Electronic marketplaces

(Clauses 47(3), 65 and 66)

Summary of proposed amendment

Special rules will apply when remote services are supplied through an electronic marketplace to a New Zealand-resident consumer. The proposed rules will require the non-resident operator of the marketplace, as opposed to the underlying supplier, to register and return GST.

Key features

Definition of “electronic marketplace”

An addition to section 2 will define an electronic marketplace as a marketplace that is operated by electronic means through which a person (the underlying supplier) makes a supply of remote services by electronic means through another person (the operator of the marketplace) to a third person (the recipient).

This definition includes a marketplace operated via a website, internet portal, gateway, store, distribution platform or other similar marketplace. It excludes a marketplace that solely processes payments.

Non-resident electronic marketplace rule

Proposed section 60C will apply to supplies of remote services made to a person resident in New Zealand through an electronic marketplace operated by a non-resident. The section treats the operator of the electronic marketplace, as opposed to the underlying supplier, as making the supply in the course or furtherance of a taxable activity.

Proposed section 60C will not apply when:

  • the documentation provided to the recipient identifies the supply as made by the underlying supplier and not the marketplace; and
  • the underlying supplier and the operator of the marketplace have agreed in a document signed by them that the supplier is liable for the payment of tax; and
  • the electronic marketplace does not:
    •  authorise the charge to the recipient;
    • authorise the delivery to the recipient; or
    • set the terms and conditions under which the supply is made.

Subsection 60C(3) will apply when multiple electronic marketplaces may be liable to register and return GST in relation to a supply of remote services. In this situation, the first operator that authorises a charge or receives payment for the supply is treated as making the supply. If no operator exists that meets this requirement, the first operator that authorises delivery of the supply is treated as making the supply.

Subsection 60C(4) ensures that the electronic marketplace rules override the general agency rules under section 60(1).

Specific rule for resident underlying suppliers

Proposed section 60(1B) is a specific rule that applies to New Zealand-resident suppliers supplying remote services through an electronic marketplace. In this situation, the supplier and marketplace may treat the supply as two separate supplies:

  • a supply of services from the underlying supplier to the operator; and
  • a supply of those services from the operator of the marketplace to the recipient.

Background

An electronic marketplace is generally in a better position to register and return GST on supplies than the underlying suppliers. Typically, the electronic marketplace would be larger, better resourced and have a closer relationship with the customer. Requiring the electronic marketplace to register may also reduce the compliance costs, from a large number of smaller suppliers not having to register for GST.

Requiring intermediaries to register for GST in this context has been a relatively recent international development. Australia announced proposed rules that would require an operator of an “electronic distribution platform” to register and return the GST. This will occur when the operator controls any of the key elements of the supply such as delivery, charging or terms and conditions. These proposed rules are modelled on similar rules currently in operation in the European Union and Norway.

It is likely that many of the electronic marketplaces that will be required to register under the proposed rules will already be registered in Member States of the European Union and Norway. Therefore, to avoid confusion and to promote compliance, the rules proposed are intended to be consistent with the rules in these other jurisdictions.

Detailed analysis

Definition of “electronic marketplace”

A marketplace is a medium that allows consumers and suppliers of goods and services to interact in order to facilitate the sale and purchase of the goods and services. The marketplaces we envisage here are virtual marketplaces where consumers and suppliers do not physically interact (typically, online marketplaces).

The proposed definition of electronic marketplace requires that:

  • the marketplace allows underlying suppliers to make supplies of remote services through the marketplace to customers;
  • the marketplace must be operated by electronic means, including by a website, internet portal, gateway, store, distribution platform or other similar marketplace; and
  • the supplies made by the marketplace must be made by electronic means.

In the context of the proposed rules that apply to supplies of remote services, the proposed marketplace rules will apply to virtual or electronic marketplaces. The proposed definition of “electronic marketplace” therefore captures marketplaces that are operated by electronic means, including via a website, internet portal, gateway, store, distribution platform or other similar marketplace. The supplies made through the marketplace must also be made by electronic means.

Payment providers will be excluded from the definition of “electronic marketplaces” as these providers merely facilitate the exchange of money between the supplier and consumer, rather than the exchange of the remote service itself.

Non-resident electronic marketplace rule

Proposed section 60C states that when a supply of remote services is made through a non-resident operator of an electronic marketplace to a person resident in New Zealand, the operator of the marketplace will be treated as making the supply in the course or furtherance of their taxable activity. As the rules will only apply to non-resident operators of electronic marketplaces through which supplies of remote services are made to New Zealand residents, this rule is not expected to affect existing GST arrangements that apply in the domestic context.

Proposed section 60C will treat the non-resident operator of the electronic marketplace as the supplier, when a supply of remote services is made through a non-resident electronic marketplace to a New Zealand resident.

However, the operator of the electronic marketplace will not be considered to have made the supply if they do not control any of the key elements of the supply, and the liability of the underlying supplier is made clear in the documentation relating to the transaction. Accordingly, under proposed section 60C, the non-resident operator of an electronic marketplace will be the supplier, unless all of the following conditions are satisfied:

  • the electronic marketplace does not authorise the charge to the recipient, or authorise the delivery of the supply, or set the terms and conditions under which the supply is made;
  • the documentation provided to the recipient identifies the supply as made by the underlying supplier and not the marketplace;
  • the underlying supplier and the operator of the marketplace have agreed in writing that the supplier is liable for GST.

As a result of being treated as making the supply, the operator of the electronic marketplace will be responsible for returning GST. The operator of the electronic marketplace will include these supplies in their turnover for the purpose of determining whether the registration threshold is exceeded and, if it is exceeded, will be liable for the GST. The operator will make any adjustments arising from the supply, for example, when GST is refunded to a GST-registered business.

Specific rule for resident underlying suppliers

A specific rule in proposed section 60(1B) will apply to New Zealand-resident suppliers supplying remote services through an electronic marketplace. These underlying suppliers may already be registered for GST under the existing rules. If these suppliers were subject to the general rule under proposed section 60C(3), the services they supply through the electronic marketplace would no longer be taxable, as the operator of the marketplace will have been treated as the supplier. This would mean that GST incurred by the underlying supplier in making these supplies would be unrecoverable.

A specific rule is therefore proposed to treat the supply of remote services as two separate supplies – a supply of services from the underlying supplier to the operator, and a supply of those services from the operator of the marketplace to the recipient. The first supply to the marketplace is likely to be zero-rated under the existing provisions as the supply is to a non-resident outside New Zealand. This will generally enable the resident underlying supplier to recover the GST costs incurred in making the supply.

Example

Gaming Co. a New Zealand GST-registered app developer, contracts with Applications Co. a non-resident operator of an app store, to distribute its smartphone games. Applications Co. collects payments from customers and authorises delivery of the app.

Applications Co. is treated as the supplier under proposed section 60C, and therefore is responsible for GST on the supply. If Applications Co. makes supplies that exceed the registration threshold, it will be required to register and return GST on supplies of the remote services that are made through it to New Zealand-resident consumers.

Even though Applications Co. is treated as a supplier of the app due to proposed section 60C, under proposed section 60(1C), Gaming Co. and Applications Co. can agree to treat the supply from Gaming Co. to Applications Co. as a separate supply. This will allow Gaming Co. to deduct its GST costs incurred in making supplies to Applications Co.