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Australia jumps ahead of NZ in taxing digital commerce

The Australian Government has released draft legislation proposing to apply GST to downloads and streaming of digital content and other services supplied from offshore to Australian consumers.

This will affect media such as games, movies, e-books and music downloaded over the internet by Australian resident consumers. GST will also apply where an Australian consumer buys other services from offshore such as legal, accounting, architectural, medical or other similar services.

There will be measures to allow the GST to be collected from operators of electronic distribution services in addition to the offshore supplier and a simplified registration regime appears on offer. A lot of the detail will appear later in Regulations.

The States of Australia still need to approve the legislation but it is intended to apply from 1 July 2017.

So Australia gets an early jump on NZ. Bets are on something similar being announced in the NZ Government’s Budget this month.

The practical issues with these measures have been well debated now and no complete or ideal solution has been found. Australia is essentially following the EU lead.

The Australian approach tilts the playing field completely in the opposite direction. At the moment, products sold electronically from offshore (such as e-books) are not taxed as highly as goods purchased online and imported into the country.

When this measure comes into force the preference shifts in favour of goods purchased online. That is because, for goods bought over the internet and imported into Australia there is a threshold of $1,000 below which no tax is payable. There is no suggestion at this stage to apply a similar threshold to imported services. How this impacts consumer choices (such as buying hard copy books over the internet rather than an e-book) remains to be seen.

The thorny issue of the low value import threshold just won’t go away.

 

 

Iain

 

 

 

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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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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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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