Indirect Taxes in 2020: the New Zealand Picture with a Global Lens

2020 has been an unprecedented year in so many respects and it is worthwhile recapping the significant indirect taxes developments in New Zealand.

It is evident from the coverage in this article that New Zealand is not the only country dealing with the incredible pace of change in the indirect taxes area. For context, goods and services tax (GST) and customs are significant taxes in New Zealand, together representing approximately 35% of the tax take. The other key tax take percentages (tax to total tax revenue) stem from payroll taxes 38%, company tax 14%, and withholding taxes 2%. (Source: New Zealand Treasury Pre-Election Economic and Fiscal Update, September 16, 2020)

Customs

The Year at a Glance

The remarkable year in the Customs area was summarized by Christine Stevenson (Comptroller of Customs):

“Many of us never imagined we would see New Zealand close its air and sea borders to almost all but its own citizens. Yet this was the reality from March 2020.

Providing an essential government service, many of our staff worked tirelessly at our country’s frontline, as New Zealanders returned home, and as businesses imported much-needed personal protective equipment and other essential items, while continuing to facilitate exports and support the economy.” (Source: New Zealand Customs Service Annual Report, December 2020)

The passage stresses the incredible impact of the pandemic and the massive contribution by New Zealand Customs Service (NZCS) to the response. A similar positive response was evident in the sustained actions of New Zealand’s other revenue agency, the Inland Revenue.

In terms of tax revenue at the border:

• NZCS collected NZ$15.1 billion ($10.6 billion) of revenue by way of customs duty, excise duty, and GST in 2019/2020;
• the current year revenue represents a decrease of 2.8% from the 2018/19 record total of NZ$15.5 billion; and
• the drop in revenue was in part due to the effect of the pandemic on trade. To a lesser extent, it reflects NZCS’s arrangements with businesses to delay payment of revenue as part of their assistance to those adversely affected by the pandemic.

General Developments

NZCS has had a central role in relation to the new GST rules on low-value imported goods (LVIGs), which commenced on December 1, 2019—these rules are discussed in the GST section below. From that date NZCS did not collect revenue on imported consignments (parcels) valued at or under NZ$1,000, unless they included alcohol or tobacco (these are not subject to the new rules). Under the new rules, NZCS only collects GST and duty (and certain incidental border fees) on consignments over the NZ$1,000 threshold.

In practical terms, NZCS:

• does not collect GST if the documentation shows it has already been charged offshore. NZCS shares data on low-value imports with Inland Revenue, enabling that agency to monitor and ensure payment; and
• continues to assess all consignments entering New Zealand for non-revenue risks, regardless of value or who collects the GST.

This year was the second full year of the new customs legislation (Customs and Excise Act 2018 effective from October 1, 2018). Most importers and brokers are now used to the new rules and in particular the Provisional Value Scheme (PVS). NZCS has been active in relation to the PVS and customs audits. Several disputes have arisen in relation to royalties and some of these cases are heading to court.

Strategic Trade Deals

Regional Comprehensive Economic Partnership

After several years of negotiation, New Zealand signed the Regional Comprehensive Economic Partnership (RCEP) agreement along with 10 ASEAN countries and Australia, China, Japan and South Korea on November 15, 2020. The RCEP agreement needs to be ratified by at least six countries to be effective and this process could take 12–18 months.

The agreement is a significant and positive milestone for the region, which has a population of 2.3 billion and 30% of the global gross domestic product. The agreement is the largest global free trade agreement (FTA) and sits alongside other FTAs. It should serve as a strategic enabler of trade in the region and is expected to enhance, as well as revitalize, trade in and out of the region.

In the press release by Prime Minister Jacinda Ardern and Minister for Trade and Export Growth Damien O’Connor on November 15, 2020, the following benefits for New Zealand were highlighted:

• a single set of trade and investment rules across the entire RCEP region, increasing certainty and reducing complexity that comes from different rules with different partners;
• the opportunity for exporters to get their products into RCEP-wide regional value chains, increasing demand for New Zealand inputs into the engine room of the world economy;
• more market access opportunities, especially for services and investment into China and some ASEAN member states;
• less red tape for exporters, and more streamlined trade.

Similar comments were made in the comprehensive National Interest Analysis document produced by the Ministry of Foreign Affairs and Trade. With tariff barriers already low under existing FTAs, non-tariff barriers are of particular interest for New Zealand goods exporters. The RCEP benefits include:

• harmonizing documentation requirements (including more focus on electronic verification and processes), reducing the time exporters spend waiting for goods to clear customs;
• lowering compliance costs and increasing the certainty around other countries’ processes through more consistent rules;
• having a platform for enhanced regulatory cooperation to facilitate trade; and
• removing costs and fostering greater business opportunities in RCEP markets.

The regional integration aspect of RCEP is positive and is expected to increase demand for New Zealand inputs into regional and global value chains. The expected benefits may take some time to crystallize, but businesses should start to plan to assess the impact of RCEP sooner rather than later.

Digital Trade

On June 12, 2020, New Zealand signed the Digital Economy Partnership Agreement (DEPA) with Chile and Singapore. The DEPA is an innovative agreement and covers business and trade facilitation measures, such as setting up faster customs procedures and supporting e-payments, and issues of consumer trust. It will promote online consumer protection and address emerging trends and technologies, such as financial technology and digital identities. The agreement also promotes “digital inclusion,” extending the benefits of the digital economy to all people and businesses.

The DEPA is an “open plurilateral” agreement by design, meaning it is open to other World Trade Organization members to join if they meet its high-quality standards.

GST

General Developments

Even though New Zealand’s GST is widely regarded as a global “best in class” system, there is always room to improve the current rules. On February 24, 2020, Inland Revenue officials released GST policy issues—an Officials’ Issues Paper (the Issues Paper) for public consultation. The Issues Paper proposes a number of changes to address and clarify technical tax policy and remedial issues within the existing legislation, for example:

• simplifying tax invoice requirements;
• the GST treatment of cryptocurrencies;
• refining the apportionment and adjustment rules;
• clarifying the GST treatment of funds management services and insurance pay-outs to third parties; and
• refining the compulsory zero-rating (CZR) rules for land.

Crypto-Assets

Much like the rest of the world, New Zealand is grappling with the tax treatment of crypto-assets. Two main options were put forward in the Issues Paper:

• Option 1: Making all supplies of crypto-assets not subject to GST. Under this option, supplies of crypto-assets would have the same GST treatment as supplies of money, which is disregarded for GST purposes.
• Option 2: Making supplies of crypto-assets to New Zealand residents exempt from GST and supplies to nonresidents zero-rated supplies (i.e. subject to GST at 0%). Under this option, supplies of crypto-assets would have the same GST treatment as financial services.

Option 1 is attractive because it is simple and involves less compliance. The widest definition of crypto-assets is proposed, which is helpful from a tax design perspective. The crypto GST reform will bring more certainty and help reduce market distortions. It is expected that a Taxation Bill will be tabled in Parliament in the first part of 2021 to address this matter and any law change likely to be backdated to January 2009.

Digital GST Developments

GST and Remote Services

Inland Revenue is still processing registrations under the remote services rules, which commenced on October 1, 2016 (coinciding with the anniversary of 30 years of GST in New Zealand). Offshore sellers and platforms should actively consider their obligations under these rules. Positively, New Zealand has a number of concessions, particularly in relation to business-to-business (B2B) sales.

In the recent “Tax Policy Reforms 2020” report, the Organization for Economic Co-operation and Development (OECD) observed:

“New Zealand collected NZD 357 million (approx. EUR 204 million) in the first two years of implementation of its regime for the collection of GST on services and intangibles (as of April 2017).”

The annual GST collected has exceeded the original expectations by about four times (and this GST take is growing). The rate of compliance has been high in New Zealand, and the remote services rules have been regarded as a success by officials.

GST and LVIGs

The LVIG rules commenced on December 1, 2019, making New Zealand one of a handful of countries globally that has successfully implemented both GST on remote services and LVIGs. The Inland Revenue is still receiving registrations from impacted offshore sellers and platforms.

The number of registrants currently sits at about 650 and it has been reported that the annual GST take in the first year of the rules will exceed NZ$100 million. The number of registrations should exceed 1,000 at some point in 2021, which would mirror the remote services GST story as those registration numbers grew over time.

The Inland Revenue has been encouraging impacted sellers to register and has been applying a “light touch” to any potential penalties if registrations are received late. This approach will not last indefinitely. Use of money interest (at 7% per annum) can apply to late registrants who have a tax shortfall. However, subject to appropriate discussions with the Inland Revenue it may be possible to mitigate the impact of interest in some (but not all) cases during the early phase of the LVIG rules.

The LVIG rules have several beneficial concessions for sales involving high-value items (above the low-value threshold of NZ$1,000) and certain B2B sales (subject to criteria). These concessions are unique to New Zealand and give impacted sellers flexibility in terms of compliance and systems changes

Global and Future Tax Trends

As mentioned, New Zealand is one of only a handful of countries that has successfully implemented GST rules for supplies of remote services—known globally as electronically supplied services (ESS) rules—and the LVIG rules.

For a small country, this is a fantastic achievement. The New Zealand rules are being reviewed by other countries’ regulators in terms of the ease of compliance and the systems concessions that provide offshore sellers/platforms flexibility as to when the tax should apply on sales of high-value imported goods and B2B sales.

Indirect Taxes

One of the most significant global indirect tax developments in 2020 has been the impact of value-added tax (VAT)/GST in relation to online education and learning. Many tertiary and education providers have discovered that domestic VAT/GST obligations—and in some cases where there were no domestic tax obligations in countries like the U.S.—have turned into significant VAT/GST obligations in multiple countries under the ESS rules.

This issue arose when overseas students returned to their home country but continued to receive education via online means from a supplier in another country. New Zealand education providers and universities have been grappling with this issue globally for most of the year. PwC has prepared a global blog on this issue.

Digital Taxes

Looking at the international direct tax developments and the positive work of the OECD in this area (under Pillar 1 and Pillar 2 and the Inclusive Framework), there is expected to be more change with digital taxes in 2021. The ideal state will be one where there is a degree of consensus and consistency, which in turn hinges on a number of technical and political factors.

Whatever the final shape of the global corporate tax reform, it is evident that direct tax and indirect tax concepts will converge more in the near future. We can expect to see more focus on where the consumer is located, a transactional analysis to determine tax obligations, the prospect of reporting digital direct taxes in VAT/GST returns (in some countries), and many business divisions working together with their advisers on the rapidly changing tax rules globally.

Environmental Factors

The combination of tax and environmental matters is also expected to be more prominent as governments, policy makers and businesses grapple with aligning environmental and social factors with tax behavior and policy. New Zealand reformed the GST rules on emissions trading units over 10 years ago—essentially adopting a zero-rated treatment in most cases—and that type of innovative tax policy thinking is expected to be more prevalent in the near term.

Technology and Digital Innovation

As country economies and supply chains look to bounce back in 2021, it is widely expected that technology and digital innovation will be a vital part of the new global and domestic horizons. E-invoicing and real time reporting is expected to become a natural part of the indirect taxes landscape. This echoes remarks made by the OECD earlier this year on the importance of digital innovation and technology to future tax systems, both in terms of tax policy design and tax collection.

The taxation rules around virtual currencies will also develop to accommodate the global trends in this area.

The future tax policy trends in New Zealand were recently summarized by the Minister of Revenue David Parker:

“Over the next twelve to eighteen months we’ll need a strong tax and social policy system to help support recovery. 2020 has been a big year and 2021 will be as well. More changes are coming and it’s by working together that we’ll make them successful.” (Source: speech at The Chartered Accountants of Australia and NZ Tax Conference, November 19, 2020)

In conclusion, embracing the debate on tax policy issues and being ready for the future tax changes will become part of the norm in 2021. Increasingly, businesses will need to be thinking globally—with a digital lens—even if they have traditionally had a domestic focus or not relied on technology as much.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Eugen Trombitas is PwC’s global digital indirect taxes leader.

The author may be contacted at: eugen.x.trombitas@pwc.com