The New Zealand government has issued a discussion document about imposing a goods and services tax (GST) on the cross-border supply of services and intangibles. This would include e-books, music, videos and software purchased from offshore websites.
The proposed rules would require offshore suppliers to register and return the GST when they supply services and intangibles to consumers who are residents of New Zealand.
The destination principle
New Zealand’s GST is a “consumption tax” — a tax on consumer spending on goods and services. Under the so-called “destination principle,” generally the country that has the right to tax consumer spending is the country in which the good or service is consumed.
Goods and services that are exported (presumably consumed offshore) are generally untaxed. Therefore, double taxation is expected to be largely averted if countries apply the destination principle and recognize that the GST is a tax on consumers (rather than businesses).
Existing GST system
In general, the existing GST system in New Zealand doesn’t apply to cross-border services and intangibles that are “consumed” in New Zealand. The Goods and Services Tax Act of 1985 generally applies only to services that are:
- Performed by New Zealand tax residents, or
- Supplied by a nonresident, but physically performed in New Zealand.
When New Zealand introduced the GST in 1986, few consumers purchased services from offshore, and online digital products weren’t yet available. Since the introduction of the GST, steps have been taken to apply it to some cross-border services consumed in New Zealand.
First, since 2003, offshore suppliers of telecommunications services have been required to return GST on telecommunications services initiated by consumers in New Zealand. However, the definition of “telecommunications services” excluded the content of the telecommunication and, thus, excluded services such as Internet downloads that are delivered electronically.
In addition, since 2005, the GST reverse charge has been made applicable to imported services by businesses making exempt supplies and other nontaxable supplies. A reverse charge treats the purchaser as having made the supply and thus liable for the GST. The reverse charge also applies to certain unregistered persons who acquire imported services.
The discussion draft
The discussion draft notes that the Organisation for Economic Co-operation and Development (OECD) is developing guidelines that establish international best practices for determining taxing rights in regard to cross-border business-to-consumer supplies of services and intangibles. The OECD’s business-to-consumer guidelines for value-added tax and GST broadly divide cross-border services into “on-the-spot” services and “remote” services.
In relation to remote services, the draft suggests the consumer’s usual place of residence as the predominant test for determining where consumption occurs. It also suggests requiring offshore suppliers of services to register in the country of consumption as a suitable method of taxing these supplies.
Outside New Zealand
The offshore supplier registration model has already been adopted for cross-border services and intangibles by the European Union and a number of countries, including Norway, Switzerland and South Africa, and it will be followed by Japan.
Australia has also recently announced measures to apply the GST to cross-border services and intangibles beginning July 1, 2017.
The deadline for comment submissions is September 25, 2015. If adopted, the proposed rules would be included in New Zealand’s next omnibus tax bill.