GST matters
Issue: GST provisions contained in current bill
Submission
(53 – Ernst & Young)
The provisions in the bill which address the GST treatment of transactions relating to emissions units should be deleted, as they appear to have been superseded by more comprehensive amendments enacted in the Climate Change Response (Emissions Trading) Amendment Act 2008.
Comment
The original intention was to enact the necessary amendments to the GST legislation in the current bill. However, a subsequent decision was made to enact the necessary GST amendments in the Climate Change Response (Emissions Trading) Amendment Act 2008, which was enacted in September 2008, to give taxpayers greater certainty.
Officials agree that the GST provisions in the current bill are no longer required.
Recommendation
That the submission be accepted.
Issue: Application of reverse charge provisions
Submission
(35 – PricewaterhouseCoopers)
Either:
- the legislation should make it clear that, if the reverse charge applies to a supply of emissions units, GST is charged at zero %; or
- the reverse charge rules should not apply to a supply of emissions units.
Comment
The reverse charge rules apply to a small number of transactions involving imported services. If a non-New Zealand resident makes supplies to a New Zealand-resident, and the resident does not make at least 95 percent taxable supplies, the New Zealand resident is required to account for GST on the imported services as if they had made the supply, as well as receiving it.
This provision will clearly apply to the acquisition of emission units from non-residents by New Zealand-resident entities such as financial institutions, which typically do not meet the 95 percent taxable supply threshold.
Officials do not agree with the submission that there is any uncertainty about either this or the application of the zero-rating provisions. It is clear that this transaction is zero-rated under the provisions previously introduced.
This outcome is preferable to that sought under the submission’s second alternative, which is not to apply the reverse charge rules to emissions units.
Recommendation
That the submission be declined, noting that the objective sought is already achieved under current legislation.
Issue: Application of section 5(6D)
Submission
(35 – PricewaterhouseCoopers)
That the legislation be amended to make it clear that section 5(6D) does not apply.
Comment
Section 5(6D) provides that when the Crown makes any payment “in the nature of a grant or subsidy”, that grant or subsidy is deemed to be consideration for a taxable supply made by the recipient of the grant or subsidy.
This will apply to some situations when the government awards emissions units to businesses – such as the award of units to pre-1990 foresters or businesses in the industrial sector.
These supplies are zero-rated under the amendments introduced in the Emissions Trading Act.
Officials have considered whether the deeming provision ought to be “switched off”. This would be done by way of an Order in Council under section 5(6E), rather than by a legislative amendment.
However, our view is that the better outcome is for this provision to continue to apply. This is because, consistent with the general approach to emissions transactions as an ordinary part of business, businesses which receive income in the form of emissions units should recognise that they are making taxable supplies in exchange for that income. Requiring these businesses to recognise that they have made taxable supplies will mean that the various supply-based thresholds, such as liability to register and the return periods, will apply.
A further consideration is that in some instances, it will not be clear whether businesses are making an actual supply, or a deemed supply under section 5(6D). Leaving section 5(6D) to apply means this question need not be addressed, thereby making compliance simpler.
Recommendation
That the submission be declined.
Issue: GST treatment of derivatives
Submission
(35 – PricewaterhouseCoopers)
The zero-rating which is currently applied to emissions units transactions should also apply to derivatives of emissions units.
Comment
This matter was considered when the GST provisions dealing with emissions units were introduced.
The submission makes the point that the EU experience shows that derivatives comprise a very large proportion of the carbon market. In due course, a derivatives market may also develop in New Zealand.
The effect of the current law is that a derivative which could be satisfied by the delivery of an emissions unit would be standard-rated (not zero-rated as the submission suggests), whereas a derivative which could not be satisfied by delivery of an emissions unit would be an exempt financial service.
This is the same as the treatment of any other derivative which relates to an underlying commodity (such as oil or aluminium) and we do not think that an exception is justified for derivatives relating to emissions units. In particular, several of the reasons for zero-rating emissions units do not apply to derivatives.
At this stage, we are not aware of a significant market in derivatives having been established. If this does develop over time, we can consider this matter again.
Recommendation
That the submission be declined.
Issue: Application of GST provisions to legacy schemes
Submission
(Matter raised by officials)
The existing GST zero-rating treatment of government allocation of emissions units under the ETS should be extended to government allocation of units under some of the other earlier schemes.
Comment
In addition to the transfer of emissions units to forestry and other businesses under the ETS, the government also transfers emissions units under three other arrangements – the Permanent Forest Sink Initiative (PFSI), Project to Reduce Emissions (PRE), and Negotiated Greenhouse Agreements (NGA).
Of these three schemes, only the PFSI is still open to new participants (and had its first participant enter the scheme late last year). PRE and NGA have long since closed to new participants, although emissions units continue to be allocated under them.
The current GST provisions do not apply either to the transfer of emissions units under these agreements, or any supplies made in exchange for those emissions units (such as the supply of the services of carbon capture). Accordingly, they are standard-rated, although any subsequent supply of units by the recipient of them will be zero-rated. This last aspect is important, because it means that a subsequent purchaser has no need to enquire into the original source of the units.
Officials recommend that PRE and NGA arrangements remain standard-rated for GST. These arrangements were entered into at a time when it was clear that the supplies were to be standard-rated. Some of the contractual arrangements included specific reference to GST, and a binding ruling has since been issued on the GST treatment of PRE. We see no reason to upset these established arrangements by zero-rating these transactions.
There is ambiguity in the current legislation under which certain transactions in emissions units involving the government are being zero-rated, although this was not the policy intention. Because of the nature of these transactions, there is no revenue loss, but in the interests of consistency this ambiguity should be clarified, with effect from the day on which this bill receives the Royal assent.
However, officials recommend that PFSI transactions are zero-rated. There are two reasons for the distinction between PFSI and the other legacy schemes. First, PFSI covenants have been entered into only very recently, and will continue to be entered into in the future. So, participants’ understanding of the GST treatment is being developed now, rather than arising at a time when standard-rating was the only possibility. Secondly, some businesses which enter PFSI will also participate in forestry aspects of the ETS, which are zero-rated. It would be confusing for these forestry businesses to have different GST rules applying to their transactions with the government.
This amendment should also have effect from 1 January 2009.
Recommendation
That the submission be accepted.