INSIGHT: Indirect Taxes—New Zealand and International Developments and Trends

This year is about to come to an end and it is worthwhile recapping on the significant changes in the indirect taxes landscape in New Zealand. This article discusses several highlights, and reflects on the fact that New Zealand is not the only country dealing with an unprecedented change in the indirect taxes area. The prominence of indirect taxes is fast becoming a fashionable trend globally.

New Zealand Customs Law Highlights

The full impact of the new Customs and Excise Act 2018 (effective October 1, 2018) was experienced during 2019. The new law was several years in the making and has given New Zealand a world class customs framework in terms of border management and duty and excise revenue processes. The New Zealand Customs Service (NZCS) has worked with many businesses and logistics providers to make the transition to the new law as smooth as possible.

The new law is set against the backdrop of significant export and import activity. In the year to June 30, 2019, NZCS processed 16.7 million import and export transactions—up over 4% on the previous 12-month period.

NZCS has successfully supported New Zealand’s economic growth by facilitating and promoting international trade in an efficient manner. The increase in imports in 2018–19 was largely due to ongoing growth in online shopping and the resulting increase in the imports of low-value goods.

International Developments

In 2018–19 NZCS signed new Mutual Recognition Agreements with Canada and Singapore. This is great news for our exporters to those countries, who can now get their goods to market faster. NZCS also continued to progress Single Economic Market initiatives to create a seamless trans-Tasman business environment, and lead negotiations of the customs aspects of New Zealand’s Free Trade Agreements.

Global trade changes are multiplying and creating both new complexities and opportunities. Businesses which embrace the changes and adapt the best will reap the dividends–a key benefit will be efficiency to market and this should make a difference to consumers. Administration efficiencies in relation to tax collection and clearance of goods should also be evident for revenue and customs authorities who embrace the changes.

New Zealand GST Highlights

New Zealand’s Goods and Services Tax (GST) is widely regarded as one of the most effective and successful value-added tax (VAT)/GST models globally. The main reasons for this are the purity and simplicity of the tax–broad base, relatively low rate (of 15%) with limited exemptions. New Zealand consumers are well accustomed to paying GST (incorporated in the price of goods and services) and Inland Revenue finds it relatively easy to collect GST—meaning that GST has been a policy and revenue administration winner for many decades.

New Zealand’s GST is almost 25% of the overall tax take in New Zealand (coming in at about NZ$20 billion ($13.1 billion) each year), which makes it a pillar of the New Zealand tax system.

GST Changes to Address the Digital Economy

In recent times, New Zealand’s 1986 GST-model has had to address the boom in, and challenges associated with, the digital economy. In October 2016, New Zealand started collecting GST on supplies of remote services (elsewhere referred to as “electronically supplied services” (ESS)). The New Zealand model is a business-to-consumer (B2C) model and is regarded as being successful in terms of ease of compliance by Inland Revenue as well as businesses. Remote services registrations now exceed 250 and the annual GST collected is in excess of NZ$125 million (or three times more than was originally expected to be collected).

New GST Rules for Low-value Imported Goods

A significant addition to New Zealand’s GST landscape in 2019 was the introduction of new rules, with a start date of December 1, 2019, dealing with GST on low value imported goods (LVIGs), which have a NZ$1,000 threshold.

Unlike the Australian GST law, which only had a one-year gap between their version of the remote services rules and the LVIG rules, New Zealand waited for over three years from the introduction of the remote services rules before bringing in the LVIG rules. This provided more time to understand the global business issues, learn from other countries and make the necessary adjustments. The New Zealand rules uniquely offer several business concessions to make compliance easier.

The original draft LVIG law was tabled in December 2018 with a proposed start date of October 2019. Given the new law was not expected to be passed until mid-2019, many submissions were made calling for a deferral of the start date to the first quarter of 2020. In the end, the government made a decision to start the new law on December 1, 2019, balancing the interests of collecting tax on consumption in New Zealand and giving businesses enough time to get ready.

As at the time of writing, about 400 LVIG registrations have been received by the Inland Revenue and this will undoubtedly grow over time. By the time the first returns are filed (due May 7, 2020 for the March 31 period), the number of registration could exceed 750 and time will tell if this number will grow beyond 1,000.

At one level, the LVIG rules will be regarded as successful by the government if the rules generate the same level of GST revenue as the remote services rules. However, it needs to be stressed that a true measure of success will be measured by the ease of compliance—many global sellers and platforms have multi-country obligations and New Zealand is only one place where their consumers are located.

The Future: Sound Indirect Tax Policy and Technology Vital to Sustained Success

Global Developments

The growing digital economy has caused an explosion in indirect taxes rules around the globe and with this has created both complexity and opportunity. Very soon the number of countries with ESS/remote services rules will exceed 100 and this will continue to grow. The AsiaPac region has seen a massive change in this area and countries like Mexico, Uzbekistan and Kazakhstan are about to follow.

The next big wave of indirect tax change (not dealing with digital services) will be a proliferation in the introduction, or modification, of existing LVIG rules in many countries; for example, New Zealand will follow the likes of Australia, Sweden and Switzerland, with Norway and Europe following closely behind. The AsiaPac region will also see changes in this area and the comprehensive China VAT reform will introduce a fascinating new dimension. Even the non-VAT countries are reacting to the digital tsunami of change.

The U.S. sales tax landscape has been massively transformed since the Supreme Court decision in South Dakota v Wayfair, Inc. (June 2018). There are now greater obligations placed on offshore sellers and platforms on sales of digital commodities—physical presence in the relevant state is no longer relevant for tax nexus purposes.

Indirect Tax Policy Trends

Indirect taxes are both prominent as a source of tax revenue, and agile in terms of ability to adapt to the modern environment and changes in the global trade landscape and consumer behavior. The relative success of indirect taxes reforms has been the case to date, courtesy of sound VAT/GST policy making globally, and the actions of individual countries will be instructive for any future international direct tax reform.

The overall success of any indirect tax reform also relies on effective tax policy, i.e., policy that is sound from a principles point of view (e.g., taxing consumption in the place where it takes place), simple, stable and certain for business. Importantly, effective tax policy also needs to be future-proof so the rules are not frequently tinkered with or easily avoided.

It should be highlighted that regulators have consistently made it clear in recent years that future indirect tax reform needs to focus on new rules that are simple and limit compliance burdens for businesses.

Technological Solutions

As has been extensively canvassed in the joint PwC World Bank Group report (Paying Taxes 2020), technology will play a crucial role in delivering a bright new future in the administration of, and compliance with, the ever-expanding international indirect tax rules and obligations. There is an evolution unfolding with technology and tax—in this regard some would say “Rome was not built in a day.”

The more cautious of us would suggest that some of the issues with technology are that the best technologies are still developing, require business commitment to change (both structural and operational), could require changes to tax laws to accommodate a more digital world, and change management within the tax administration may be required— to mention only a few.

On the positive side, there is a massive opportunity being presented in terms of embracing technological change and this can deliver significant benefits to various stakeholders.

These benefits include greater control over information, better data quality, greater transparency across stakeholders, end-to-end transaction monitoring, real-time VAT/GST reporting, ability to automate indirect taxes obligations and refunds, greater efficiency (allowing businesses to focus on strategy, better products and better consumer interactions) and, finally, a reduction in the gap between tax paid and tax that should be paid.

As we close 2019, one thing is clear about the next year and beyond. Innovation and embracing change will define the success of global indirect taxes reform in the future. Technology will play a key role for both businesses and regulators in terms of managing the indirect tax tsunami of change.

Eugen Trombitas is a PwC NZ Partner and PwC Global E-commerce indirect taxes leader.

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

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