A significant GST matter reflecting brave new policy globally
The NZ Government announced last week that it is seeking consultation on the best way to collect GST on online purchases, by private NZ consumers, of imported low value goods (LVGs) under NZ$400 (approx. USD 280). If enacted, the new rules will apply from 1 October 2019.
This is a significant issue which has been discussed by the OECD, governments and regulators around the world. If enacted as currently proposed, the new LVG rules will be broadly consistent with the introduction of NZ’s remote services rules (implemented in October 2016).
The imported goods measure is significant because it reflects an extension of the ‘broad base’ tax policy requiring GST to be collected on all consumption in NZ ie. with respect to both goods and services. GST on offshore remote services has been collected from 1 October 2016 with some success. The remote services rules are relatively easy to comply and have generated in excess of NZ $110 million of annual GST from about 200 GST registrations. If remote services are taxed but offshore sales of goods (consumed in NZ) are not taxed, the tax policy settings would be imperfect.
The most critical issue with the announcement is the design and efficiency of any new GST collection model in relation to LVGs ie. the “How to tax?“. Importantly, the Government has welcomed consultation on this and this consultation will be vital to ensure the most appropriate model is implemented.
The Government’s discussion document refers to an offshore seller registration (OSR) model and canvasses several other options considered by the Tax Working Group (TWG). The OSR models are currently being tried in only a handful of countries and represent brave new tax policy globally. Teething issues are bound to arise given the complexity of cross border goods flows and the multiple stakeholders in the supply chain. Indeed, the TWG has specifically recommended that the Government continue to review the GST collection options between the point of sale and delivery and after delivery following implementation of any OSR model. This caution is important and our law designers will no doubt be open to considering the issues and then delivering the most efficient solution.
Submission process will be vital
As noted, the most important part of the process now is to focus on the design features ie. the ‘How’. In this regard it will be beneficial to draw on the Australian LVG reform experience and, if necessary, improve the NZ model. Impacted parties will need to make submissions by the due date of 29 June 2018 and actively engage with officials throughout the process to make sure the tax collection design is both practical and efficient.
The two month window does not give a lot of time but we expect officials will be receptive to feedback throughout the period leading up to tabling of the draft law towards the end of 2018. The experience with the GST remote services process was that officials were engaged and appreciated receiving feedback on the design of those rules. The quality of the feedback will help improve the final design of the LVG rules.
New dimensions not evident with remote services
One aspect of the new landscape is the impact on Customs border processes – there will be new dimensions for NZ Customs. The LVG measures are in addition to NZ Customs mandatorily moving to Trade Single Window (TSW) WCO3-format for cargo reporting and clearance messages from 1 July 2018, as well as getting ready to implement an entirely new Customs and Excise Act 2018 (effective 1 October 2018).
The current de minimis for LVGs is based on minimum GST and applicable duties (capped at NZ $60) and reflects a balance between cost of collection and the tax revenue generated. There are also border fees that apply in certain cases. In a positive move, the LVG proposals will allow border processes to be streamlined. Reducing various border fees and focussing on the ‘value’ (or price) of imported goods will in the long run make matters easier compared with the current system of assessing border taxes based on minimum GST/duties.
GST and duty will still be collected at the border for high value goods (HVGs). This under scores that offshore and local border processes will need to co-exist in a happy marriage to make sure the correct party is collecting the GST ie. offshore seller on LVGs and local importer on HVGs or business imports. Multiple tax payments need to be avoided. Special attention will be required for shipments containing both LVGs and HVGs, or shipments where the offshore seller is below the annual GST threshold but sells HVGs to the NZ consumer. In short, double tax and/or double process issues need to be carefully considered with appropriate concessions introduced as appropriate. The goods declaration and import entry process will need to be adapted for the changes.
One of the fundamental features of the proposals is that an electronic marketplace (EM) can be liable for NZ GST. Some EMs buy and sell goods and they will effectively be treated the same as any other offshore seller under an OSR model. However, EMs that are ‘transparent’ and simply bring parties together are likely to face challenges and additional costs – such as tracking the location of the goods, determining transaction details, GST-able values and adjustments to values.
GST has always been a tax on the seller rather than the agent – there are limited exceptions to this cardinal rule. There is currently an EM rule in place for remote services as marketplaces are used to deliver digital products. However, there is less complexity with remote services because these services are not cleared by Customs whereas goods have to physically cross the border and be processed. Further, the remote services EM rules have inherent flex – that’s a good thing – and allow EMs and offshore sellers to agree for offshore sellers to pay GST in certain cases.
There is a saying that “Imitation is the sincerest form of flattery“. This may not be the best approach for NZ in relation to Australia’s LVG model about to commence on 1 July 2018. While many offshore retailers/vendors will be able to cope with Australia’s new rules, EMs have encountered issues and costs. The design of NZ’s rules will need to consider flexible options if EMs are used for goods, for example whether:
- it would be beneficial to consider giving EMs the ability to agree with offshore sellers for the sellers to pay GST, or
- NZ resident agents should be allowed to meet the GST obligations.
Many EMs will sell both remote services and goods meaning that business flexibility and efficiency is necessary in the final model. Re-deliverers will also have challenges under the new rules and this area warrants attention.
A B2B concession should automatically apply to supplies made by EMs and re-deliverers.
There are likely to be thousands of offshore sellers of goods (compared with several hundred remote services sellers) so it is important to make sure that registration and compliance is made as easy as possible. The OECD has also recommended that countries could consider flexible features such as using the vendor model in combination with an intermediary/transporter model (notably for small to medium sellers) and using fast track processing and/ or the bulk-shipper scheme. The OECD has specifically recognised that e-commerce platforms may face additional costs in adjusting their IT systems and processes.
A technological future is part of the solution
The GST discussion document has recognised that one day in the future joint GST registration for NZ and Australia could be considered. In addition, with much faster and accurate e-processes and information flow, data matching may also be possible between revenue authorities internationally as well as domestically relying on NZ Customs import entries. For example, if NZ Customs is able to easily identify which offshore sellers are above the annual GST threshold of $60,000 then this will be highly relevant to any new GST collection process administered by Inland Revenue.
Embracing the opportunity
To add to NZ’s success with GST on remote services, the policy of addressing GST collection on LVGs is absolutely correct. NZ can embrace the e-commerce opportunity and lead the way with designing a practical and ‘user friendly’ GST system for LVGs. In doing so, NZ can still maintain its reputation of having the best GST system globally and make this system one of it’s best exports – along with the All Blacks of course.
For more information please contact Eugen Trombitas, PwC New Zealand’s GST Leader