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GST and tips

Some discussion lately on tips and GST.

It’s become more common for eftpos devices to offer customers a tipping option when paying their bills. The GST implications of this are more complex than the old-fashioned method of slipping a bit of extra cash to the staff person directly.

Businesses use different methods for sharing out tips that have been paid with eftpos.

In my view some methods could result in GST being payable on the tip because it could be seen as an extra payment for the service received from the business or an agreed adjustment to the price, particularly where it is not paid directly by the customer to a staff member to reward them personally for extra effort.

Inland Revenue has made clear statements about the income tax treatment of tips. It might be timely to extend that guidance to cover other tax implications, such as GST given the technological developments in this area.

Iain

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Election 2014 – your GST vote

This weekend’s New Zealand general election offers some choice in GST policy.

So, if you’re a GST geek like me you might be swayed by what the different parties intend doing about GST.

Here’s what I’ve been able to find out about some of the main parties’ GST policies:

Labour Party – no change to base or rates. Committed to simplifying compliance and supports “one hour, one return, one payment” principle for monthly GST and income tax compliance.

Green Party – no change to base or rates. Propose extra ecological taxes but will leave detail to a commission. Also, propose financial transaction tax. [comment – subject to seeing the detail, the existing GST system could be one way of achieving these new tax imposts].

National Party – no change to base or rates.

Mana Party – propose abolition of GST and replace with “Hone Heke Tax” on financial speculation.

Maori Party – will revisit removing GST on healthy food (fruit and veges) and also increasing GST on sugary drinks.

I couldn’t find any detail from other parties. If anyone knows any more feel free to comment.

Cheers and happy voting on Saturday Kiwis

Iain

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Good news for Australian tiramisu lovers

The Australian Tax Office publishes a detailed food list which, over 88 pages, gives their opinion on the GST status of everything from abalone to zabaglione.

Tiramisu was on the list as subject to GST. However, on 27 August the Tax Office removed tiramisu from the list.

This means from now on not all tiramisu products are subject to GST in Australia. Some are “GST free”.

This is fantastic news for tiramisu lovers and no doubt there’ll now be something resembling a gold rush on GST free tiramisu products!

Sometimes I wish we had GST exemptions for food in New Zealand, even if just to give IRD workers the chance to think about fascinating questions such as whether tiramisu is subject to GST.

Our GST system seems so mundane by comparison, but, honestly, would we really want it any other way?

Iain

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Fat taxes

“Unhealthy diets are now a greater threat to global health than tobacco” – said UN Investigator Professor Olivier de Schutter to the World Health Organisation annual summit on 19 May.

http://www.reuters.com/article/2014/05/19/us-health-food-idUSKBN0DZ15H20140519

Professor De Schutter’s suggested solution is a global pact to tackle obesity similar to the UN convention on tobacco control in 2005. The accord should include taxes on unhealthy products, regulation of food high in saturated fats, salt and sugar and restricting junk food advertising.

This debate has been around for a while and doesn’t look like going away any time soon, particularly in NZ during an election year.

Similar calls are made for environmental taxes which are also about discouraging certain consumption or behaviour.

In New Zealand recently the debate on food taxes culminated in a Bill before Parliament from the Maori Party to remove GST on fresh fruit and vegetables, i.e. “subsidising” healthy foods as opposed to taxing the unhealthy, admittedly because a focus of the policy behind the Bill was the cost of food. The Bill did not get Parliament’s support.

It seems to me the “subsidy” versus “penalty” debate is now pretty settled. Plenty of studies have shown subsidising healthy foods benefit most those who already consume the greater proportions of healthy food (which we are told are higher income households). So, those who least need to change their eating behaviour receive the greatest subsidies.

Another issue with healthy food subsidies is they aren’t as effective in changing consumer behaviour. The money saved by high consumers of unhealthy foods tends to be spent on more unhealthy food or other stuff rather than more healthy food, the opposite of what is sought. In part this is because the amounts they save from the subsidy are too small to make a big difference.

Increasing taxes on unhealthy products can be effective. Tobacco is a good example. Various trials with taxes on sugary drinks in the US and Ireland and a 2013 study in Norway indicate small tax increases are hardly worth doing. Real behavioural change comes when the tax is at least 20%.

The big problem with extra taxes on food is their regressive impact, i.e low income households end up paying a higher proportion of their income on the tax than better off households. Supporters of these taxes will argue this is exactly why they can be so effective (i.e. the tobacco example).

Reportedly lower income households are more highly represented in poor health statistics. One reason we’re told is that unhealthy food per calorie is cheaper than healthy alternatives and, therefore, low income households tend to consume proportionately more unhealthy food resulting in poorer health outcomes. Thus, supporters of fat taxes would argue they may be “regressive” but their outcomes are “progressive”.

If countries follow Professor De Schutter’s advice and those arguing for fat taxes New Zealand could well find itself grappling with how best to tax unhealthy food.

The tobacco model would suggest some sort of excise tax.

Personally I think GST has to be the preferred mechanism for implementing this sort of policy. Sure it flies in the face of our “pure” GST system, of which we have every right to be very proud. It’s the most efficient VAT/GST in the world. However, it just makes sense to me. Why add another tax to businesses and the IRD when they already have a collection system that they’re quite used to?

Yes, there’s complexity with having a higher GST rate for certain products but that’s going to arise whatever mechanism is used for any fat tax. The legislation is going to have to be very clear on what’s in and what isn’t. As long as that part is got right the added complexity for most businesses will be no more than businesses all over the world already deal with.

The problems with differential rates in VAT/GST systems arise mainly from definitional issues. What items are caught by the higher rate? Any legislation taxing unhealthy foods would have to find a clear, scientific way for identifying those items. Provided that can be done I think the best way to impose any such tax is to have a higher GST rate for those items.

Cheers

Iain

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NZ GST legislation inadequate

The NZ GST Act inadequately deals with online supplies of services and should be fixed immediately.

I’m referring to how the Act treats those selling products online such as e-books, movies, professional advice, teaching materials, photographs and lots of other digital information.

For businesses selling directly to private consumers the issues are more significant.

In certain situations the legislation requires the supplier to determine where their sales are “physically performed”. This affects how GST applies to them.

The concept of “physical performance” does not sit well with how these products are delivered. Is it the place where the supplier is located, where a server in the delivery chain is located, where the consumer is when they download the relevant product, where the consumer resides or some other place? Is there any “physical performance” at all?

I know these issues are being looked at and no doubt we’ll see some reform at some stage.

However, businesses are having to work out how the law applies to them now and it’s just not clear at all.

Iain

 

 

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VAT and online sales

This is a very good item on the wider business implications of proposed changes in Europe to the VAT treatment of online digital media sales.

http://performance.ey.com/2014/02/20/vat-change-online-sales-just-tax-concern/

Cheers

Iain

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Global VAT alignment edges closer

At the Global Forum on VAT in Tokyo last week 86 countries signed up to the first agreed framework for applying VAT to internationally traded services and intangibles. The new guidelines set out core VAT principles to be applied when taxing services and intangibles, will ensure more consistency between countries, will reduce double taxation and will protect the neutrality of business to business (“B2B”) transactions.

While an important step in the right direction, the more vexing question of how to tax internationally traded business to consumer (“B2C”)services and intangibles has been left for another time.

The Global Forum on VAT occurs under the umbrella of the OECD and provides a platform for global discussions on VAT. The first session took place in November 2012. Last week was the second occasion academics, tax administrators. business representatives and others were invited to discuss VAT policy trends and developments.

The main output from this latest session was a set of new OECD Guidelines on applying VAT across borders.

The Guidelines can be downloaded from the the OECD website – here: http://www.oecd.org/ctp/consumption/international-vat-gst-guidelines.htm

The focus of the Guidelines is B2B transactions. They discuss place of supply rules, the well known “destination principle” (B2B services should be taxed in the country where the customer is located) and mechanisms available to countries to allow non established foreign businesses to recover VAT incurred there.

None of this is startling news for New Zealand. We’re already ahead of this stuff thanks to our super charged GST system. Just this month we’ve seen a new streamlined registration and GST recovery system come into place for overseas businesses incurring GST here.

The really challenging question for New Zealand, and every other country with a VAT, is how do you tax B2C services and intangibles traded across borders? Unlike goods there’s no border control in place to capture internationally traded services and there’s no existing registration system to collect the tax from the customer/consumer.

This really is the more urgent question in my view. Countries are attempting to deal with the issue on their own (eg South Africa and the EU) but global cooperation and alignment are critical. Some States in the USA have implemented mechanisms to apply state taxes to inter-state B2C online sales (such as e-books) and the latest evidence suggests these measures are improving the sales of local bricks and mortar retailers at the expense of online retailers such as Amazon.

Last week’s Forum in Tokyo urged the OECD to finalise work on the VAT treatment of B2C services in time for the next Global Forum on VAT in November 2015. That seems like a long time to wait, but as we all know, achieving global consensus on anything is a slow process.

Cheers

Iain