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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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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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Certainty in construction

Planning ahead and attention to detail in contractual documentation are essential for retirement village operators wanting clarity of what GST costs they are up for.

That was the key GST message at this week’s Retirement Villages Association finance forum focussing on construction and development. Another outstanding event incidentally run by the able team at the Retirement Villages Association: www.retirementvillages.org.nz.

There aren’t many businesses in New Zealand with more GST headaches than retirement village operators. They live in a complex GST world. Getting it wrong can be expensive not to mention extremely time-consuming.

When constructing a facility, retirement village operators cannot claim GST credits on some construction costs, can claim back all GST on some costs and have to claim a portion of GST on other costs provided they continue to monitor and adjust that portion annually.

Knowing what they can and can’t claim and what costs they have to monitor every year makes for better sleep. Those operators who include GST in their planning when budgeting, concluding contracts and setting up systems will have an easier time and more clarity over their financial position. This involves people throughout their organisation with an appreciation of the GST issues working together. The legal, finance, IT, procurement, sales and property teams need to be working together.

When all systems, processes and controls are set up to deliver a correct and consistent GST outcome life is a lot easier and less risky for a retirement village operator.

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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Commonsense prevails: well almost

Yesterday the Australian Tax Office issued a practice statement explaining when it would overlook an incorrect GST input claim made by a business.

You can read it here

On the face of it the practice statement reeks of commonsense.

The supplier wrongly applies GST to the transaction and so over pays their GST. The recipient over claims their GST but would have been entitled to the claim anyway if the transaction was subject to GST. The ATO doesn’t have to refund the over paid GST to the supplier so they turn a blind eye to the over claimed GST by the recipient and everyone’s left where they would have been if the mistake had never been made. In the document they call it “preserving the status quo”.

I really like the way the ATO is prepared to come out and say when they will use their “powers of general administration”. Their intention is admirable: to adopt a pragmatic approach to tax administration where being overly technical would result merely in extra administration and costs without any net effect on tax collected.

In New Zealand the IRD does in practice demonstrate the same sort of common sense approach to compliance, agreeing not to go to great lengths to unwind historic wrongs if there is no net tax at stake [although not always it must be said]. What we don’t see so much of though are published statements from the IRD saying when they will turn a blind eye to past wrongs in the interests of administrative expediency.

As sensible as the ATO position seems to be though I do have a slight quibble with it. I’m not sure it’s quite as straightforward as the document suggests.

The ATO’s statement is based on an assumption that the pricing of the transaction between the supplier and recipient explicitly took GST into account. In other words, it assumes the parties turned their minds to GST and adjusted the contract price to add GST. In my experience that isn’t always the case.

Often parties contract on the basis prices include GST (and any other taxes). The price is driven by market considerations and is the agreed price regardless of whether GST applies. So, if a supplier has incorrectly treated the transaction as being subject to GST, from a contractual perspective, it would not be right for the tax authority to insist the supplier refund a GST component to the recipient. Yet that is a strong driver of the ATO’s position.

The ATO assumes the mistake made by the supplier in over paying their GST must be corrected by a refund to the supplier being passed on by the supplier to their customer. Because of that, the ATO come to the conclusion it’s administratively acceptable simply to allow the customer to keep the refund claim they wrongly made and for the ATO not to refund the over paid GST to the supplier.

In my view, if the supplier has mistakenly reduced their margin by accounting for GST on a transaction which should not have been subject to GST and the parties clearly contracted on a GST inclusive basis without turning their minds to GST, then rather than “preserving the status quo”, the ATO’s approach could well leave the supplier out of pocket and the recipient with a windfall.

Cheers

Iain

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Emissions units

Receiving emissions units can cost you.

It’s easy to assume GST doesn’t apply to emissions units. The legislation has specific provisions which “zero rate” many supplies of emissions units so perhaps the natural presumption is, you don’t have to worry about GST whenever an emissions unit is involved.

That could be a costly mistake.

Some businesses receive emissions units as part payment for goods or services they supply as part of their business activity. This is a “barter” arrangement; goods or services are exchanged in return for other goods or services, rather than payments of money.

GST applies to barter arrangements just as it would if money were the payment method.

So, if you are a GST registered business and you supply goods or services to someone else who pays you with emissions units, you have to pay GST on the value of the emissions units you receive as payment in the same way you would had your customer paid you in cash. If you don’t you could incur penalties and interest not to mention the extra GST cost you probably didn’t factor in to your cash flows.

Tread carefully.

Iain

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Late payment fees or penalties?

Yesterday’s tax bill proposes a new provision saying “a fee charged for the late payment of an account” is treated as subject to GST.

It will be back dated to 2003 to prevent the Government being inundated with refund claims.

My issue is with the drafting. It applies to “late payment fees” but according to the commentary does not apply to “penalty or default interest”. Yet there’s nothing in the proposal to help taxpayers determine the difference.

I’ve been thinking through some examples and frankly I don’t think it’s always obvious when something is a “fee” for late payment and when something might be a “penalty” for late payment. There are no relevant definitions in the legislation.

If the IRD is not careful this could backfire on them. On a literal interpretation of the new provision it seems to me there’s a more than reasonable argument it applies to IRD “late payment penalties” under the Tax Administration Act. These penalties are not “interest” because use of money interest is imposed under different sections in addition to late payment penalties. When they were introduced we were told late payment penalties recognised the extra administrative costs incurred by the department when taxpayers paid their tax accounts late. That description is amazingly similar to the language in the Official’s Commentary on the new bill which talks about a late payment fee representing the “cost of administering the late payment”.

If IRD late payment penalties are subject to GST then businesses who have incurred them over the last few years might be entitled to ask the IRD for a tax invoice once this legislation is enacted and claim an input tax credit for the GST component.

This is a classic sledgehammer to crack a nut and needs more thought.

Iain