2019:
New Zealand's bumper indirect taxes year

 

This year is about to come to an end and it's worthwhile recapping on the significant changes in the indirect taxes landscape in New Zealand. This article discusses several highlights and reflects on the fact that New Zealand is not the only country dealing with unprecedented change in the indirect taxes area. The prominence of indirect taxes is fast becoming a fashionable trend globally.

 

There are two standout features for 2019. First, the growth in the digital economy and online shopping is shaping much of the new indirect taxes landscape not just in New Zealand but globally as well. Second, businesses are finding the pace of change hard to cope with and are looking for change management and technology solutions to make matters easier. Use of technology also features significantly in the approach of the Revenue authorities to tax administration.

 

 

Customs changes

The full impact of the new Customs and Excise Act 2018 (effective 1 October 2018) was experienced during 2019. The new law was several years in the making and has given New Zealand a world class Customs framework in terms of border management and duty and excise revenue processes. The NZ Customs Service (NZCS) has worked with many businesses and logistics providers to make the transition to the new law as smooth as possible.

Growing volume of trade

The new law is set against the backdrop of significant export and import activity. In the year to 30 June 2019, NZCS processed 16.7 million import and export transactions – up over 4% on the previous 12-month period.

a) 11.9 million import transactions were processed in 2018/19, up 10% on the previous 12 months.

b) 4.8 million export transactions were processed in 2018/19, down 7% on the previous 12 months.

NZCS has successfully supported New Zealand’s economic growth by facilitating and promoting international trade in an efficient manner. The increase in imports in 2018/19 was largely due to ongoing growth in online shopping and the resulting increase in the imports of low-value goods. According to NZCS, there was a very high level of voluntary compliance by importers, with 98.8% of import transactions compliant. All of these import and export transactions are processed through the Trade Single Window, and on average are cleared in a blistering 21 seconds!

International developments

In 2018/19 NZCS signed new Mutual Recognition Agreements with Canada and Singapore. This is great news for our exporters to those countries, who can now get their goods to markets faster. NZCS also continued to progress Single Economic Market initiatives to create a seamless trans-Tasman business environment, and lead negotiations of the Customs aspects of New Zealand’s Free Trade Agreements.

Global trade changes are multiplying and creating both new complexities and opportunities. Businesses who embrace the changes and adapt the best will reap the dividends - a key benefit will be efficiency to market and this should make a difference to consumers. Administration efficiencies in relation to tax collection and clearance of goods should also be evident for Revenue and Customs authorities who embrace the changes.  Efficiencies in the system will ultimately benefit consumers and keep the cycle of success rolling on in a sustainable way.

Reflections on the new Customs and Excise Act 2018

Under the new Customs law businesses have had to deal with:

a) new rules for provisional value entries if the final value of the goods is not known at the time of importation or the landed value changes after importation and adjusting payments are made. The provisional value scheme (PVS) replaced the uplift regime, but compensatory interest can apply to undervalued goods if the PVS is not used. The main issues in practice have been to do with awareness of the new rules and ensuring that logistics providers accurately record entries under PVS so importers can reconcile them to final value; 

b) heightened focus by NZCS on related party transactions particularly in relation to royalty and fee payments after the goods are imported. In this area, there have been several controversies and 2020 could shed some light in terms of precedent in a 21st century supply chain environment (the earlier New Zealand cases are 20 years old); 

c) clarification of the last export sale rules where care is required to ensure the correct value is applied. NZCS is looking to revise its guidelines in this area.

In all cases, businesses can utilise a positive new feature of the new law and seek a ruling concerning the valuation of goods. This approach will enhance certainty for importers and NZCS provides an efficient service in this area.


 

Goods and services tax (GST) changes

New Zealand's GST is widely regarded as one of the most effective and successful VAT/GST models globally. The main reasons for this are the purity and simplicity of the tax - broad base, relatively low rate (of 15%) with limited exemptions. New Zealand consumers are well accustomed to paying GST (incorporated in the price of goods and services) and Inland Revenue finds it relatively easy to collect GST - meaning that GST has been a policy and revenue administration winner for many decades. Reflecting on the effectiveness and breadth of New Zealand's GST, the expression that "GST applies to everything!" comes to mind and this was borne out once in a remark made by David Lange (former Prime Minister) who quipped: "Even drug dealers pay GST in New Zealand."

New Zealand's GST is almost 25% of the overall tax take in New Zealand (coming in at about NZ$20 billion each year), which makes it a pillar of our tax system.

Digital economy - GST changes

In recent times, New Zealand's 1986 GST-model has had to address the boom in, and challenges associated with, the digital economy. In October 2016, New Zealand started collecting GST on supplies of remote services (elsewhere referred to as electronically supplied services (ESS)). The New Zealand model is a business-to-consumer (B2C) model and is regarded as being successful by Inland Revenue as well as businesses in terms of ease of compliance. Remote services registrations now exceed 250 and the annual GST collected is in excess of NZ$125 million (or three times more than was originally expected to be collected).

New GST rules for low-value imports

A significant addition to New Zealand's GST landscape in 2019 was the introduction of new rules dealing with GST on low value imported goods (LVIGs, NZ$1,000 threshold - start date of 1 December 2019). Unlike the Australian GST law, which only had a one year gap between their version of the remote services rules and the LVIG rules, New Zealand waited for over three years from the introduction of the remote services rules before bringing in the LVIG rules. This provided more time to understand the global business issues and learn from other countries - as well as the remote services experience in New Zealand - in order to make allowance for necessary adjustments.

The original draft LVIG law was tabled in December 2018 with a proposed start date of October 2019. Given the new law was not expected to be passed until mid 2019, many submissions were made calling for a deferral of the start date to the first quarter of 2020. In the end, the Government made a decision to start the new law on 1 December 2019 balancing the interests of collecting tax on consumption in New Zealand and giving businesses enough time to get ready.

As at the time of writing, about 400 LVIG registrations have been received by the Inland Revenue and this will undoubtedly grow over time. By the time the first returns are filed (due 7 May 2020 for the 31 March period), the number of registration could exceed 750 and time will tell if this number will grow beyond 1,000. At one level, the LVIG rules will be regarded as successful by the Government if the rules generate the same level of GST revenue as the remote services rules. However, it needs to be stressed that a true measure of success will be measured by the ease of compliance - many global sellers and platforms have multi-country obligations and New Zealand is only one place where their consumers are located. 

NZ LVIG rules - unique features

To make compliance easier, New Zealand uniquely introduced a number of LVIG concessions and features (compared to rules in other countries and the Australian rules). These include the following:

a) although the LVIG rules are mainly designed to apply to business-to-consumer (B2C) sales, offshore sellers and platforms can apply GST on other sales if this is easier from a systems perspective in certain cases (subject to criteria), for example, if mostly B2C sales are made or in relation to low value business-to-business (B2B) sales;

b) limited safe harbour rules apply to marketplaces and redeliverers. This feature is designed to make compliance easier by providing an ability to agree a methodology with Inland Revenue. If GST shortfalls arise - due to incorrect information about key matters that determine GST obligations - then the marketplace or redeliverer is not liable;

c) business friendly rules exist for issuing receipts and tax invoices;

d) flexible rules are in place for foreign currency conversions and methodologies that can be used to make foreign currency conversions; and

e) the GST registration process is simple, and processing times have been relatively quick.

Another feature of the LVIG rules so far has been the excellent education campaigns run by the Inland Revenue and NZCS. In terms of border processes, NZCS has made a concerted effort to make matters as easy as possible (under a "green line" type approach) if offshore sellers/platforms are liable for GST on sales of LVIGs and the Customs import documentation records this.

“New Zealand's GST is widely regarded as one of the most effective and successful VAT/GST models globally.”

 

The future: sound indirect tax policy and technology are vital to the sustained success

Global developments

The growing digital economy has caused an explosion in the indirect taxes rules around the globe and with it created both complexity and opportunity. Very soon the number of countries with ESS/remote services rules will exceed one hundred and this will continue to grow. The AsiaPac region has seen a massive change in this area and countries like Mexico, Uzbekistan and Kazakhstan are about to follow. 

The next big wave of indirect taxes change (not dealing with digital services) will be a proliferation in the introduction of, or modification of existing, LVIG rules in many countries eg. New Zealand will follow the likes of Australia, Sweden and Switzerland, with Norway and Europe following closely behind. The AsiaPac region will also see changes in this area and the comprehensive China VAT reform will be a fascinating new dimension.

Even the non-VAT countries are reacting to the digital tsunami of change. The United States sales tax landscape has been massively transformed since the Supreme Court decision in South Dakota v Wayfair, Inc. (June 2018). There are now greater obligations placed on offshore sellers and platforms on sales of digital commodities - physical presence in the relevant State is no longer relevant for tax nexus purposes.

Indirect tax policy trends

Indirect taxes are both prominent as a source of tax revenue and agile in terms of ability to adapt to the modern environment and changes in the global trade landscape and consumer behavior. The relative success of indirect taxes reform - as has been the case to date courtesy of sound VAT/GST policy making globally and the actions of individual countries - will be instructive for any future international direct tax reform. This will be a fascinating dimension over the next two to three years.

New Zealand's remote services rules have been relatively successful and mostly easy to comply with. The success of the LVIG rules will be measured over the next six months and ease of compliance has to be at the top of the "success measurement" criteria.

The overall success of any indirect taxes reform also relies on effective tax policy ie. policy that is sound from a principles point of view (eg. taxing consumption in the place where it takes place), simple, stable and certain for business. Importantly, effective tax policy also needs to be future proof so the rules are not frequently tinkered with or easily avoided. It should be highlighted that regulators have consistently made it clear in recent years that future indirect tax reform needs to focus on new rules that are simple and limit compliance burdens for businesses. This is an important principle to follow globally. 

Technological solutions

As has been extensively canvassed in the joint PwC World Bank Group report (Paying Taxes 2020), technology will play a crucial role in delivering a bright new future in the administration of, and compliance with, the ever-expanding international indirect taxes rules and obligations. There is an evolution unfolding with technology and tax - in this regard some would say: "Rome was not built in a day" and the writer would say: "Good wine takes time".  The more cautious of us would suggest that some of the issues with technology are that the best technologies are still developing, require business commitment to change (both structural and operational), could require changes to tax laws to accommodate a more digital world, and change management within the tax administration may also be required - only to mention a few. On the positive side, there is a massive opportunity being presented in terms of embracing technological change and this can deliver significant benefits to various stakeholders. These benefits include greater control over information, better data quality, greater transparency across the stakeholders, end-to-end transaction monitoring, real-time VAT/GST reporting, ability to automate indirect taxes obligations and refunds, greater efficiency (allowing businesses to focus on strategy, better products and better consumer interactions) and, finally, a reduction in the gap between tax paid and tax that should be paid.


 

As we close 2019, one thing is clear about the new year and beyond. Innovation and embracing change will define the success of global indirect taxes reform in the future. To end, here are some visionary words from Muhammad Ali - he said that a person with no imagination has no wings. This couldn't be more true right now.  


Eugen Trombitas

Partner, Auckland, PwC New Zealand

+64 21 493 903

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