Chapter 7 - Information, compliance and enforcement under the proposed rules
7.1 This chapter discusses other key features and the practical application of the proposed new rules, specifically:
- How will offshore suppliers identify New Zealand-resident consumers and, if business-to-business supplies are excluded, how will offshore suppliers identify New Zealand-registered businesses?
- What if a consumer incorrectly represents themselves as a foreign resident or a New Zealand-registered business?
- If business-to-business supplies are excluded, when would the existing reverse charge rule apply?
- If business-to-business supplies are excluded, what if a New Zealand-registered business is inadvertently charged GST?
- Enforcement of the proposed rules.
Identification of New Zealand-resident consumers
7.2 Assuming business-to-business suppliers are excluded, the proposed rules would only apply to services supplied to New Zealand tax residents who are not registered for GST. Consequently, before charging GST on a supply, an offshore supplier would be required to determine whether their customer is:
- a New Zealand tax resident; and
- registered for New Zealand GST.
7.3 One of the main aspects of the proposed rule is that it would apply only to services received by New Zealand tax residents. A New Zealand tax resident is generally a person who is in New Zealand for more than 183 days in any 12-month period or has a “permanent place of abode” in New Zealand.
7.4 A company is generally considered to be resident in New Zealand if it meets any one of the following criteria:
- It is incorporated in New Zealand.
- Control by company directors is exercised in New Zealand.
- It has its centre of management in New Zealand.
- It has its head office in New Zealand.
7.5 It would not be expected that offshore suppliers would be required to know precisely the tax residency status of their customers. Instead, offshore suppliers would be able to use proxies as evidence to identify whether a customer is a resident of New Zealand. Examples of the type of proxies recommended by the OECD and used in other countries that have similar rules include:
- the billing address of the customer;
- the home address of the customer;
- the Internet Protocol (IP) address of the device used by the customer;
- the customer’s bank details;
- the location of the originating payment for the service; and
- the location of the customer’s fixed landline through which the service is supplied, if applicable.
7.6 The proxies relevant for determining the residency of the customer may depend upon the type of service being supplied. Proxies will be particularly relevant for suppliers of digital services, as the supplier and the customer are unlikely to have a close relationship. However, it is likely that for the more traditional cross-border services, such as professional advice, the supplier and customer will have a closer relationship and therefore the supplier will be better able to determine the residency status of the consumer.
7.7 In the European Union, the supplier is required to have two non-conflicting pieces of evidence to determine the residency of the customer. Australia’s proposed rules require the supplier to take reasonable steps to obtain information concerning whether the recipient of the supply is an Australian consumer, and after taking these steps, reasonably believe that the recipient is not an Australian consumer.
7.8 There is a trade-off between imposing compliance costs on offshore suppliers to accurately determine the residency of their customers, and having proxies which will, in the vast majority of cases, produce the right outcome. Consideration would need to be given to how susceptible to error some proxies may be and therefore whether they should be able to be used by offshore suppliers to determine the customer’s residency.
7.9 While both models have their merits, we consider the option that imposes the lowest compliance costs on non-resident businesses should be preferred. Allowing non-resident businesses to rely on information they collect as part of their standard business practices appears to meet this objective better than one that requires these businesses to make further enquiries about individual customers. In saying this:
- the rules should focus on the customer residency indicators that are least susceptible to error; and
- the supplier should not be able to rely on location proxies which provide less accurate outcomes if better information can be relatively simply obtained.
New Zealand-registered businesses
7.10 If offshore suppliers are required to return GST in relation to business-to-business supplies, they will not need to identify whether their customer is a GST-registered business.
7.11 Assuming that the proposed rules will not require offshore suppliers to return GST in relation to services supplied to GST-registered New Zealand businesses, offshore suppliers, in many instances, would be able to presume the services were being received by individual consumers, given the nature of their supplies.
7.12 For services that could be received by either businesses or non-registered consumers, it is proposed that the default position should be that GST is charged. New Zealand GST-registered businesses should be able to provide their Inland Revenue Department (IRD) number to the offshore supplier to prove that they are in fact a registered business. However, registered businesses should not provide their IRD number to the supplier if the services received do not relate to their business activity.
7.13 Suppliers would be able to rely on the provision of an IRD number as evidence of GST registration and would not be required to charge GST on these supplies. However, the supplier would also be required to keep sufficient records of the IRD numbers provided by business customers for auditing purposes.
Incorrect representations by consumers
7.14 There is a risk that some consumers may incorrectly represent themselves as a registered business customer (if business-to-business supplies are excluded) or a resident consumer of another country and avoid being charged GST.
7.15 There are two ways this issue could be addressed:
- First, existing “knowledge offences” could apply if a consumer knowingly supplied incorrect information to a supplier in order to avoid being charged GST.
- Secondly, it is proposed that the Commissioner of Inland Revenue have the discretion (which is expected to be limited to more egregious cases) to require the consumer to register for GST and treat the consumer as having made the supply from the time the recipient purchased the service.
7.16 The knowledge offences apply when a person knowingly provides altered, false, incomplete, or misleading information to any person in respect of a tax law or a matter or thing relating to a tax law. A person convicted of a knowledge offence is liable to a fine up to NZ$25,000 for a first-time offence, or NZ$50,000 for repeated offences.
7.17 In relation to requiring the recipient of the service to register, similar rules already exist in relation to land transactions when land was incorrectly zero-rated. In these situations the recipient would be required to return the GST and, since the supply is treated as being made at the date of purchase, the recipient may be subject to use-of-money interest, with any applicable penalties calculated from that date.
7.18 The consumption of goods and services in New Zealand should be subject to GST. However, GST should not be a tax on businesses. To achieve this, registered businesses are able to claim back GST charged on goods and services they receive to the extent the goods and services are used for, or available for use in, making taxable supplies. In contrast, final consumers are unable to claim back any GST.
7.19 However, registered businesses may purchase goods and services for non-taxable purposes, such as for private or exempt activities. In these situations, the business cannot claim back the GST as the goods and services received do not relate to the making of taxable supplies. In effect, the business is treated like a final consumer.
7.20 In the context of registered businesses purchasing services from an offshore supplier that do not relate to the making of taxable supplies, and assuming that business-to-business supplies are excluded from the proposed rules, New Zealand’s existing “reverse charge” rule should apply to tax those services or intangibles. This would ensure that businesses receiving services and intangibles from an offshore supplier, other than for making taxable supplies, are treated in the same way as individual consumers.
7.21 The European Union operates a broad reverse charge which requires registered businesses to return VAT on the total value of the service received regardless of whether the service relates to the making of non-taxable or taxable supplies. Businesses are then able to claim back the VAT that relates to their taxable activities in the usual way. The ability to offset the portion of VAT that relates to their taxable activities means the VAT is only payable on the services that relate to their non-taxable activities.
7.22 While the European Union system has been considered, arguably the same outcome can be achieved with the more limited reverse charge with less compliance costs imposed on domestic businesses.
7.23 If offshore suppliers are required to return GST in relation to business-to-business supplies, consideration would need to be given to whether the existing reverse charge should be repealed or better integrated into the proposed rules.
Application of the reverse charge
7.24 New Zealand’s existing reverse charge treats a GST-registered recipient as having made the supply in New Zealand and therefore requires it to return the GST on the supply instead of the offshore supplier. This means that the recipient returns output tax on the full value of the supply (as the deemed supplier), but only claims an input tax deduction to the extent the service is used for making taxable supplies. The net result is that output tax on the non-taxable use is paid by the recipient.
7.25 The reverse charge only applies to the extent the services relate to non-taxable activities, such as private activities or exempt supplies, and the current 5 percent de minimis rule would be retained.
Virginia is a self-employed project manager who is registered for GST. She purchases a software package from an offshore supplier for $400. Assuming business-to-business supplies are excluded, she identifies herself as a registered business and therefore is not charged GST. She uses the software 50 percent for her taxable project management services and 50 percent for home/recreational use.
Under the reverse charge, Virginia is treated as making a supply to herself of $400 at the 15 percent rate. She must return output tax of $60 ($400 x 15 percent). However, Virginia can claim an input deduction for the portion of the value of the software package (50 percent) that is attributed to her taxable use. This input deduction is $30. Her net position in the relevant return (assuming no other supplies) is therefore an output tax liability of $30 ($60 output tax minus $30 input tax).
If Virginia’s use of the software package had been 95 percent taxable or more, she would not have been required to apply the reverse charge.
New Zealand businesses being inadvertently charged GST
7.26 Assuming that business-to-business supplies are excluded from the proposed new rules, there could be some instances when an offshore supplier may inadvertently charge a registered New Zealand business GST.
7.27 In these situations, the business would be required to contact the offshore supplier in order to receive a refund of the incorrectly charged GST. It is not proposed that businesses would be able to claim GST back in their normal GST return. This is because offshore suppliers will not be required to provide a full tax invoice and therefore it would be difficult to verify whether GST had been charged and returned.
7.28 Offshore suppliers would be able to adjust their output tax in a GST return, subsequent to the refund being made, to take into account the overpaid GST. Consistent with the general rules for claiming input deductions under section 20 of the GST Act, it is proposed that these adjustments would, subject to existing exceptions, be required to be made within two years of the original supply.
7.29 New Zealand’s tax system works on the principle that the vast majority of people do the right thing and comply with their tax obligations. This is largely because our tax system is fair and coherent. It is expected that most offshore suppliers would comply with our rules for the same reasons.
7.30 When similar rules to those proposed in this document have been applied in other countries, offshore suppliers, particularly large international suppliers that account for the majority of cross-border services and intangibles, have demonstrated a willingness to comply.
7.31 To generate a similar level of compliance for New Zealand we have aimed to adopt similar and consistent rules with the rules that apply in other countries.
7.32 For offshore suppliers that do not comply, the normal enforcement rules and penalties that apply to New Zealand suppliers are expected to apply. The Commissioner is able to register a supplier who is liable to register from the date the person first became liable to register or a later date as the Commissioner considers equitable, and a supplier is deemed to be registered if it claims that GST is being charged on their supplies but is in fact not registered and not returning the GST.
7.33 The OECD also envisages countries cooperating and sharing information to ensure that suppliers comply with registration requirements in different jurisdictions. For example, New Zealand is a signatory to the Convention on Mutual Administrative Assistance in Tax Matters. The Convention is a multilateral instrument available for all forms of tax cooperation to tackle tax evasion and avoidance. The Convention has a very wide scope and covers all forms of compulsory payments, including GST/VAT.
7.34 Like many other countries, New Zealand has a large network of double tax agreements. These agreements allow for information-sharing, which normally includes GST/VAT.
What proxies do you consider would be appropriate to use in order for offshore suppliers to determine the residency of their customers?
What proxies are likely to be most accessible in practice?
To what extent should offshore suppliers be required to accurately determine the residency of its customers and how much evidence should suppliers be required to obtain?
If business-to-business supplies are excluded, will offshore suppliers be able to easily distinguish between individuals and GST-registered businesses in practice and what compliance costs would this impose on them?
Do you agree with the sanctions proposed for incorrect representations by consumers?
If business-to-business supplies are excluded, do you agree with the application of the reverse charge as suggested?
If business-to-business supplies are excluded, New Zealand businesses will be required to recover any inadvertently charged GST from the offshore supplier. Do you agree with this approach?