Budget 2015: GST rethink needed for digital evolution
All too often, changes to tax legislation happen at a glacial pace.
As a nation, we can’t afford to let that happen with the GST changes required to modernise the law and processes to capture GST from overseas online purchases.
Budget 2015 provides a suitable time for the government to readdress this to ensure the market isn’t distorted based on the tax residence of suppliers.
Increased online activity is rapidly changing consumption behaviour while the GST legislation is largely still based on the bricks and mortar approach.
Think beyond tangible online purchases to the rapid emergence of the digital economy and the massive amounts of money spent on music, books, gaming and movie downloads.
The nature of these digital products makes it challenging to efficiently impose consumption tax because they are generally low value/high volume transactions. And because there is nothing tangible being imported, these transactions are difficult to capture under traditional border control methods.
The issue has generated a significant amount of attention recently with emotive headlines scattered throughout the media such as, ‘Netflix won’t charge Kiwis GST’ and, ‘Spark cries foul over Netflix GST dodge’.
For those not in the know, these articles incite a xenophobic reaction – why should local companies pay GST when foreigners avoid this? That’s not fair!
Well, ladies and gentlemen, tax is neither fair nor equitable. But let’s clarify matters: foreign companies aren’t dodging any tax obligations; they are complying with the law as it stands. It's the law that needs adjusting, not the suppliers’ behaviour.
This issue is not unique to New Zealand – it has become a significant issue for all worldwide players.
Late last year, the OECD released a draft discussion paper highlighting the importance of this matter from a global perspective and offered potential solutions.
Findings from the review indicate that it is most appropriate that internationally traded services and intangibles should be taxed according to the rules of the country of consumption – the "destination principle."
The OECD review indicates the most cost effective and efficient option is to place the obligation on the non-resident supplier to register and account for GST – but appropriate simplification is necessary to effectively achieve this.
South Africa has already introduced legislation with effect from June 1, 2014, that requires non-resident providers of digital services to register and account for GST for such supplies. Initial indications are that some 80-100 providers have registered to date. Although not without teething problems – this option works.
Earlier this month, the Minister of Revenue announced he has instructed officials to report on developments in countries that have implemented such an approach and, specifically, their suitability in the New Zealand environment.
This is a positive sign for local providers; changes may be imminent to the GST legislation to remove the current cost advantage afforded to non-resident providers.
Prime Minister John Key has also weighed in by commenting that the continuing growth of online shopping was considerably affecting the government's tax-take. Changes are necessary to not only eliminate this erosion of the tax base but to establish consistent rules for all providers, irrespective of their tax residency.
Although increasing the cost of online purchases may not be popular with Joe Public, it is an important issue to address from the fiscal perspective.
Increased focus on this matter is required as it is only going to grow with time. Perhaps the electoral mid-term is an ideal time for the government to make the necessary changes.
Dan Lowe is an associate, tax, at Grant Thornton New Zealand