The Government has finally made traction on the online GST debate by releasing a discussion document on taxing digital goods.
The document details options on how to start collecting GST on overseas digital services like iTunes downloads, Netflix and Spotify subscriptions.
The release of the paper is intended to generate public feedback about the issue.
Revenue Minister Todd McClay called it an important first step in dealing with the increasing number of overseas online purchases in New Zealand.
“It is a fairness issue,” McClay says.
“It’s about putting New Zealand businesses and New Zealand jobs ahead of retailers overseas.”
The news has been welcomed by the likes of Sky TV and Spark.
Their video-on-demand services Neon and Lightbox have to pay tax as they’re based in New Zealand, unlike their overseas competitors.
The discussion paper says putting a charge on digital services is likely to generate about $40 million.
McClay says the overall amount of GST lost from goods (both digital and physical) is estimated to be $180 million and growing at 10 percent each year.
Adding a digital online tax wouldn’t take effect until next year.
This follows in the footsteps of Australia, which introduced a ‘Netflix’ tax earlier this year.
It has since proposed taxing all digital goods purchased, including items like clothing, electronics and books.
The Government will release a separate consultation paper on the de minimis threshold in the near future.
This threshold is the hot issue for retailers. It lets low value physical goods, like clothes, books and electronics between $225 to $400, enter the country tax-free.
Flying Out Record Store co-director Matthew Davis says it’s hard to comment without knowing how the rules will be implemented, but anything that levels the playing field for local shop owners is a good thing.
“Because we have to bring products down to the bottom of the world, we’re already hampered getting the goods into the country and on shelves, so having rules in place would be beneficial just to even things up,” Davis says.
He says the digital tax being discussed may not have a huge effect on the music business, as Spotify and iTunes have still done well in countries that have taxed digital services.
“If it’s an extra $1.50 it’s not a big deal [to the customer], as streaming services are pretty cheap as it is,” David says.
Retail NZ chief executive Mark Johnston praised the Government’s move to close the digital tax loophole, but is concerned about prioritising digital services ahead of physical goods.
He says making foreign companies register for GST is a solution that can apply to both goods and services.
“The biggest foreign retailers already have the functionality in their websites to collect local sales taxes, so there’s no reason for the Government to let them off the hook,” Johnston says.
“If the global ecommerce giants were registered for GST, then we think that would mean GST was paid on around 80 percent of all low value goods entering the country.
“This would be a significant advance towards closing the current tax loophole, and would mean that tax could be manually collected at the border, or at the point of delivery, on a relatively small number of items.”
However, he says overall, retailers will welcome the release of a discussion paper.
PwC partner Eugen Trombitas says New Zealand is expected to follow OECD guidelines and international trends to tax foreign sellers of online services.
With collecting GST on imported goods, Trombitas says more work is required to figure out which option is the most efficient.
“"Foreign sellers will need to take note of the new proposals, and local businesses will have an improved playing field, while consumers will still have choice but offshore sellers may revisit their pricing,” Trombitas says.
"The discussion document is an excellent piece of work and will take the New Zealand GST system forward.”
The discussion paper
The paper says despite benefits of shopping overseas, when GST is not applied evenly it may bias consumer and business decisions, which could lead to an unfair market.
It gives the example of a New Zealand consumer purchasing a software programme for NZ$10 from an overseas site.
The same programme would cost $11.50 including GST when bought locally, so the question is how to implement the $1.50 that’s missing from the overseas purchase.
One of the options being discussed is an offshore supplier of services being required to register and return GST on services purchased by Kiwis.
The company charging the customer a GST inclusive price and then returning the amount to Inland Revenue could achieve this.
In other situations, an electronic marketplace may be required to register instead of the specific offshore supplier, like an app developer on the Apple App Store.
The discussion document suggests New Zealand should adopt a model for cross-border services and intangibles that matches the OECD guidelines.
It says offshore companies have usually complied when tax laws have been brought in overseas, so New Zealand’s rules should be consistent with overseas rules.
Similar taxes are currently operating in South Africa, Switzerland, South Korea and Norway.
One of the decisions to make is whether new rules should cover business-to-consumer suppliers, or both business-to-consumer suppliers and business-to-business suppliers.
In Europe, the rules are limited to business-to-consumer suppliers.
The discussion paper says there wouldn’t be much point in charging GST business-to-business transactions, as New Zealand businesses could claim the GST back.
The paper also outlines the downside to introducing a digital service only tax.
It says this can create customer bias between digital and non-digital services, as well as make the rules unnecessarily complex working out what counts as digital.
Submissions on the discussion document can be made until 25 September.
A consultation process about the minimis threshold paper will start in the near future.