whether we suffer any pushback from non-resident suppliers selling or facilitating the sale of goods to New Zealand.
GST is sometimes a “forgotten tax” – possibly because it is built into the price we pay for goods and services, so its impost is not so keenly felt as say, the income tax bill. However, given that GST accounts for more than 30% of the Government’s tax take (and is nearly double than the amount of company tax paid), any changes in this area are likely to have a significant impact. We will be keeping a close eye on any local and international trends so we can ensure you are kept up to date.
Please contact our Tax Director, Maggie Jaques at email@example.com, or your usual Nexia advisor.