Appendix - International adoption of the offshore supplier registration model
The offshore supplier registration model is being used to collect GST on imported services by the European Union and in some other countries, including Norway, Switzerland, South Korea, South Africa, and soon Japan and Australia. The countries that have implemented these regimes report some success in collecting the GST on cross-border services. Some parallels can also be drawn with recent sales tax proposals in the United States.
The following summary details how other countries have approached the issue.
Since 1 July 2003, the European Union has required offshore suppliers to register and return VAT for supplies of services to European Union consumers (business-to-consumer supplies).
To lower the compliance costs on offshore suppliers, a simplified registration system is available (known as the “one-stop-shop”), where offshore suppliers are able to register in a single Member State. This is an alternative to registering in every Member State to which they make supplies.
All VAT collected by the offshore supplier is returned to that single Member State, with VAT amounts for each Member State reported, and the Member State of registration is responsible for redistributing the VAT revenue to the Member States where the consumption took place. The Member State is in part responsible for auditing offshore suppliers that register with that State.
In terms of supplies of services and intangible goods between Member States, before 1 January 2015, suppliers returned VAT on an origin basis (returning VAT to the Member State in which they made the supply as opposed to where the consumption took place). This resulted in suppliers (foreign and domestic) locating branches in Member States with low VAT rates. The supplier would then be able to contract with the EU consumers from that branch and return a lower rate of VAT to the Member State in which the branch was located.
However, since 1 January 2015, this type of tax planning is less attractive as European Union suppliers are required to return VAT based on the rate that applies in the Member State where the consumption takes place (on a destination basis, which is consistent with supplies from offshore). The rules apply to telecommunications, broadcasting and electronic services. In order to lower compliance costs, European Union suppliers will also be able to use the one-stop-shop scheme.
In regard to offshore supplies of services and intangibles to business customers (business-to-business supplies), the business customer is liable to account for VAT through a reverse charge. That is, the business customer itself will account for the VAT in the business customer’s jurisdiction.
Since July 2011, the Norwegian Tax Administration has required offshore suppliers of e-services (including digital goods) to register and return VAT on supplies to Norwegian consumers. Like the European Union, VAT on business-to-business supplies is accounted for by the business receiving the services under a reverse charge mechanism.
Norway operates a simplified registration and filing system for non-residents in a “pay-only” position. Norway also allows non-residents to register under the ordinary domestic system if, for example, the non-resident wishes to claim back any Norwegian VAT that they may have incurred.
Since 2010, Switzerland has required offshore suppliers who supply more than CHF100,000 (around NZD$150,000) of telecommunications or electronic services to Swiss consumers to register for VAT. When measuring the threshold, offshore suppliers only count their supplies to Swiss customers who are not registered for VAT (for example, non-business customers), but once the offshore supplier is registered for VAT they are required to charge VAT on all their supplies in Switzerland (including supplies to business customers). A reverse charge applies to business consumers when the offshore supplier is not registered.
“Electronic services” is broadly defined and includes providing web-hosting, text and images, databases, software, music, movie, games and gambling electronically over the internet.
One of the most recent examples of a country adopting the offshore supplier registration model is South Africa. From 1 June 2014, non-resident suppliers of certain electronic services to South African residents are required to register and account for VAT if the total value of taxable supplies exceeds R50,000 (almost NZD$6,000). Electronic services include online gambling, subscriptions and most downloads. The registration threshold is the same as the domestic threshold for voluntary registration. Once registered, the offshore supplier is required to return GST in respect of both suppliers to businesses and consumers.
Offshore suppliers can use the customer’s address, or the location of the customer’s bank account (where the payment originates from), to determine the customer’s residency.
On 12 May 2015, as part of its Budget, the Australian Government announced that it will apply GST to digital products and other services imported by Australian consumers from 1 July 2017. A draft Bill and explanatory material have been released for consultation until 7 July 2015.
The rules are broadly modelled on similar rules currently in operation in the European Union and Norway, and follow OECD guidance. Below is a short summary of the proposed rules:
- The proposed rules apply broadly to all services to Australian residents. This will mean supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services will be subject to GST. Goods and real property are excluded.
- The proposed rules only apply to supplies to Australian consumers. An Australian consumer is broadly an Australian resident other than a business. This means GST will only apply to business-to-consumer supplies. The explanatory material notes that the Australian Taxation Office will work with taxpayers to agree what steps need to be taken to determine whether a customer is an Australian consumer.
- The explanatory material notes that the existing reverse charge (where registered business customers return the GST) will broadly apply to tax the supply in situations when a business receives the services for non-taxable purposes.
- In some circumstances, responsibility for the GST liability may be shifted from the supplier to the operator of an electronic distribution service. This will occur where the operator controls any of the key elements of the supply such as delivery, charging or terms and conditions. Shifting responsibility for the GST liability to operators is intended to minimise compliance costs as operators are generally better placed to comply.
- The proposed rules permit the making of regulations to provide for simplified GST registration for offshore suppliers. These amendments appear to be aimed at simplifying the administrative burden for offshore suppliers caught by the proposed rules to promote compliance.
- The proposed rules allow offshore suppliers to elect for a “limited registration” which prevents offshore suppliers from claiming input tax credits. This will further simply the registration and remittance process.
From 1 July 2015, offshore suppliers are required to charge and return VAT on electronically supplied services (for example, applications, MP3, music, films) to Korean recipients. The affected digital services include streaming services, program updates, remote service provision (such as news, traffic information), software and electronic documents.
South Korea has a simplified registration system in order to encourage compliance. The new rules apply to both business-to-business and business-to-customer supplies, and offshore service providers will be exempt from the requirement to issue VAT invoices to Korean customers.
From 1 October 2015, Japan is likely to enact legislation that will require offshore non-residents that provide services to Japanese consumers to register for Japanese consumption tax.
The United States
The United States does not operate a national VAT/GST; instead, individual states apply sales taxes and use taxes to most goods and some services at rates that vary from state to state. Currently, retailers are only required to collect sales and use taxes for states where they have a physical presence.
The Marketplace Fairness Act is proposed legislation pending in the United States Congress that would enable states to collect sales taxes and use taxes from remote retailers with no physical presence in their state. However, to address compliance cost concerns, states would only be granted this authority after they have simplified their sales tax regimes.
States can simplify their sales tax regimes in a number of ways. Many states have signed up to the Streamlined Sales and Use Tax Agreement which, among other simplification measures, allows the state to use a centralised, electronic registration system.