All posts should be blog!

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Overseas companies avoiding GST?

Simon Moutter, Spark’s MD, says overseas companies like Netflix are avoiding GST.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11422160

He has a point, and it’s not news really. But the debate grows as more New Zealand businesses feel the heat from overseas digital competitors.

I’ve no doubt a solution will be found and I agree with Moutter, it will be a technology solution.

VAT /GST regimes around the world apply the “destination principle” i.e. the tax burden lies where consumption occurs. Unless we abandon that policy building block we must find a way to tax the increasingly valuable services being purchased from offshore.

Some countries are forging ahead without waiting for the OECD to come up with a multilateral solution [South Africa, the EU, the Bahamas]. As Moutter points out, the US has rules in place for sales taxes on inter-state transactions, but of course enforcement isn’t as difficult when the two taxing states are part of the same country.

This is a challenge for technology entrepreneurs as much as tax administrators.

Cheers

Iain

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Govt raises stakes for online shoppers

The NZ Prime Minister says his government will go it alone if the OECD doesn’t move quickly enough to impose GST or VAT on online sales.

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11418586

The fact the Prime Minister is raising this now is significant. The OECD is working on a multilateral solution for governments losing tax revenue from digital commerce. The next reporting deadline is towards the end of 2015. The question is, will Mr Key wait that long? He doesn’t say.

Other countries have already moved on this. The EC requires certain overseas companies to register and collect VAT on products sold to consumers in the EC. South Africa has done the same and there are others.

The likely multilateral solution will focus on enforcement in my view. Legislating to require non-resident companies to register for GST here is an important first step and most companies will comply. However, many may not and the Government will need a mechanism to enforce the law. That’s where an OECD wide solution could be helpful.

Prime Minister Key is suggesting some mechanism to block digital retailers from access to OECD consumers if they do not comply with the VAT/ GST law.

Clearly this issue is now well and truly in the Government’s spotlight. NZ retailers have been pushing for something to be done for some time now and will be watching developments closely.

Cheers

Iain

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Bodies corporate GST status to be clarified

Legislation introduced yesterday will clarify the GST status of bodies corporate.

Here’s the press release: http://taxpolicy.ird.govt.nz/news/2015-02-26-bill-clarifies-gst-bodies-corporate-rules

This issue has some history.

In the past Inland Revenue took the view bodies corporate did not have to and could not register for GST. That was tested in recent years by some which wanted to register so they could claim GST credits for remedial work done following leaky building claims.

Last year the Government announced its intention to change the law so that it was clear bodies corporate could not register for GST. This would be done by exempting bodies corporate from GST, which in turn meant some confusing and complex provisions to deal with the consequences of an exemption.

The proposal was subject to consultation and the response from tax experts and industry was pretty forceful by all accounts.

This latest development comes close to concluding this particular argument.

Some see it as a “back down”. Sure it is a change of approach for the government but the core policy, not requiring bodies corporate to register for GST remains the same. You could see it more as an example of how laws get made. There’s a proposal, then consultation then a final position.

The solution is quite elegant in my view. Bodies corporate won’t be required to register for GST, so that deals with those who were concerned about unnecessary compliance costs for taxpayers and the government. However, they will be able to register and those which are already registered may remain registered. So that deals with those who wanted registration as a means to recover GST on their costs.

To avoid a flood of bodies corporate registering suddenly so they can spend their leaky building settlements and claim back GST there’s a rather unique provision which says on registration a body corporate will have to pay GST on the value of any funds they hold. My concern about this is it seems to treat a body corporate which has already received a leaky building settlement differently from one which has yet to receive a settlement. The latter can still opt to register and potentially have no GST liability on their settlement amount.

The law making process hasn’t been completed yet so this isn’t necessarily the last word on this issue.

cheers

Iain

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It wouldn’t happen in New Zealand – or would it?

An Australian court says a taxpayer has not commenced a subdivision activity until they have the funds needed to purchase the land. The costs spent beforehand on planning permits and market valuations were preliminary or preparatory to starting any business.

That’s according to a Melbourne tax court in Bryxl Pty Ltd v FC of T [2015] AATA 89.

This is a big deal for the taxpayer because it means they can’t claim GST credits for the planning and preparatory expenses. Their GST registration was cancelled and they had to pay penalties.

New Zealand’s GST legislation says “anything done in connection with the beginning … of a taxable activity is treated as being carried out in the course of .. the taxable activity.”

That would indicate the Bryxl Pty Ltd might have got a different result in New Zealand.

But not necessarily. In Case P73 (1992) 14 NZTC 4,489 a New Zealand tax court said commencement work can only be added to a taxable activity. It cannot, by itself, amount to a taxable activity. So, if the taxable activity never actually gets up and running the work done in connection with the beginning of that activity cannot be treated as part of any taxable activity.

For GST purposes therefore, the amounts spent on the pre-commencement activities fall into a black hole and there is no entitlement to claim an input tax credit unless the business or taxable activity actually gets up and running.

Who knew that?

Iain

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Fishing quota and coastal permits

Inland Revenue has confirmed GST second hand goods credits cannot be claimed on the purchase of fishing quota, coastal permits and certificates of compliance.

Two binding rulings (BR 15/01 and 15/02) just released by the tax department conclude fishing quota, coastal permits and certificates of compliance are not “goods” under the GST Act and therefore a “second hand goods” input tax deduction cannot be claimed when a non-GST registered vendor transfers these items to a GST registered purchaser.

Fishing quota are not “goods” because they are choses in action which are expressly excluded from the definition of “goods” in the GST Act. Coastal permits and certificates of compliance are granted under the Resource Management Act which provides they are not personal or real property and, therefore, they too do not fall within the definition on “goods” in the GST Act.

This will come as no surprise to most people because these new rulings reach the same conclusion previously published by the Department in earlier and now expired rulings.

The rulings are effective indefinitely.

A copy is attached.BR 15 fishing quota second hand goods

 

cheers

 

Iain

 

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Charges for failing to turn up to parties

A parent in the UK invoiced the parents of a five year old GBP15.95 because their son failed to turn up to a birthday party after they had accepted the invitation on his behalf.

See the story here: http://www.bbc.com/news/uk-england-cornwall-30876360

They’re threatening to sue to recover the money!

So what are the VAT implications here, even if the claimant has only a snowball’s chance of recovering the money?

VAT probably wouldn’t apply because it’s likely to be viewed as a “compensatory” payment rather than consideration for goods or services.

Also, the claimant probably isn’t registered for VAT in relation to the birthday party activity.

However, if the claimant were a professional birthday party organiser VAT might apply. It would have to be established there were legal relations intended between the organiser and the invitee and a term of that contract was that the invitee, having accepted the invitation, would pay a fee if they failed to show up.

So, there was a contract, the customer failed to honour their side of it and a fee is charged. In New Zealand that fee might be subject to GST if the fee effectively is an adjustment to the originally agreed price. However, if it’s to “compensate” the organiser for a loss suffered because of the no-show then GST probably wouldn’t apply.

The IRD recently stated their view on the GST treatment of late hire charges and certain fines:http://www.ird.govt.nz/resources/1/5/1552acab-6838-4617-817d-86bfe0ab86b4/qb1414.pdf

The statement illustrates some of the same principles.

These things get complicated when you scratch beneath the surface don’t they?

cheers

Iain

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Governments using lotteries to collect tax

Tax collectors in the EU are looking more closely at the use of lotteries to tackle VAT evasion.

This paper, just published, discusses how existing lottery schemes work and reveals there could be upside for governments. It concludes more empirical evidence is needed to confirm the benefits of tax lotteries but they may be a useful weapon in the fight against VAT (GST) evasion. http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_51.pdf

They might also be a useful tool for governments looking to reverse the revenue lost as a result of increased online shopping.

The challenges for governments from the growing digital economy have been widely discussed. The OECD is consulting on a possible multilateral solution, http://www.oecd.org/ctp/consumption/discussion-draft-oecd-international-vat-gst-guidelines.pdf. I wouldn’t be surprised if tax lotteries are considered as a tool to encourage compliance with laws requiring non-residents to register for VAT in countries where they are selling online products to consumers.

The paper on tax lotteries is the product of a recent workshop attended by 39 EU member states. They discussed lottery schemes already running in Malta, Slovakia, Portugal and Georgia. They also heard from experts in Greece looking at a scheme there.

Tax lotteries have been around for a while. Taiwan has used them since the 1950’s and there was some evidence they experienced up to 20% improved compliance as a result.

They’ve been used to encourage consumers to ask for receipts when buying goods and services. The receipts are then sent to a central agency (by post, text or email) or some other electronic system is used so the receipts become entries in a lottery. There are then regular draws and cash prizes. In Malta for example the draws take place each month and are done manually i.e. the receipts are sent to the central lottery agency and put into a large barrel from which the draws are made.

The idea is consumers are incentivized to ask for receipts and this discourages evasion by creating a paper trail which the tax authorities can use to monitor compliance.

Some data collected so far suggests these lotteries do have an initial impact on compliance with increased revenues for the government. However, it seems over time the benefits fade. The EU workshop found that the main difference occurred as a sharp increase in reported sales by very small retailers but little difference in the reported sales of large retailers. One study reported increased tax revenues of Euro 8m against administrative costs of Euro 1.6m.

There have been some interesting reactions, including the emergence of “professional players” in these lotteries, being people who devote a large amount of time to them and who have even been found to be submitting receipts into the lottery for expenses they did not themselves incur.

The EU is committing resources to better quantify the potential upside for states in running these sorts of lotteries.

Another overseas development for the NZ Inland Revenue Department to watch.

 

Cheers

 

Iain

 

 

 

 

 

 

 

 

 

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Australian Tax Office rules on Bitcoin

The ATO has just issued a ruling on the GST treatment of Bitcoin. Here: http://law.ato.gov.au/atolaw/view.htm?docid=%22GST%2FGSTR20143%2FNAT%2FATO%2F00001%22

In brief:

1. A transfer of bitcoin is a “supply” for GST purposes.
2. Bitcoin is not “money” under the GST legislation.
3. A supply of bitcoin is not a “financial supply”.
4. If bitcoin are supplied in exchange for goods or services the transfer will be treated as a barter.
5. A bitcoin is not a “voucher” for GST purposes.
6. A secondhand goods input credit is not available on the acquisition of bitcoin.

No real surprises there. This had been well signposted.

We await the NZ IRD view which I wouldn’t expect to be much different.

Iain

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12 GST thoughts of Christmas

12 GST thoughts of Christmas:

1. There’s no GST on gifts (so Santa is probably not GST registered).
2. GST registered businesses can claim back the GST on gifts they buy for staff, suppliers and customers.
3. If you buy someone a gift voucher for Christmas it’s quite likely the IRD won’t get any GST until the person redeems it.
4. If the person you gave the voucher to loses it the IRD might never get any GST.
5. On Boxing Day when you go to the shop to return the present you don’t want the retailer will be able to get a refund of GST from the IRD provided they credit you for the return.
6. However, the retailer will have to pay GST if you use the credit to buy something else.
7. The government gets a double whammy of GST when you buy alcohol for your Christmas festivities or petrol for that family road trip (because GST applies to excise taxes on alcohol and fuel).
8. If you order an expensive gift online from overseas for someone in New Zealand and have it delivered directly to them you may be giving them a GST bill because chances are they’ll have to pay GST on the value of the present before they can pick it up from Customs.
9. Businesses are given an automatic extension of time to file their November GST return so they don’t have to file it on 28 December.
10. GST registered businesses with 31 December balance dates which make exempt supplies may have to come back early from their holidays so they can calculate their annual GST adjustment due on 28 January.
11. If you’re booking an overseas holiday and have to take a domestic flight to get to your departure airport it’s best to book both flights together if you want to save the GST on the domestic flight.
12. There’s no GST on gifts but if someone gives you something expensive while overseas you might have to pay GST when you bring it back with you.

Happy Christmas everyone

Iain

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Savings up + GST collections down = GST rate up?

Kiwi households are saving more than at any time since 1995 according to the latest national accounts.

http://www.beehive.govt.nz/release/household-savings-rate-positive-five-years

The flip side is with low inflation and lower consumption the Government’s GST take is down.

I’m not an economist but my understanding is even though households may be saving more, national savings overall aren’t necessarily any better off because of the push/pull effect of private savings and tax collections.

This was something the Savings Working Group considered in their report Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity: Final Report to the Minister of Finance published in February 2011.

As a countermeasure the Savings Working Group recommended an increase in the GST rate from 15% to 17.5% over other tax changes because GST is “less distorting than income tax on the saving decision”.

http://www.treasury.govt.nz/publications/reviews-consultation/savingsworkinggroup/finalreport/30.htm

The political challenge with increasing GST to 17.5% is that our rate is already amongst the highest in the world when it comes to basic food, education, healthcare and utilities. Outside of the benefit system there doesn’t seem to be a simple mechanism to compensate low-income households for an increase in GST and this must surely put real pressure on our single rate broad-based regime.

Iain