20 Sep 2015

Tackling tax in the digital age

From Insight, 8:12 am on 20 September 2015

The government wants to soak up the tax that's leaking out of online sales. But is there a simple solution that won't cost more than the tax collected?

Online shopping.

Photo: Flickr / Keith Williamson

The exponential growth of e-commerce means the government can no longer ignore the absence of potential tax revenue from its coffers.

Collecting Goods and Services Tax (GST) on goods, downloads and services bought in New Zealand, but supplied from offshore, seems a simple concept, but it is fraught with difficulty in practice.

The argument put forward by Retail NZ for GST to be extended to online buying has been one of fairness.

Fought under #eFairnessNZ, the business group called the lack of GST on many online activities involving overseas companies a "loophole".  It said lack of action was hurting Government finances, damaging local businesses and costing New Zealand jobs.

But the first area to be tackled was not the goods bought online that currently escape GST, because they fall below the threshold of $400, but services and so-called intangibles; e-books, music, television and film. 

Todd McClay

Trade Minister Todd McClay Photo: NZ Parliament

Revenue Minister Todd McLay estimated $40m in potential tax revenue was being lost in this sector each year. The number wasn't huge in the overall tax take, but it was important. He said it would pay for a new school or a whole lot of hip operations and added that people and businesses tended to feel unhappy if others were not paying their share.

"If we don't find a way to make sure GST covers this trade, then at some point we might have to consider increasing tax rates or GST rates in New Zealand."

Consultation on this first step to extend GST to cover services and digital downloads purchased from overseas closes in a few days. But it has taken years of discussions on the international stage to establish common rules to make sure businesses and individuals are not doubled taxed.

The careful approach to bringing in these changes has been applauded by a Victoria University consumption tax expert, David White.

Victoria University Tax expert, David White

Victoria University Tax expert, David White Photo: RNZ/Philippa Tolley

"You don't want to be the first cab off the rank. We're a tiny country. For services there has to be agreement over who has jurisdiction to tax …Nowadays with the internet, you don't just trade with familiar jurisdictions that speak the same language and we have a lot of interconnections. The moment someone sets up a website, just a small New Zealand enterprise, the moment that happens they are an international trader" – David White.

The system currently under consideration would require overseas traders to register for GST and gather the charge on any local sales.

But many experts in the field flag the possible ease of tax avoidance. People have been legitimately using methods such as Virtual Private Networks or VPNs for security and privacy reasons and to access services blocked to users in different parts of the world. Consumer's technology writer Hadyn Green can see it happening all the time.

"When you connect to the internet you go through this VPN and it looks like you're from another country… So Amazon goes you're from the US you're not from New Zealand, we're not going to charge you that GST."

From the other end of the transaction, he raised the possibility that some services might choose not to bother with the New Zealand market and its need to register for GST at all.

"There are quite a few music and streaming services online and not all of them are big players and if someone has a new start up or a new music service like "Tidal" by the famous Jay Z … are they just going to go, you know if we have to be registered for New Zealand let's not bother".

The difficulties seem to grow when it comes to working out if it would be practical to gather GST on a wider range to goods ordered in from overseas. So far no country has come up with a workable solution that does not cost more to set up than the extra tax gathered.

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Photo: Fickr/Shardayyy

At the moment there is no GST to pay on most goods with a value of $400 or less. In the last month Australia has announced that it will drop its current threshold of AU$1,000 – one of the highest in the world – down to zero. That means from 2017 everything would be liable for GST.

Whether those tax policies announced in Australia will influence the direction New Zealand is taking is a pressing question.

PwCs GST Partner, Eugen Trombitas

PwCs GST Partner, Eugen Trombitas Photo: Supplied

Going a step further and joining forces in some sort of geographical tax zone is a concept worth exploring according to the GST Partner at consulting firm PWC Eugen Trombitas.

"Our clients – the corporates on the US west coast – are saying wouldn't it be nice to have simple and consistent rules not just across Australia and New Zealand but the Asia-Pacific region."

A concept like that would mean challenging ideas such as one country collecting tax on behalf of another. Could New Zealand collect tax on behalf of Australia, Japan or South Korea, Eugen Trombitas asks? While not on the table for discussion yet, talks like that might make the idea of levying GST on the millions of parcels that arrive in the country each year seem relatively simple.

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