GST On Foreign Supplies

Imposing Goods and Services Tax (GST) on the digital economy has been a hot topic this year as New Zealand retailers push for equal GST treatment between local and foreign suppliers.

At present, foreign providers of cross-border services and intangibles (including music, e-books, videos and software purchased from offshore websites) do not have to pay GST on sales to New Zealand based consumers. This puts local based providers at a substantial disadvantage because they have to charge GST, which will, at a minimum, increase their prices by 15% when compared to foreign competitors.

Currently, whether or not GST applies to a particular transaction depends on a number of factors, such as the location of the supplier or where the services are performed. Because most e-tailers are not based in New Zealand, and their services are not performed from New Zealand, GST does not apply.

This issue is not isolated to New Zealand with many countries facing similar GST/VAT non-collection issues. Given the significant revenue at stake, governments worldwide have a vested interest in reform. The Organisation for Economic Co-operation and Development (OECD) has released guidelines on GST/VAT treatment, which countries are considering adopting.

The New Zealand Government has now released its own discussion document titled ‘GST: Cross-border services, intangibles and goods’ which broadly proposes to align New Zealand with the general direction of reforms undertaken by a number of countries.

The key suggestions include:

  • Introducing a new ‘place of supply’ rule so that services and intangibles supplied remotely by an offshore supplier to New Zealand-resident consumers will be treated as performed in New Zealand and therefore subject to GST.
  • The new rules to apply to a wide range of ‘services’, which capture both digital and traditional services.
  • A requirement for offshore suppliers to register and return GST when they supply services and intangibles to New Zealanders if their services exceed a given threshold in a 12 month period.
  • In situations where offshore suppliers do not directly supply services to their customers, and instead use electronic market places to market and sell their services or intangibles, the electronic marketplace may be required to register for GST instead of the principal offshore provider.

While not confirmed in the discussion document, the expectation is that the proposed changes will not require offshore providers to return GST when they make supplies to New Zealand businesses (who would normally be able to claim the GST back). The new rules would focus on taxing business-to-consumer supplies.

At present, GST not collected on low-value goods imported into New Zealand is also an issue. The Government intends to align, where possible, the collection of GST on imported goods with the changes relating to cross-border services and intangibles. The New Zealand Customs Service is looking at options for simplifying the collection mechanism and reducing the threshold before GST is charged on imported goods (currently $400), while balancing the cost to collect that GST.

As e-commerce continues to grow, the volume of services and imported goods on which GST is not collected is becoming increasingly significant. It has passed the tipping point where the Government is now moving to capture that lost tax revenue.

Businesses should also be mindful of similar changes being implemented in other countries that may result in GST/VAT being required to be paid.

Modernising New Zealand’s Tax System

The Government has released two discussion papers to engage in public consultation on options for simplifying and modernising New Zealand’s tax system. The documents introduce taxpayers to the general direction the Government intends to take to improve administration of the tax system.

Basically, the Government wants to simplify tax for individuals and businesses by reducing compliance costs, and making interactions with the IRD faster, more accurate and convenient with a greater use of electronic and online processes. As the IRD puts it, “tax obligations should be easy to comply with and hard to get wrong”.

The first discussion paper ‘Making tax simpler – A Government green paper on tax administration’ outlines the overall direction of the tax administration modernisation programme. Key elements of potential change include:

  • Simplifying tax for businesses, for example by streamlining the collection of PAYE, GST and other withholding taxes and integrating these obligations into business processes. Options will be investigated for simplifying the calculation of provisional tax – with more emphasis on real time information, together with payment options that better reflect taxpayer’s cash flows.
  • Simplifying tax for individuals by providing online income tax statements for individuals pre-populated with income details, so that all that would be required is to ‘check and confirm’. Technology will be used more effectively to better manage both overpayments and underpayments of tax.
  • Social policy objectives would be met by using information that the IRD or the Government already holds, providing for timely payments on a more real-time basis, resulting in certainty for individuals and families. With faster, more accurate information, there should be less chance of people receiving too much and going into debt.

The IRD wants to make tax obligations part of the normal day-to-day business processes, making it quick, easy and harder to get things wrong.

Consultation closes on 29 May 2015.

The second discussion document ‘Making tax simpler – Better digital services’ outlines proposals for greater use of electronic and online processes. In particular the discussion document considers whether secure digital services can be delivered using the current policy and legislative framework and discusses options to move people to digital services, these include:

  • The IRD working with third parties such as banks and business software developers so that tax interactions are built into a customer’s regular transactions rather than managing tax separately at specific times of the year.
  • Non-digital services will need to be provided for those who still cannot use digital services.
  • A process would be developed for moving to a digital format those who could potentially use digital systems for some services – in circumstances where there would be wider benefits accrued.

Consultation closes on 15 May 2015.

These are the first two releases in a series of public consultations designed to modernise and simplify the tax system. Further discussion documents will be released over the next two years and public feedback is requested.

The significance of this process can’t be overstated. In an age where changes in lifestyle as a result of technology have moved at an explosive rate, the design, administration and technology associated with our tax system have not kept up.

Tax Payments – When Received In Time

Despite our best efforts, many of us are familiar with the consequences of making late tax payments to the IRD. Often, the problem is not just that we forget and leave it to the last minute, but that the payment we make is not processed or received by the IRD in time.

Late payment penalties and use-of-money interest can often be prevented by simply paying tax on time. The IRD has released an updated Standard Practice Statement (SPS 14/01) setting out when different types of tax payments will be accepted as having been paid by the due date. Importantly, it contains several amendments to the previous standards, particularly in relation to payments by post and payments made at Westpac. These changes took effect from 1 October 2014. To ensure your next tax payment is not late and subject to interest and penalties, it is important to familiarise yourself with the standards, as summarised below.

PAYMENTS BY POST – previously, the IRD based the payment date on the post date on the envelope. This is no longer the case. Instead, the IRD will deem the payment date to be the date the envelope is received. As a result, if your routine is to post the cheque on the due date, you may need to put it in the post a day or two earlier.

ELECTRONIC PAYMENTS – payments made electronically or by direct credit into an IRD account must be completed before the end of the bank’s online “business hours”.

For example, if a GST payment is made on 28 April at 10.30pm but the bank’s internet banking cut off is 10.00pm then the payment will not be processed that day and could be treated as late. This also applies to payments made from overseas (bearing in mind the international time difference).

PHYSICAL DELIVERY – payments made by cheque must be delivered to an IRD office before it closes, by the due date.

CASH & EFTPOS – all cash and EFTPOS payments must be paid over the counter at a Westpac branch by the due date. It is important to note that returns must still be filed electronically, posted or delivered to the IRD (Westpac will accept the payment but not the actual tax return).

POST-DATED CHEQUES – post-dated cheques will not be banked by the IRD until the specified date. If it is post-dated after the due date then it will be treated as a late payment (even if it was received before the due date).

Take note that from 1 October 2014, Westpac stopped accepting cheque payments so these must now go directly to the IRD.

WEEKENDS & PUBLIC HOLIDAYS – if a due date falls on a weekend or a public holiday then electronic payments will be accepted on the next working day. This includes all provincial anniversary days.

Whatever your preferred method of payment, adhering to these updated and clarified standards will enable you to avoid unwanted interest and penalties.