GST Direct: Bringing you the latest GST and Customs developments

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1 GST Direct: Bringing you the latest GST and Customs developments Issue 25 In this issue: Review of the Customs and Excise Act March 2015 GST and bodies corporate GST and the digital economy Annual GST adjustments Recent GST developments

2 Customs

Review of the Customs and Excise Act 1996 (CEA) - a great opportunity for NZ Inc 1 New Zealand prides itself on having one of the more progressive Customs services in the world.

3 Review of the Customs and Excise Act 1996 (CEA) - a great opportunity for NZ Inc 1 New Zealand prides itself on having one of the more progressive Customs services in the world. However, our Customs legislation has not kept pace with the digitalisation and globalisation of trade and travel and changes in global business models and practices. In the next few weeks we expect a discussion document to be released on the review of the CEA. The current legislation was enacted in 1996 after a decade long review process. The 1996 legislation rewrote the 1966 Customs legislation, which still had many of the early 1900 s legislative provisions. Although the 1996 rewrite exercise was landmark at the time it did not replace all of the Customs provisions and various rules in the 1966 legislation were retained. The 1996 rewrite was designed to propel the Customs framework into the 21st century. It was intended to be innovative and give businesses flexibility. The 1996 rewrite brought in simplified import entry procedures, introduced Customs Controlled Areas (CCAs), established an independent Customs Appeal Authority, modified the powers of officers on account of the Bill of Rights Act 1990 and introduced various administrative penalties. The name of the Department at the time was changed to the New Zealand Customs Service (NZCS). Almost 20 years later it s time to assess the landmark 1996 changes. NZCS and our Government now have the opportunity to create a legislative framework that is both modern and meets the dual objectives of border protection and business growth. In recent times, NZCS has taken great strides in delivering innovation and better services through, for example, SmartGate and Trade Single Window. As noted in the Customs 2020 strategy: Our goal is to make compliance easy to do and hard to avoid. NZCS s ability to meet various economic and security objectives is constrained by detailed legislation that can be difficult to amend. In PwC s view, a more enabling and principles based approach to the CEA, supplemented by practical Customs rules, is worthwhile pursuing as this would provide continued efficiencies in this area. Ultimately, this will benefit all stakeholders and have a positive impact on NZ Inc.

4 Review of the Customs and Excise Act 1996 (CEA) - a great opportunity for NZ Inc Continued... 1 We look forward to the upcoming discussion document. Although there are many dimensions to the rewrite including border protection, security and inter-governmental information functions, we have listed below a selection of issues that businesses will be thinking about: Facilitative approach preferred over prescriptive - reduce the volume of primary legislation and have compliance light Customs rules; Ensure new CEA is progressive legislation, keeps pace with digitalisation and modern business supply chains; Clarify the term Enter the commerce of another country and how this affects the application of preferences under Free Trade Agreement for imports; Record keeping - in the digital age, is it still relevant to require that records are kept in New Zealand (section 95 current CEA)? Align Customs valuation methods with current tax/transfer pricing (TP) valuation methods; Simplify TP adjustment procedures and methodology; Consider if import GST (that can be claimed from Inland Revenue) should not be charged on the importation of goods by GSTregistered importers. Options here are: a. removing import GST completely from these imports (ie. ensuring they are outside the scope of Customs collection); b. applying a zero-rating (or offset) mechanism; c. licensing of importers (ie. licensed importers would not have to pay import GST) Clarify when a number of individual packages are treated as one importation for Customs purposes (relevant for the low value import threshold); Expand the current Customs Ruling regime to also cover, for example, valuation issues and assessment of duty; Consider the merit of other procedures to resolve or escalate Customs disputes beyond the current system of objecting to assessments in the Customs Appeal Authority; Ensure that rules concerning CCAs are fit for purpose and do not impose unnecessary compliance burdens; Refund schemes - New Zealand Customs manages three types of refund scheme (refunds, remissions and drawbacks). Ensure that the schemes are consistent, well understood and practical; Ensure valuation rules are easy to work with and that Schedule 2 (valuation) is reviewed.

5 GST

A practical solution for GST and bodies corporate The Taxation (Annual Rates for 2015-16, Research and Development, and Remedial Matters) Bill was introduced into Parliament on 26 February 2015.

6 A practical solution for GST and bodies corporate The Taxation (Annual Rates for , Research and Development, and Remedial Matters) Bill was introduced into Parliament on 26 February The Bill includes amendments to clarify the GST position of bodies corporate and addresses historical uncertainties. The proposed changes arise from consultation undertaken on the issue following the release of the Issues Paper in June Overall, we welcome the proposed solution because it will give bodies corporate the choice of being in the GST net or not. Under the Bill, bodies corporate that are currently GST-registered are able to remain registered. Bodies corporate that are not GST-registered will not be required to register but have the option to voluntarily register. The key here is choice for the relevant body corporate. This pragmatic approach differs to the original proposals in the Issues Paper, which called for a compulsory deregistration of most bodies corporate with retrospective effect. In brief, the mechanics of the rules are that levies paid by members will be treated as consideration for a supply but will be excluded from the GST registration requirement this provides flexibility. Usual GST rules will apply to supplies made to third parties. Special rules will apply to: a. An unregistered body corporate that decides to register - an output tax liability on the value of funds (as defined) will arise. This is a base maintenance measure as GST deductions can be claimed on funds spent after registration; b. Bodies corporate registered before the date of introduction that decide to deregister after this date; c. A body corporate that registers after the date of introduction cannot deregister for four years. We are pleased that officials took submissions received on board and developed a solution that is more simple to apply and keeps compliance costs at a minimum. The proposed amendments also endorse Inland Revenue s earlier work that correctly found bodies corporate to be carrying on a taxable activity. Some GST-registered bodies corporate will need to review their position especially if they represent both GSTregistered and non-registered unit owners. There does not appear to be a specific look through to the GSTregistered owners that was canvassed in the Issues Paper. It may therefore be more desirable for these bodies corporate to remain GST-registered.

GST and the digital economy 3 The growth of the digital economy continues to be an issue that cannot be ignored for countries around the world, with a number of them already implementing changes to

7 GST and the digital economy 3 The growth of the digital economy continues to be an issue that cannot be ignored for countries around the world, with a number of them already implementing changes to their GST rules to ensure digital services are adequately taxed. The European Union (EU) is the latest to join the ranks of jurisdictions that are making changes to their GST (VAT) rules in relation to digital services for B2C transactions. From 1 January 2015, digital service providers within the EU are required to pay VAT in the country where the consumer resides. The services covered include telco, broadcasting and electronically supplied services. This is a change from the previous rule where VAT was paid in the country where the supplier is based. NZ businesses supplying these services to the EU need to take note. The new rules mean that the VAT rate in the country of the service provider is no longer relevant. Rather, businesses will need to consider the VAT applicable in the country of their customers which may have an impact on their commercial and pricing strategy. Since 1 June 2014, South Africa has had in force a foreign seller registration regime for B2C digital services. The rules are working well with some 80 foreign businesses registered. What about New Zealand? Like other tax authorities around the world, Inland Revenue recognises that New Zealand s current GST rules do not adequately cater for the digital economy. The solutions need to address both cross border digital services and low value goods imports. To date, there has been little public consultation or information on potential solutions that could be implemented in New Zealand. Indication from Inland Revenue is that they will take advice from the work undertaken at the OECD. The OECD work to date has favoured a tax on foreign sellers supplemented by a streamlined compliance and registration system. The final OECD report is due later this year. Expectation is that the Inland Revenue will consider the various options that are canvassed in the OECD report. The developments in the other countries in relation to digital services will also be instructive. In relation to low value goods imports the role of New Zealand Customs Service will be important. Any changes in this area will need to be sustainable and ensure that the costs of the tax collected do not outweigh the amount of the actual tax. We will continue to monitor any developments in this area with interest.

Annual GST adjustments 4 Those businesses with a 31 March balance date need to consider a number of annualised GST issues that fall due at around the same time.

8 Annual GST adjustments 4 Those businesses with a 31 March balance date need to consider a number of annualised GST issues that fall due at around the same time. The current use based apportionment rules require an annual adjustment to reflect changes in the extent of taxable (or exempt) use of assets. These adjustments are required to be included in the GST return that coincides with the annual balance date. Our experience is that this is an aspect regularly checked by Inland Revenue. The GST adjustment for entertainment expenditure must be included in the GST return coinciding with the date on which the relevant income tax return is filed, or due for filing, whichever is earlier. In many cases this will be in the GST return which includes 31 March. Debtors ledgers are often tidied-up at balance date. Bad debts written off can often qualify for a corresponding GST recovery. Those businesses with a 31 March balance date need to consider a number of annualised GST issues that fall due at around the same time.

Recent GST developments 5 Inland Revenue has been busy lately and has released rulings on the following: zero-rating of legal services provided to non-residents; fishing quotas, coastal permits and

9 Recent GST developments 5 Inland Revenue has been busy lately and has released rulings on the following: zero-rating of legal services provided to non-residents; fishing quotas, coastal permits and certificates of compliance; mortgagee sales and GST recovery; and retirement sector. A GST remedial issues paper is also expected. We expand on these below. Zero-rating of legal services relating to land provided to non-residents Inland Revenue has released a draft public ruling (Draft Public Ruling PUB0207) concerning the GST implications of legal services provided to a non-resident in relation to transactions involving land in New Zealand. The draft public ruling confirms the position taken in the earlier Public Ruling BR Pub 10/09. The zero-rating rules in the GST Act allow services supplied to a non-resident, who is outside New Zealand at the time the services are performed, to be zero-rated unless the services are supplied directly in connection with land or moveable personal property in New Zealand. The draft public ruling concludes that legal services provided in respect of transactions involving the sale or purchase of land in New Zealand (or the lease, licence, or mortgage of land in New Zealand) are not services supplied directly in connection with land. These services can be zero-rated provided they are supplied to a non-resident who is outside of New Zealand at the time the services are performed. Enquiry should be made by the supplier to confirm the recipient of the services is in fact a non-resident. For example, services supplied to an individual who is a tax resident under the permanent place of abode test, despite living outside New Zealand, cannot be zero-rated. Consideration should also be given to whether the land transaction concerned makes the non-resident purchaser of land a resident for GST purposes. Fishing quotas, coastal permits and certificates of compliance Public Ruling BR Pub 15/01 has been released and confirms that a secondhand goods deduction is not available for purchases of fishing quotas, costal permits or certificates of compliance. For a secondhand goods deduction to be available, a registered person must purchase secondhand real or personal property, not being a chose in action, from an unregistered person. The Commissioner has ruled that fishing quotas are a chose in action and that coastal permits and certificates of compliance are not personal or real property. Mortgagee sales GST recovery A recent draft operational statement (OS) (ED0164) released by Inland Revenue outlines the Commissioner s position on the ability to claim GST input tax on costs associated with a mortgagee sale: A mortgagee (or lender) in a mortgagee sale cannot deduct the costs of sale before calculating the GST due under section 17 of the GST Act. The main reason for this is that the enforcement of the security is an exempt supply. A mortgagee cannot claim input tax for the costs associated with a mortgagee sale.

10 Recent GST developments continued... 5 A GST-registered mortgagee that makes a mortgagee sale in respect of loan that is subject to the businessto-business (B2B) supply of financial services rules is unable to claim input tax for the costs associated with that mortgagee sale. PwC believes that a mortgagee who has elected into the B2B financial services regime is entitled to recover GST on mortgagee sale costs and will be submitting on this point. A mortgagor cannot claim input tax for the costs, incurred by the mortgagee, associated with a mortgagee sale. The deadline for comment on ED0164 is Friday, 27 March When approved, ED0164 will replace OS005: GST and the costs of sale associated with mortgagee sales (published in TIB Vol 16:3 (April 2004)). Retirement sector On 24 February 2015, a draft Interpretation Statement (INS0109) was released dealing with GST and the retirement sector. The latest draft Interpretation Statement follows the same structure as the previous Interpretation Statement on GST and the retirement sector, issued in 2010 (10/08). The main differences outlined in the latest draft Interpretation Statement include: changes to reflect the new definitions of dwelling and commercial dwelling ; a discussion of the new GST apportionment rules in relation to retirement villages; and a discussion of the zero-rating of land rules for retirement village operators. PwC welcomes the new draft statement. It is a comprehensive document that will provide practical guidance to businesses operating in the retirement sector. The statement also usefully addresses various aspects of the GST apportionment and land zero-rating rules that will provide useful guidance to businesses in other sectors. The deadline for submissions on the draft statement is 7 April GST remedial issues Inland Revenue is expected to release a GST remedial issues paper in the next few months. We anticipate that it could touch on matters such as land transactions, GST apportionment, financial services, and capital raising costs. It promises to be a busy year in the GST area.

Contact us If you have any questions regarding the issues covered in this publication, please contact your normal PwC advisor or a member of our GST team.

pwc.com Waikato Hayden Farrow Director T: +64 7 838 7422 E: hayden.d.farrow@nz.pwc.com Wellington Gary O Neill Director T: +64 9 355 8432 E: gary.oneill@nz.pwc.com Shane Philip Manager T: +64 9 355 8761 E: shane.

11 Contact us If you have any questions regarding the issues covered in this publication, please contact your normal PwC advisor or a member of our GST team. Our team can help you by delivering practical GST and Customs solutions and effectively managing your indirect taxes risk. Auckland Eugen Trombitas Partner T: E: eugen.x.trombitas@nz.pwc.com Waikato Hayden Farrow Director T: E: hayden.d.farrow@nz.pwc.com Wellington Gary O Neill Director T: E: gary.oneill@nz.pwc.com Shane Philip Manager T: E: shane.j.philip@nz.pwc.com Emma Richards Director T: E: emma.h.richards@nz.pwc.com Ian Rowe Director T: E: ian.rowe@nz.pwc.com Hawkes Bay Taranaki Christchurch Melissa Brownrigg Senior Manager T: E: melissa.d.brownrigg@nz.pwc.com Brent Hulbert Partner T: E: brent.hulbert@nz.pwc.com Richard Perrett Partner T: E: richard.perrett@nz.pwc.com Sandy Lau Manager T: E: sandy.m.lau@nz.pwc.com Dunedin Richard McKnight Partner T: E: richard.mcknight@nz.pwc.com 2015 PricewaterhouseCoopers New Zealand. All rights reserved. PwC refers to the New Zealand member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. Disclaimer: GST Direct is intended as comment only and should not be relied upon or used as a substitute for professional advice. No liability is accepted for loss or damage incurred by persons who rely on this commentary. Professional advice should be sought in relation to any particular situation or circumstance

GST Direct: Bringing you the latest GST and Customs developments

GST Direct: Bringing you the latest GST and Customs developments Issue 26 In this issue: GST on the digital economy June 2015 GST and crowdfunding GST and inbound tour operators New border clearance levy