Tax is boring....but what is the deal with GST and online digital purchases?
In contemplating a subject for my blog I thought it could not get any worse than to write about something as boring as tax! Unfortunately when subscribing to an Adobe product monthly subscription the way the transaction was handled differed from previous, I found myself navigating the complexities of tax law and the implications of the new rules. Furthermore; some clients were unsure of their status, so here we go with my understanding!
In New Zealand the pivotal date was 1 October 2016 whereby a "Digital tax." of 15% consistent with current GST was imposed on all "remote services" to a person deemed as a resident in New Zealand. The regime prior to 1 October 2016 saw all digitally provided services excluded from GST imposition. The tax has been called the "Netflix" tax and the intent is to provide a more level playing field for domestic service providers against international competitors. Essentially the GST is to be collected by the offshore provider and remitted to the NZ Inland Revenue Department. Clearly this has implications for online providers to have systems and processes capable of administering the requirements. The "non resident" business supplying services is required to register for GST in New Zealand where the expected sales have, or likely to be more than $60,000 (NZD) in the preceding, or ensuing 12 months.
Pursuant to Section 8 of the Goods and Services Tax Act 1985, the determination of the customer is proven to be a New Zealand resident involves a test of meeting a check of having "two non-conflicting pieces of evidence" that indicate the services recipient is a New Zealand resident. The type of taxable supply caught up in the GST net are those services derived from online gaming, gambling, video streaming, software services, mobile apps, website design, webinars and e-learning, music streaming services and any other services purchased online (including accounting, legal and consultancy services). These two non-conflicting pieces of evidence are:
- the persons billing address
- the Internet Protocol (IP) address of the device, or determined by another geolocation method
- the person's bank or credit/debit card account details, including billing address
- the mobile country code derived from SIM card used
- the location of the customer's fixed land line
- and the catch all "any other commercially relevant information"
There are prescribed hefty penalties to discourage non compliance by consumers such as using Virtual Private Networks (VPN's) etc as a potentially circuitous way around circumventing the regulations. There have also been issues in Europe where services are provided by various electronic marketplaces and intermediaries in actually determining the origin of supply. it seems for New Zealand for practical purposes that the end link of the supply chain is deemed responsible for GST collection.
Whilst for businesses accounting for GST has cash flow implications and the net value add is what is ultimately paid to the tax authority, this new policy relates to business to consumer (B2C) and not to business-to-business (B2B) transactions. In my Adobe experience the services were being billed out of Ireland in Australian dollars (no NZD option), if you entered as user selected option a New Zealand GST number there was no GST levied n the billing process, if not the GST was added. There has been misinformed chatter in the media of offshore businesses possibly refusing to supply New Zealand consumers due to the accounting "complexities." This is nonsense, other jurisdictions have such rules and within the USA there are specific state by state requirements which are routinely handled. Any eBusiness product operating in a global market handling of specific taxes is the least concern of their supply chain logistics. The likes of Apple and Netflix derive a perpetual cash flow and holding benefit of GST they collect until they have to remit to Inland Revenue. (not that they really need this "benefit" it raises an interesting offset to net external indebtedness for the cumulative sum of non remitted tax held by offshore vendors. Netflix has reportedly 300,000 subscribers in New Zealand, this is a nice little earner for GST revenue take, at say c.$500K per month or c.$6mio GST per annum just for one vendor.)
Skype a subsidiary of Microsoft have arbitrarily imposed the GST without ascertaining the status of whether their customer is GST registered or not. Netflix will impose the tax despite earlier contrary reports, their website now reflects the higher prices. With reviewing this in February 2017 it is noted with vendors such as Adobe where you declare the purchase is for business purposes and provide your GST number, the GST is not collected. Australia will adopt similar regulations from 1 July 2017. (For both NZ and Australia the more complex regulating for GST on all physical products imported is on the radar circa 2018/19.)
At Move37 Consulting we have formed good working relationships with a number of eBusiness software providers please contact us for assistance in selecting appropriate platforms.