GST on “remote” services
Tax Alert - April 2016
By Jeanne du Buisson and Divya Pahwa
GST on the online purchases of goods and services continues to get attention in various jurisdictions as authorities grapple with the international challenge of taxing and collecting GST on cross-border supplies. Many countries such as Member States of the European Union, Norway, South Korea, Japan, Switzerland and South Africa have already implemented rules to deal with aspects of this often “untaxed” area of commerce. Australia has also proposed similar rules that will apply from 1 July 2017. The application of tax on digital services indicates a global move from supplier based to destination based consumption tax.
Not one to be left behind, New Zealand will soon join these jurisdictions and start capturing GST on online services. The new rules are contained in the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill ("the Bill"), which was introduced on 16 November 2015 and reported back recently. Once enacted, the new GST rules on online services (often called the “Netflix Tax”) will come into force on 1 October 2016. The rules will collect GST on services and intangibles (including digital downloads) supplied remotely by an offshore supplier to New Zealand-resident consumers. Insurance and remote gambling services provided by offshore suppliers will also be caught by the new rules.
The new rules will mainly impact offshore businesses (who will need to register and collect the GST) and New Zealand consumers subscribing to these services (who will likely bear the increased costs). The offshore suppliers of remote services to private consumers will have a liability to register for New Zealand GST if certain supplies exceed the threshold of NZ$60,000 per annum.
An area which is not addressed by these rules is the collection of GST on the purchases of goods online from overseas. This is a more complex issue that is still being considered by New Zealand Customs and Inland Revenue separately.
Key features of the New Zealand rules
The proposed new rules for GST on imported services for New Zealand will operate as follows:
- Remote services (as defined) which are supplied to New Zealand-resident consumers will be treated as being performed in New Zealand and subject to GST;
- A wide definition of remote services is proposed. This will include both digital services (downloads etc.) and more traditional services (such as consultancy and advice);
- Offshore suppliers will be required to register and return GST if their supplies of services to New Zealand-resident consumers exceed the threshold of NZ$60,000 in a 12-month period;
- As electronic marketplaces such as online app stores are generally in a better position to register and return GST on supplies compared with the underlying supplier, they will be required to register for GST instead of the principal supplier registering, where certain conditions are satisfied;
- To ensure compliance costs are minimised, the new rules will only apply to business to consumers (B2C) transactions. Business to business (B2B) transactions will be excluded (unless the offshore supplier elects that these supplies will be zero-rated in order to allow the offshore supplier to recover any New Zealand GST);
- Significant fines, of up to NZ$50,000, would apply to New Zealand-resident consumers who deliberately and repeatedly represent that they are a business to an overseas services supplier; and
- A new proposed rule will prevent double taxation from arising on supplies of remote services performed in New Zealand to a non-resident consumer, by allowing a deduction against the supplier’s liability for New Zealand GST to the extent that the supply has already been taxed in another jurisdiction.
Electronic marketplaces, such as an app or online music store, will generally be treated as the supplier and be required to register and collect GST, even if legally the marketplace is operating as an agent. This will be in situations where customers would normally consider the marketplace to be the supplier. This is a significant change from the normal manner in which GST operates, as the GST rules will disregard the legal structure of the agent / principal relationships of the parties. This is a pragmatic response to the issue of many small international suppliers operating through a central market place and follows the approach that Australia has adopted in the design of its regime for services imported by Australian consumers.
Overall we consider the proposed rules have been drafted in a pragmatic way and are aimed at broadening the base of New Zealand’s GST system. We consider it is likely there is still some fine tuning required to make the provisions work in a coherent and coordinated manner with the current legislation and also with e-commerce taxation rules prevalent in other jurisdictions. There is likely to be a crucial interplay of the e-commerce taxation rules between Australia and New Zealand.
This Bill is expected to be enacted before the end of April 2016 which means there will be less than 6 months until the rules go live. It is important that offshore businesses supplying remote services to consumers in New Zealand are ready to comply. However, New Zealand businesses supplying digital services to consumers in other countries should also be aware that their sales of any remote services to other jurisdictions may trigger VAT/GST obligations in those countries. It is inevitable that more countries will look to adopt similar rules.
For more information on this area, please contact one of our indirect tax specialists.
Tax Alert April 2016 Contents:
- Outsourcing payroll compliance overseas? Beware the risks
- GST on “remote” services
- The rise of holiday pay woes
- A step in the right direction – relaxation of the bank account requirements for IRD number / GST applications
- FBT errors – we are only human after all, right?
- Use of money interest rates to reduce