Indirect Taxes in 2021 and Beyond: Part 1—New Zealand in Review

2021 has been a significant and fast-paced year with regard to indirect tax developments in New Zealand. Part 1 of this article will recap the main goods and services tax (GST) and customs developments.

Customs

Highlights

The main trade and revenue highlights during the year ended June 30, 2021 were:

• New Zealand Customs Service (NZCS) processed 16.4 million import and 5.7 million export transactions, an increase of 21.5% for imports and 1.6% for exports compared to 2019/20. This was driven by an increase in low-value imports under NZ$1,000 ($680)—which made up 90% of all imports in 2020/21—due to the growing popularity of online shopping.
• NZCS collected NZ$14.9 billion of revenue, a decrease of 1.5% from the NZ$15.1 billion collected in 2019/20. The decrease was largely due to the impact of the Covid-19 pandemic on trade. (Breakdown by type of revenue collected: GST, 65%; customs duty, 22%; and excise duty, 13%.)

In the upcoming year, NZCS has indicated that it will focus on:

• shifting its focus from economic recovery from Covid-19 to supporting trade and economic growth;
• supporting the remaining Asia-Pacific Economic Cooperation (APEC) 2021 meetings (note that New Zealand hosted the APEC 2021 forum meetings and NZCS chaired the Subcommittee on Customs Procedures sessions);
• piloting the Joint Electronic Verification Scheme (JEVS) self-service system with China, streamlining self-declared origin data as part of the upgraded NZ–China Free Trade Agreement.

Royalty Cases

Where importers have royalty arrangements in place, it is important to consider whether the royalty should form part of the declared customs value. Under New Zealand law, if a royalty or license fee is a condition of the sale of goods for export to New Zealand, the royalty amount must be added to the customs value.

After two decades of no new case law in this area, several cases are working their way through the court system, with verdicts expected shortly. The importer retailers are arguing that the royalties do not relate to the price of goods, and that they relate to matters such as store layout, know-how, IP, business experience, and marketing.

NZCS is arguing the opposite and asserting that the royalties adjustment rule applies widely and the amounts are part of the price of goods.

The cases have also highlighted that importers need to consider if certain adjustments—to the value of the goods after importation—need to be disclosed to NZCS either voluntarily or under the provisional value scheme.

International Trade Deals

In November 2021, New Zealand ratified the Regional Comprehensive Economic Partnership (RCEP). RCEP will come into effect in January 2022 and will be the world’s largest free-trade agreement. Ratification of RCEP is a positive development and comes at a good time. The agreement will help the AsiaPac region position international trade using the new platforms provided by RCEP. Details of RCEP were covered in the author’s December 2020 article for Bloomberg Tax.

On Oct. 20, 2021 New Zealand and the U.K. reached agreement on the key elements of a new high-quality comprehensive and progressive free-trade agreement (FTA). This agreement in principle does not create any legally binding obligations, as work continues toward finalizing it. Once the text is finalized and legally verified, and domestic approval processes have been completed, arrangements will be made for the signing of the agreement.

Considerable work has been done to pave the way for removing virtually all tariff duty, the impact of climate change on trade, recognizing Maori economic interests, promoting e-commerce and digital trade, and streamlining customs procedures—to name just a few areas.

These developments are particularly significant given that trade was referred to as a “pillar” in the 2021 APEC Leaders’ Declaration (November 2021) in the context of recognizing that multilateral trading rules have an important role to play in economic recovery.

Goods and Services Tax

General Developments

On Sept. 8, 2021, the government introduced the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill (the Bill), which is expected to be passed into law by March 31, 2022. It contains a variety of policy and technical GST changes including the exclusion of cryptoassets from GST, modernizing the GST invoicing rules, and a raft of technical changes concerning land transactions, going concerns, GST grouping and GST apportionment.

Cryptoassets

The Bill proposes to exclude cryptoassets from the GST base, which will prevent the potential for multiple taxation and help reduce distortions to the development of new products and investment activities. The application date is proposed to be Jan. 1, 2009 (when the first cryptoasset, Bitcoin, was launched).

Positively, the Bill also confirms that GST on costs associated with issuing cryptoassets with features similar to traditional securities—security tokens—can be deducted by a GST registered business (with a start date of April 1, 2017).

A wide definition of “cryptoasset” is proposed and the supply of cryptoassets will be excluded from being taxable or exempt for GST purposes. The definition of “cryptoasset” refers to a digital representation of value that must be fungible. Other services related to cryptoassets, that are not in themselves supplies of cryptoassets such as mining, providing cryptoasset exchange services, or providing advice, will continue to be subject to the existing GST rules.

The New Zealand GST law policymakers are still working on the final shape of the law. At this stage, non-fungible tokens (NFTs) do not fall within the proposed definition (of cryptoasset), and ordinary principles of GST will apply to NFTs.

In certain cases, cryptoassets and tokens have dual (and often multiple) characteristics—sports tokens or fan tokens allow sports fans many benefits, including being able to vote on sports club matters (akin to a membership), the right to digital images, and access to digital video clips (or statistics) based on a set menu. The main aspects to note are:

• If tokens give voting rights (i.e. operate analogously to shares), should they be exempt from GST?
• Even if tokens give voting rights, if they also confer rights to underlying goods or services should GST apply without exemption (as to at least a portion of the value)?
• Suppliers of NFTs, as well as platforms involved in NFT trades, need to consider the global VAT/GST remote services rules as many consumers are located overseas.

Modernizing Tax Invoice Rules

The current rules regarding tax invoices have not changed substantially since they were first introduced in 1986. The Bill proposes changes to these rules, intended to modernize invoicing requirements to align with modern day business recordkeeping practices, e-invoicing initiatives and electronic recordkeeping. The final shape of the law is still being developed through the submission process.

Key Inland Revenue Focus Areas

During the year, Inland Revenue has been focusing on GST registrations where there is low or no taxable activity, non-profit bodies, and GST refund claims.

A large number of draft interpretation statements and technical decision summaries have been issued, covering a number of areas such as residency, agency, leasing, and GST claims by importers.

Digital GST Developments

New Zealand introduced an offshore vendor/platform model and has been taxing remote services since Oct. 1, 2016 and low-value imported goods (LVIG) since Dec. 1, 2019. Both models have been very successful for the government and compliance is relatively easy. The number of remote services registrations sits at about 570 and the number of LVIG registrations at just under 750. The New Zealand rules have been used by other countries as a template.

The next chapter in relation to GST and the digital economy is how to deal with the gig economy, for example ride sharing, food delivery and short-term accommodation.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Eugen Trombitas is PwC’s global digital indirect taxes leader.

The author may be contacted at: eugen.x.trombitas@pwc.com