Legislation

This post comes from our resident tax expert – Kelvin Scoble

The cost of digital services that are imported into New Zealand is poised for a 15% hike when GST becomes payable from 1st October.

This is the day when overseas companies who supply “remote services” to end consumers in New Zealand will be required to register for GST here and to charge output tax on those services.

It might sometimes be hard to recognise it as such, but the widening of our GST base and others like it in Australia and much of Europe is a major landmark in a wider re-engineering of global tax rules, as countries around the world move decisively to shore up the integrity of their indirect tax regimes in the face of rapidly evolving commercial practices.

In this case the principal driver of change is to ensure that providers who are based here are not disadvantaged by their physical location, and that offshore suppliers pay tax on the same consumption principles as their domestic rivals do.

Remote services include:

• Digital content including movies, TV shows, music providers, e-books and online newspaper subscriptions.
• Games, apps, software, gambling and related services.
• Website design and web publishing services.
• Legal, accounting, insurance, business advisory and other similar consulting services.

If you are a New Zealand business which is registered for GST you won’t be charged tax on remote services you purchase from offshore suppliers, provided that:

• You purchase the offering as part of (or for use in) your taxable activity here; and
• You tell the supplier you are registered for GST; and
• You give the supplier your GST number.

If you fail to do either of the last two things the supplier will have to charge you GST at the standard rate.  The fish hook to watch here is that unlike domestic suppliers, non-resident suppliers are not compelled to issue a “tax invoice” and you won’t be able to claim back any GST that you have been (incorrectly) charged and paid.

There are ways to resolve errors but they are limited to specific situations and will be time-consuming because invariably they require you to liaise directly with the supplier concerned.  This is not always easy to achieve in practice, particularly if the problems relate to low-value transactions and intermittent or one-off purchases.

If an intermediary is involved; for example,  a mobile app store which retails products developed by app wizards – the GST obligations are borne by the agent (not the principal), so you will be charged GST by the intermediary.

If digital services are purchased for private use you will be charged 15% GST.  Any attempt to represent yourself as being registered for GST so you can avoid the tax would be very unwise – there are hefty penalties for mischief of this type.

In case you wondered how seriously these issues are taken by governments, the answer is “very”.  This week there were reports out of Australia that regulators there were considering their ability to force internet providers to block access to internet shopping sites that refused to collect and pay GST over to the ATO.  While Treasury officials in Canberra described such measures as a “last resort” it is clearly a tool which is being contemplated.  There is no evidence of any such approach in this country, but in the modern world only a fool would stand between a government and tax revenues it feels it is entitled to receive.

In the meantime the situation regarding imported goods remains unchanged for now.

However Customs is under increasing political pressure to do more work in terms of exploring the increasing cost of GST and duty concessions for low-value items and potential ways to reduce what is undeniably a growing “leakage” from the economy as a whole.  Given the myriad issues at play here we expect further updates from officials in the not too distant future.