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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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GST heat goes on internet sales

Debate is turning into action over taxing internet sales.

The Australian Treasurer told media at the Council on Federal Financial Relations Meeting in Canberra on 9 April his Government will require overseas companies selling intangibles into Australia to register and pay GST on their sales there. This includes companies like Netflix and many others which are clearly in the Australian Government’s sights.

Treasurer Hockey says the States in Australia have agreed to this in principle and they intend working as quickly as possible to achieve it. He also said it would make sense to apply the same rules to goods sold over the internet below the import exempt threshold of $1,000. That will be welcome news for Australian retailers.

http://jbh.ministers.treasury.gov.au/transcript/075-2015/

Meanwhile, in New Zealand, our Government maintains the line it will await the OECD special working party on digital commerce (due to release a further report later this year) before acting and there is no current intention to review the low value import threshold here for goods.

NZ retailers still have their work cut out to persuade our Government to act sooner and follow the EU and South Africa.

On 13 April Retail NZ and Bookseller NZ launched an #eFairnessNZ campaign seeking urgent action on this. They say it is hurting retailers all over New Zealand. The campaign is being run on Facebook, Twitter and Instagram using the hashtag #eFairnessNZ.

www.retail.kiwi/eFairnessNZ

While the regimes in place in South Africa and the EU have significant practical and enforcement issues it does appear they are collecting revenue. We won’t know how they are impacting consumer behaviour for another few months but it certainly doesn’t look like the sky has fallen on them.

I’d say this is an inevitability but we still are some way away from the ideal technological solution we need.

Cheers

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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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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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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“Australia should follow NZ GST”?

NZ’s GST is certainly the most efficient form of VAT in the world.

The “VAT Revenue Ratio” is used by the OECD as a measure of VAT efficiency. The average in the OECD is about 50%.

The least efficient is Turkey’s VAT at about 30%. NZ ranks top at a little more than 95%, followed closely by Luxembourg.

Australia’s VAT Revenue Ratio is around 45%.

The Australian Treasury Secretary thinks they can learn from NZ’s GST and argues for a further shift in Australia from income taxes to GST. See: http://www.stuff.co.nz/business/world/9900014/Aussies-should-follow-our-GST-lead

If efficiency is the goal then the evidence seems compellingly in favour of the Secretary’s argument.

However, political realities seem to pull most countries in the opposite direction.

Yes VAT is spreading around the world as the tax of choice for governments but, increasingly those governments are voting for multiple rates, exemptions and zero rating when designing their version of VAT.

When the GFC hit we saw governments making greater use of reduced rates to stimulate activitiy. There is now a growing trend to use penal VAT rates as policy tools to discourage certain “undesirable” consumption (e.g for environmental reasons). Policies like these make a VAT system less efficient but they also make it more politically acceptable and relevant.

Perhaps the questions are: how long can NZ resist these political pressures and is it more likely we will follow the Aussie lead?

Iain

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At least it’s a start – UPDATE on E-commerce in South Africa

At least it's a start.

An update on the South African proposal to require non-resident e-services suppliers to register for VAT.

The effective date for the new rules has been stretched out to 1 June 2014 (an extension of 2 months) to allow businesses more time to get ready. Registration is open however from 7 April for those wishing to beat the rush.

Following consultation the scope of services caught by the new registration requirement has been narrowed in an attempt to exclude some common business to business transactions. This should eliminate some unnecessary compliance obligations for businesses and the South African tax authority.

This is clearly a work in progress for the South African government, as it is for every other country, so more changes to the detail are expected (such as to the registration threshold for example). They intend to continue with a wider review on the taxation of electronic services, particularly in the financial services sector.

You can read more about this here: http://www.treasury.gov.za/comm_media/press/2014/2014032801%20-%20Press%20Release%20-%20Electronic%20Services%20Regulations.pdf

Iain

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GST and online shopping – is there a cure?

The NZ Government has delayed the Customs / IRD report on GST and online trading to allow the issue to be considered as part of the wider review of how global corporates are taxed. I think the merger of the issues was unavoidable. They are closely linked and the ultimate solution will be multilateral.

Nevertheless we’ve just come through another peak retail season with shoppers confirming their increasing appetite for internet purchases. Senior politicians have taken notice of the amount of GST being lost to the government and local retailers wonder why their overseas competitors continue to have this advantage over them.

As I see it, there are two interim solutions:
1. Remove the low value import threshold.
2. Introduce a domestic low value threshold for GST purposes.

Each has its own challenges and each means more compliance costs for someone. The first option appeals more however because it is consistent with perserving the integrity of our existing GST system.

cheers

Iain