Chapter 5 – Domestic legs of the international transport of goods


Background

5.1 The GST Act zero-rates services provided to transport goods to and from New Zealand. Furthermore, in certain circumstances, the transport of goods within New Zealand as part of the international transport of goods may also be zero-rated. This is because exported goods are zero-rated, and the value of transport services is already included in the cost of imported goods which are subject to 15% GST.

5.2 However, the rules around when domestic transport services that form part of the international transport of goods may be zero-rated do not align with common commercial practices. It is now common commercial practice for an international courier contracted to supply the international transport of goods to or from New Zealand (the primary transport supplier) to subcontract to a New Zealand-based courier company to supply the domestic transport services – instead of establishing their own courier company in New Zealand to carry out the domestic portion of the courier service.

5.3 For the domestic transport services to be zero-rated, the requirement that the primary transport supplier must also supply the domestic portion of the international transport of goods for the domestic transport services is applied strictly. That means that if a New Zealand-based courier is subcontracted by the international transporter to provide domestic transport services as part of the international transport of goods service, the New Zealand-based courier must charge GST on this supply, even if they are associated with, or a wholly owned subsidiary of, the international transport supplier.

Example 20

Jason’s Amazing Shipping Experience (JASE), an international courier company, has a New Zealand-based subsidiary called Kim Couriers.

JASE is hired to transport goods from Sydney to Greymouth. JASE delivers the goods from Sydney to Christchurch and contracts Kim Couriers to deliver the goods from Christchurch to Greymouth.

Despite being associated JASE and Kim Couriers are considered to be different suppliers. Therefore, the domestic transportation services supplied by Kim Couriers to JASE should be subject to GST at the standard rate.

Issues

Non-compliance

5.4 The current rules have led to significant non-compliance within the goods transportation industry. Officials understand that many goods transporters are incorrectly zero-rating their domestic services, even though they do not qualify under the GST rules.

5.5 Much of this non-compliance is due to a lack of understanding of the requirement that for the domestic transportation leg to be zero-rated it must be supplied by the exact same supplier as the international transportation. We understand that some couriers erroneously consider the same supplier requirement to be met if an associated or sub-contracted courier supplies the domestic transportation services.

5.6 We also understand that there can be significant commercial pressure for suppliers of domestic transport services to erroneously zero-rate their supply, especially when the recipient of the supply of the domestic transport service is not registered for GST. Naturally, the current rules create a bias towards the international transport supplier of the international transport services also supplying the domestic transport services. This can lead to commercial pressure on domestic courier companies to zero-rate their supplies of domestic transportation services provided as part of the international transport of goods.

Tax cascades

5.7 The current rules may create tax cascades when a business that is not registered for GST (such as an offshore courier company) is charged GST by a domestic courier undertaking the domestic leg of the transportation. Any GST charged to a non-registered business by a supplier of the domestic leg of the international transport of goods cannot be refunded by Inland Revenue. Consequently, this GST will become embedded in the price charged for the international transport of the goods and ultimately will become embedded in the price of the goods.

Example 21

Brett’s Golf Emporium, a GST-registered golf store from Hamilton, purchases a large order of golf clubs from Luecker Golfing Supplies, a golf equipment manufacturer based in Chicago.

Brett’s Golf Emporium hires JASE, an international courier company that is not registered for GST, to transport the golf clubs from Chicago to Hamilton. JASE subcontracts the domestic leg of the transportation to Kim Couriers, JASE’s New Zealand subsidiary.

Kim Couriers is registered for GST so charges JASE $115 (including GST) for its supply of domestic transport services. As JASE is not registered for GST, they are unable to recover the $15 GST charged to them by Kim Couriers. The total price charged by JASE to Brett’s Golf Emporium is $215. This price includes the $15 of GST charged to JASE by Kim Couriers.

Despite Brett’s Golf Emporium being registered for GST they are unable to reclaim this $15 of GST that is embedded in the price of the international transport of the golf clubs. This unrecoverable GST will therefore become embedded in the price of the golf clubs sold by Brett’s Golf Emporium.

5.8 Tax cascades (where a business absorbs the GST cost that is otherwise irrecoverable and passes this additional cost on to its customers as part of the sales price) can be avoided if non-resident businesses chose to register for GST in New Zealand either under section 51 if they have a taxable activity in New Zealand or section 54B if they do not make taxable supplies in New Zealand but do incur GST.

Services provided to international postal agencies

5.9 Section 11A(1)(g) of the GST Act zero-rates services supplied to overseas postal organisations for delivery in New Zealand of postal articles mailed from outside New Zealand, regardless of whether parts of the service are provided by the same transport provider. This difference in GST treatment between courier-delivered packages and postal-delivered packages has unintentionally favoured postal-delivered businesses.

Possible solution

5.10 We propose allowing domestic transport services supplied to the primary transport supplier contracted to transport goods to or from New Zealand to be zero-rated if the primary transport supplier is a non-resident. This is similar to the approach taken in Australia and Singapore.

Example 22: Non-resident courier subcontracts a domestic courier

JASE, a non-resident courier company, is contracted to transport goods from Mumbai to Hamilton. JASE transports the goods to Auckland and subcontracts Kim Couriers to provide domestic transport services between Auckland and Hamilton.

Under the current rules Kim Couriers must charge GST on its supply to JASE.

Under the proposed rules Kim Couriers can zero-rate its supply of domestic transport services as they are part of the international transport of goods and are supplied to the primary transport supplier who is a non-resident.

Example 23: Resident courier subcontracts a domestic courier

Laura’s Logistics, a resident courier company, is contracted to transport goods from Stewart Island to New York City. Laura’s Logistics subcontracts Pilko’s Post, a domestic courier company based in Stewart Island, to transport the goods from Stewart Island to Bluff. Laura’s Logistics then transports the goods from Bluff to New York City.

Despite Laura’s Logistics being the primary transport suppliers, Pilko’s Post would still need to charge GST on its supply to Laura’s Logistics under the proposed rules. This is because Laura’s Logistics is a resident courier company.

Why should domestic transport services only be zero-rated if supplied to a non-resident?

5.11 The rationale for only allowing zero-rating of domestic transport services supplied to the primary transport supplier if the international transport supplier is a non-resident is that non-residents are much less likely to be registered for GST. The commercial pressure to zero-rate the domestic transport services and potential for tax cascades from standard rating domestic transport services only arise when the recipient of these services is not registered for GST.

5.12 In addition, only allowing zero-rating when the international transport supplier is non-resident means the supplier of domestic transport services only needs to determine if their supply is part of the international transport of goods if supplied to a non-resident.

5.13 However, we are interested in receiving feedback on whether it would be better to zero-rate all domestic transport services supplied to the primary transport supplier contracted to transport goods to or from New Zealand regardless of the residency of the primary transport supplier. This approach may be simpler for domestic transport providers because rather than determining the residency of the international transport provider, they would need to identify whether the goods delivery service they are undertaking is related to an international transport service.

Domestic transport services supplied as part of the international transport of goods

5.14 Consistent with the existing policy intent, we are proposing that if the international transport supplier is contracted to deliver goods from point A outside New Zealand to point B in New Zealand then they can zero-rate their entire supply. Any domestic transport services contractually supplied to the international primary transport supplier between point A and point B can therefore also be zero-rated if the international transport supplier is non-resident.

5.15 Likewise, if the international transport supplier is contracted to deliver goods from point B in New Zealand to point A outside New Zealand then they can zero-rate this entire supply. Any domestic transport services contractually supplied to the international transport supplier between point B and point A can therefore also be zero-rated if the primary transport supplier is non-resident.

5.16 However, we are interested in feedback on whether we need a more prescriptive definition of what constitutes the international transport of goods. For example, Australia has specific rules to determine when domestic transport services have been supplied as part of the international transport of goods.

5.17 In Australia, the transport of imported goods may be zero-rated up to the place of consignment. This is generally where the goods are to be delivered under the international transport supplier’s contract for international transport services. Any domestic transport services supplied to the international transport supplier until the goods reach the place of consignment can therefore be zero-rated if the international transport supplier is a non-resident.

5.18 Likewise, for the international transport of exported goods Australia allows zero-rating from the final place of collection prior to containerisation. This is the location that the goods will be collected under the international transport supplier’s contract of service before the goods are placed into shipping containers. Any domestic transport services provided to the international transport supplier from the final place of collection prior to containerisation can therefore be zero-rated if the international transport supplier is a non-resident.

Questions for submitters

  • Other than subcontracting arrangements, are there any other commercial practices that should be considered?
  • Should any amendment to the rule be based on whether the international transport provider is a non-resident, or alternatively, zero-rate all domestic transport services where they relate to an international transport service?
  • Should any amendment include a prescriptive definition of when domestic transport services have been supplied as part of the international transport of goods