KPMG submission - Taxation (Residential Land Withholding Tax, GST on Online Services and Student Loans) Bill

Transcription

1 KPMG 10 Customhouse Quay P.O. Box 996 Wellington New Zealand Telephone +64 (4) Fax +64 (4) Internet The Chair Finance and Expenditure Select Committee Parliament Buildings Our ref KPMGsubRLWTandGST Dear Sir or Madam: KPMG submission - Taxation (Residential Land Withholding Tax, GST on Online Services and Student Loans) Bill KPMG is pleased to make a submission on the Taxation (Residential Land Withholding Tax, GST on Online Services and Student Loans) Bill (the Bill ). The focus of our submission is on the Residential Land Withholding Tax ( RLWT ) and GST on remote services proposals. Residential Land Withholding Tax We acknowledge the Government s rationale for the RLWT. However, we have concerns about the compliance and general costs that will be imposed on property buyers, sellers and their agents. In our view, the cost of the RLWT will significantly outweigh the revenue collected and protected. We therefore do not support the implementation of a RLWT, at this stage at least. The RLWT will apply where New Zealand residential land is sold by a so-called offshore person within the new two year bright line test period. At the time the bright line test was being legislated for, Officials estimated that the total revenue collected by this measure would be approximately $5 million per annum. (The figure for offshore persons will be a subset of this.) The compliance costs of implementing the RLWT, including the passing on of those costs in monetary terms, will far exceed the revenue at stake. The proposed rules will impose compliance costs for every transaction relating to New Zealand land. This is because the vast majority of sellers will not be offshore persons but conveyancers will need to request and hold information to confirm that is the case. They may also need to establish that the land being transacted is not non-residential land. This will add costs to every transaction for little to no revenue either collected, or protected. There is also an element of unnecessary duplication between the proposed information requirements for RLWT purposes and the new land information requirements (i.e. land transfer tax statement obligations which came into effect from 1 October 2015), which we discuss in our detailed submissions. In summary, if the RLWT proposal proceeds, withholding agents should be able to collect this information once to mitigate the costs for buyers and sellers. A RLWT is efficient for Government and Inland Revenue as it imposes the collection obligation on taxpayers and their intermediaries. However, unlike other withholding taxes, the 2016 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

2 administrative efficiency (and revenue protected for Government) is not justified in the case of the RLWT. We consider the more reasonable approach is to defer the implementation of the RLWT to allow the wider land information requirements to be bedded-in and tested for their impact on, and compliance with, the bright line test (i.e. to see whether this results in greater revenue under the test). A deferral would also allow time for Inland Revenue s Business Transformation program to establish a more efficient process for the withholding tax. This appears to be an aspect that has been missed in the haste to legislate the RLWT. With Inland Revenue s systems and processes (including the current range of withholding tax regimes) due for a major upgrade, it is illogical for the RLWT to be designed under the current tax administration framework, when this will change. Related issue issue of Inland Revenue (IRD) numbers to offshore persons The new land information requirements for buyers and sellers of New Zealand land, enacted in September 2015, have resulted in unintended consequences. Under the new rules, an offshore person (as defined for land information purposes) must show evidence of a fully functioning New Zealand bank account in order to successfully apply for a New Zealand IRD number. In its guidance, Inland Revenue has indicated that a fully functioning bank account must be capable of withdrawals as well as the depositing of funds. This requires the relevant New Zealand bank to complete its anti-money Laundering and Countering the Financing of Terrorism and Know Your Client checks. This imposes costs on banks. We understand that some New Zealand banks are refusing to open bank accounts for non-residents if they do not believe there will be a material ongoing banking relationship. We understand others may charge a fee to cover their internal risk processes. The result has been frustration for non-residents and a back log of IRD number applications. Most egregiously, the requirement to have a fully functioning bank account also applies where a non-resident s reason for applying for an IRD number is not related to a land transaction. For example, a non-resident business may wish to register as a taxpayer in New Zealand because it expects to pay GST in New Zealand (e.g. if hosting a conference here). Similarly, non-resident employees from non-tax Treaty countries may have NZ PAYE obligations if they are here for more than 92 days. In both cases, a NZ bank account will not be relevant for their purposes, which is to pay tax. The NZ bank account requirement is an unnecessary complication in these circumstances. The Bill contains a change (clause 71(1)) to remove the NZ bank account requirement for a nonresident supplier that is required to register for IRD and GST numbers under the proposed GST Remote Services rules (see below). However, the relaxation of this requirement is narrow and will only take effect from 1 October 2016, which does not address the current issue KPMGsubRLWTandGST 2

3 The ability to quickly and easily be supplied with an IRD number is fundamental to the operation of New Zealand s tax system. The previously enacted changes compromise that operation. We strongly recommend a change in the Bill to remove the NZ bank account requirement (in section 24BA of the Tax Administration Act 1994). GST on remote services We support the introduction of GST on cross-border supplies of remote services ( the Remote Services rules ). The application of GST to cross-border supplies is a notable gap for a comprehensive GST. It is difficult to defend a system which taxes milk bought from the supermarket but not a downloaded game. However, we acknowledge that applying GST to cross-border supplies does require compliance and other trade-offs. Further, we have concerns with the haste with which this change is being implemented. A 1 October 2016 application date provides insufficient time for offshore suppliers of remote services, and their NZ consumers, to implement the rules. We submit that the application date should be extended to 1 April 2017, at the earliest. Alternatively, 1 July 2017 to align with the introduction of a similar remote services rule in Australia may provide the best implementation date. Further information We would be pleased to appear before the Finance and Expenditure Select Committee to discuss and elaborate on our submission. We can be contacted on (John Cantin) or (Darshana Elwela). Yours sincerely John Cantin Partner Darshana Elwela National Tax Director KPMGsubRLWTandGST 3

4 Detailed submissions Residential Land Withholding Tax Our detailed submissions on the proposed RLWT regime are outlined below. As a general comment, if the RLWT proceeds, we support the deduction obligation arising principally on the vendor s conveyancing agent. Submission 1: The main home exclusion should apply for RLWT purposes As presently drafted, the RLWT applies if an amount received on disposal of NZ residential meets the bright line requirements, but excluding the application of the main home exemption. The main home exemption should apply for RLWT purposes. The Bill Commentary states that an offshore person would typically not qualify for the main home exemption under the bright line test. This appears to assume that offshore persons will either be New Zealand citizens or permanent residents who have been living away for some time or non-nz citizens/permanent residents who have never lived here (i.e. own NZ property remotely ). It is possible for someone that is not a NZ citizen or permanent resident, but is working here (i.e. has a temporary work visa but not a resident visa), to have bought residential property, lived in it as their main home, and not to be subject to tax under the bright line rule when they sell it. However, because they are an offshore person they will be caught by the RLWT. They will then need to request a potentially significant tax refund. The omission of the main home exemption in the RLWT rules should be remedied. Submission 2: offshore persons Issue 1: a wider definition of offshore person for RLWT purposes is not supported The Bill proposes to introduce a new definition of offshore person in the Income Tax Act, for RLWT purposes. For non-natural persons, the proposed definition is different (and wider) than the definition of offshore person in the Tax Administration Act 1994, that was introduced under the land information rules (and is based on the overseas persons definition in the Overseas Investment Act 2005). The Bill proposes new criteria for when a company, trust or partnership will be an offshore person for RLWT purposes. In the case of a trust, this includes where any trustee or settlor is an offshore person (including if the majority of trustees/settlors are New Zealand resident) and if a beneficiary that is an offshore person has received a distribution of residential land proceeds within the previous 6 years (again, even if all other beneficiaries are NZ resident). In contrast the offshore person definition for land information purposes requires the offshore trustee/settlor/beneficiary to have at least a 25% control interest/beneficial entitlement/or decision making rights over the trust. It is proposed that a NZ incorporated company will be an offshore person if one of the directors is an offshore person. (This contrasts with a requirement for an offshore person/s to have at KPMGsubRLWTandGST 4

5 least 25% or more of the securities or decision making rights, including the right to appoint directors, under the land information rules.) It is also proposed that a New Zealand established partnership should be an offshore person if a single partner is an offshore person. The test for land information purposes, in contrast, is based on at least 25% of the partners being offshore persons (or an offshore person having a 25% income or voting/control interest in the partnership). We see no reason for these inconsistencies. It will result in some entities being offshore persons for RLWT purposes, when they are not for land transfer tax statement purposes, with the potential for confusion for sellers and their agents. We therefore recommend that the definition of offshore person under the RLWT rules be consistent with the land information definition. Issue 2: the offshore person definition should be simplified The Finance and Expenditure Select Committee should instruct Officials to further simplify the definition for both the RLWT and land information requirements. Potential inconsistencies, which have eventuated (see above), and complexity were concerns with the different parts of the Government s land tax package being progressed through different legislative tracks. The Committee should consider carefully if the existing offshore person definition is fit for purpose. We do not believe it is, particularly, in the context of a New Zealand incorporated/established entity that may have offshore persons as minority shareholders, trustees, settlors or beneficiaries. The rationale for the RLWT is to prevent those with no physical presence in New Zealand avoiding their tax obligations here. Where the seller is a New Zealand resident entity 1 there is greater scope for Inland Revenue to pursue the entity (or its key officers), compared to an individual who does not live in New Zealand or entities with no ties to New Zealand. Further, under the new resident director requirements, a New Zealand incorporated company will need to have at least one NZ (or Australian) resident director. This provides an additional layer of security for Inland Revenue as there is someone in New Zealand (or Australia) against which a tax claim is enforceable if there is non-compliance. We can see no reason why Inland Revenue should be privileged with respect to collecting money owed by a New Zealand company over other creditors. This is particularly the case as the full range of New Zealand tax obligations will apply. Similarly, in the case of a trust or partnership, if the trustee or one of the partners is New Zealand resident. 1 This includes New Zealand incorporated or established entities, but also foreign entities that are controlled from NZ (e.g. NZ director or trustee control) KPMGsubRLWTandGST 5

6 We consider there to be a strong argument for limiting the application of the RLWT to individuals who do not live here and non-resident entities. This will also simplify the requirements for conveyancers. Alternatively, the offshore person definition should be changed to define an offshore person in the entity context as a New Zealand company, trust or partnership that does not have at least one NZ shareholder/trustee/partner. If our above submissions are not accepted, we recommend that a New Zealand incorporated company and/or established trust/partnership should only be an offshore person if the majority of the shareholders (by voting percentage), trustees or partners are offshore persons. The RLWT should certainly not apply where the relevant NZ entity is majority owned or controlled by nonoffshore persons. We believe this better aligns the definition with the policy intent of the RLWT changes. Submission 3: clarifying that a vendor receives a tax credit if their conveyancer deducts but does not pay the RLWT to Inland Revenue Under new section RL 2(1) and (5) a vendor is solely liable to pay the amount of RLWT, notwithstanding the deduction obligation generally falling on the vendor s conveyancing agent. We generally support agents not being jointly and severally liable for a vendor s RLWT. However, where an agent deducts the withholding tax (i.e. the vendor receives the net of RLWT sales proceeds) but does not remit the amount to Inland Revenue, the vendor should still receive a tax credit for the RLWT, under new section LA 6B, against their income tax liability. At present the tax credit provision only applies to an amount of RLWT paid. Arguably, where the conveyancing agent has not remitted the amount to Inland Revenue, the RLWT has not been paid. We submit that the vendor should be entitled to a tax credit so that Inland Revenue s recourse is to the conveyancing agent to recover the RLWT deducted but not remitted. Submission 4: the rules around how much RLWT should be deducted need to be clarified Issue 1: lesser of amounts calculated under three formulas New section RL 4(1) requires the relevant withholder to deduct an amount of RLWT that is the lesser of the results of three formulas. This includes 28% or 33% of the difference between the property s current purchase price and the vendor s acquisition cost (under section RL 4(2)). While we would expect in most cases vendors to be compliant and provide the necessary information (as this option is likely to result in the lowest withholding), there may be situations where this is not the case. Here, the conveyancing agent will not be able to determine the lowest of the three amounts and will technically not be able to comply with section RL 4(1) KPMGsubRLWTandGST 6

7 We recommend that a default rule which allows RLWT to be deducted at 10% of the current purchase price (i.e. the formula in new section RL 4(4)) be available if the vendor has not complied with requests for information from their conveyancing agent. Issue 2: security discharge amount from a registered bank We support the ability to offset the amount payable to a registered bank or similar (i.e. a licenced security holder) under a mortgage, when calculating RLWT under new section RL 4(7). A registered bank is defined in section 2 of the Reserve Bank Act 1989 as a person whose name is entered in the register maintained [by the Reserve Bank] under section 69 or who continues to be a registered bank by virtue of the provisions of section 76. While this would capture mortgage relationships with New Zealand registered banks, it does not appear to apply where the mortgage relationship is with a non-nz bank. As the RLWT is aimed at non-residents, it is very likely that such persons could have banking relationships with non- NZ banks in respect of the residential land being disposed of. Therefore, we recommend the definition of licenced security holder in new section RL 4(8) be amended as follows: a person who has a mortgage or another security over the resident land if that person is a registered bank or similar under the equivalent of the Reserve Bank Act in another jurisdiction: Issue 3: Verification requirement for vendor s acquisition price The Bill is silent on how a conveyancer is required to verify the vendor s acquisition price is correct to determine the amount subject to RLWT under new section RL 4(2). (While the conveyancer would be able to verify the acquisition price if they also acted for the vendor at the time of purchase, this will not always be the case.) Unless they know the information to be false (e.g. because of information or knowledge otherwise held), the conveyancer should be able to rely on the acquisition price notified by the vendor, and not have to independently verify this information to ensure the RLWT applies to the correct gain amount. If an artificially inflated purchase price is provided by the vendor, they should be subject to the knowledge offences penalty under the Tax Administration Act The above comment applies equally to other information required to be provided by vendors under new section 54C of the Tax Administration Act It is unclear which information will require certified copies of supporting documentation to enable the conveyancer to verify. (The Bill Commentary unhelpfully notes that this will be confirmed by way of a future Commissioner s statement.) Issue 4: GST In the definitions of current purchase price and vendor s acquisition price in new section RL 4, the amounts used should be net of GST if the vendor is GST registered. This would be a helpful clarification KPMGsubRLWTandGST 7

8 Issue 5: Object of the formula vendor s costs, proof and costs of administration Typically, a withholding tax seeks to collect as far as possible the tax that is actually due. The vendor s acquisition cost (in new section RL 4(3)(b)) does not include the vendor s costs to further develop or improve the property, which would be deductible against the sales price. Submissions were made that these costs should be included in earlier consultations on the RLWT. It is not clear why these submissions were not accepted. The consequence of this decision is that the Bill: Is likely to over-tax (as the formulae result will be greater than the actual tax due); and Inland Revenue will be obliged to process refunds. Further, the requirements will impose substantial bureaucracy and administration costs in relation to land transactions. We submit that that the inability to include post acquisition costs, in the RLWT calculation, and for the vendor to have to certify those costs should be reconsidered. Submission 5: duplication of information requirements should be removed The Bill proposes requiring each vendor of NZ residential land to provide to their conveyancer with relevant (certified) information, including: Their name, address and tax file number; Whether they are an offshore person or not; and If an offshore person, whether the bright line test applies to the transaction. We note that the land transfer tax statement already collects information on the identity of the seller as well as their IRD number and offshore person details. (The latter two are disclosed indirectly. An offshore person is not able to claim the main home exemption as a nonnotifiable transfer reason and must therefore complete the tax details in the statement.) Therefore, the bulk of this information is collected already through the land information requirements. In our view, it makes no sense to duplicate the information requirements for RLWT purposes by requiring a vendor to provide an additional statement to their conveyancer. Instead, the current land transfer tax statement should be updated to capture any additional information needed for RLWT purposes. Submission 6: RLWT refunds Issue 1: Detail required with RLWT payments The Bill commentary notes that a person will be able to file an interim income tax return before the end of the year to obtain a refund of excess RLWT. The RLWT will also need to be paid to Inland Revenue before the refund will be issued KPMGsubRLWTandGST 8

9 This suggests that Inland Revenue s system will need to be able to identify RLWT deductions at the taxpayer level in real time. This will in turn require the RLWT returns filed by conveyancers to itemise the tax paid by vendor. This will need to be communicated to potential withholding agents. It is not clear that this requirement has been included by Inland Revenue in its own administrative costs. Issue 2: Inland Revenue approach to refunds We consider the RLWT formulae are likely to result in deduction of more tax than is actually due. Our experience with Inland Revenue is that Officers do not fully appreciate the policy or objective of a regime which allows refunds to non-residents. (The non-resident GST registration rules are a case in point.) Refunds which should be made readily, and as a matter of course, will often take longer than required for Inland Revenue to verify and process. It is important that Inland Revenue is aware that refunds are a design feature of the RLWT regime and that it implements processes which facilitates the efficient reimbursement of overpaid tax. Issue 3: RLWT over-deducted / deducted in error Where the RLWT has been over-deducted, or deducted in error (e.g. the person is incorrectly treated as an offshore person), it is not clear what remedy will be available to the vendor. The options here include a refund on filing of a return or an earlier adjustment by the withholding agent. This needs to be clarified. Submission 7: drafting issues We suggest the following drafting amendments: Clause 42(2): RA 10(1)(b) and (c) the proposed amendment to section RA 10(1)(b) should read RLWT for a residential land purchase amount. If this change is made, the addition of section RA 10(1)(c) ( vendor liable to pay an amount of RLWT does not pay the amount ) appears to be redundant. Clause 44: RL 1(2) we suggest the following amendment: This subpart applies for a residential land purchase amount in relation to a disposal of residential land located in New Zealand by a person (the vendor) to another person (the purchaser) if KPMGsubRLWTandGST 9

10 Detailed submissions GST on remote services Our detailed submissions on the proposed Remote Services rules are outlined below. As a general comment, we support the introduction of the Remote Services rules from a policy perspective. We have sought to broadly align our submissions with issues as raised in the Bill commentary. Cross-border supplies of remote services to New Zealand-resident consumers Submission 1: Application date Issue 1: Adoption of Remote Services rules Our concerns regarding the timeframe for submissions on the Bill, and the speed at which the Bill is progressing, are outlined in the letter. We understand that this is in part to ensure that the Remote Services rules can come into force from 1 October While we support the introduction of the Remote Services rules, the application date is, in our view, too soon. We consider that the application date should be extended to 1 April 2017, at the earliest. As Inland Revenue outlined in its Regulatory Impact Statement ( RIS ) on the Bill, submissions on the discussion document GST: Cross-border services, intangibles and goods ( the Discussion Document ) suggested that: offshore suppliers would need at least 6 months to adapt their systems depending on the complexity of the rules [Emphasis added] Even if the Bill is enacted by the end of March 2016, there is a significant risk that the lead time will not be sufficient for non-residents to adapt their systems to comply with the Remote Services rules. In our view, the commencement of the Remote Services rules with the knowledge that the lead time may be insufficient undermines New Zealand s robust Tax Policy Development Process. We consider that the initial six-monthly interim filing, or so called soft start to the Remote Services rules, would not alleviate or mitigate this risk. While Inland Revenue may be correct to state that non-resident suppliers of remote services will be able to register, file and pay by 7 May 2017, without facing interest or penalties, it does not change the fact that non-resident suppliers will need to have adapted their systems in order to determine whether GST applies, and to charge GST from 1 October We note the six monthly interim filing period is required as Inland Revenue cannot adapt its systems to allow for a simplified pay-only return or quarterly filing by 1 October Given this, imposing such requirements on non-resident suppliers seems patently unfair. We consider that a 1 April 2017 application date would be more appropriate. This would provide non-resident suppliers with additional time to adapt their systems to comply with the KPMGsubRLWTandGST 10

11 Remote Services rules and would align with the Inland Revenue s system changes. In addition, the six-monthly interim filing period would not be required. We note that a 1 July 2017 application date should also be considered. This would align with the introduction of similar Remote Services rules in Australia. The benefit for non-resident suppliers is that this would allow the system changes required to comply with the New Zealand and Australian rules to be made simultaneously, reducing the cost of compliance. Issue 2: Amendment of parts of the GST Act For completeness, amending parts of the GST Act to enact the Remote Services rules raises the risk of those amendments having an inadvertent impact on the current GST rules. We note that given the timeframe for submissions on the Bill, we have not had a reasonable opportunity to consider these impacts in detail. Submission 2: International developments We support the broad alignment of the Remote Services rules with OECD guidelines and international practice. While New Zealand should not automatically follow OECD guidelines or other jurisdictions, we consider this is a case where consistency of the principles and regimes is desirable and has a genuine advantage. This is important to avoid double taxation or nontaxation globally and minimise the cost of compliance. Submission 3: Definition of remote services We support the broad definition of remote services. We believe this aligns the Remote Services rules with the guidelines developed by the OECD, which should to the best extent possible avoid the double taxation or non-taxation of supplies as other jurisdictions implement similar rules. We consider that the broad definition should also give effect to the policy intent of capturing services where the supplier and recipient are not in the same location at the time of supply and deeming the supply of those remote services to be in New Zealand where the supplier is nonresident (unless agreed otherwise). Further, we consider that the provisos for services physically performed in New Zealand, such as in new sections 8(3)(c) and 11A(1)(j), are appropriate to ensure that there is no change to the GST treatment for services supplied in New Zealand under current GST rules. However, we submit that the definition of remote services should specifically exclude services where it is reasonably foreseeable that the services will be consumed outside New Zealand. As presently drafted, the use of a broad definition potentially captures some supplies that may in fact not be consumed in New Zealand. This may include, but is not limited to, vouchers and loyalty schemes. These remote services could be purchased and ultimately consumed in a foreign jurisdiction but subject to GST in New Zealand based on the definition of remote services, given the focus on the location of the supplier and recipient at the time of supply. We refer you to the examples outlined in our submission on the Discussion Document KPMGsubRLWTandGST 11

12 Vouchers Overseas loyalty programs Under the existing voucher rules, the time of supply is generally when the voucher is issued. We consider that this brings vouchers within the definition of remote services if the recipient and the non-resident supplier are not in the same location at the time of supply (i.e. New Zealand) irrespective of whether redemption of the voucher occurs outside of New Zealand. It may be that these services are being consumed overseas, yet will attract GST due to the recipient being a New Zealand resident. Again, if there is no consumption of the services in New Zealand, we consider that New Zealand GST should not apply. This would be consistent with the current zero-rating rules in relation to the transport of passengers. The proposed zero-rating provisions do not appear to change the position for either of these examples. Accordingly, we consider that the definition of remote services should be amended to exclude services where it is reasonably foreseeable that the services will be consumed outside of New Zealand. We would see this rule as being along similar lines to that in section 11A(2) of the GST Act to allow zero-rating. Submission 4: Registration threshold We support the alignment of the GST threshold of $60,000 for resident and non-resident suppliers. As there will be compliance costs associated with the collection of GST, and compliance with the New Zealand GST rules, the threshold should be set at an amount where it is reasonably foreseeable that the non-resident supplier will have the systems and processes to comply. We consider that the $60,000 threshold should strike a fair balance in this regard. By setting the threshold at $60,000, we also consider that there should be a lesser risk of nonresident suppliers with a small amount of supplies to New Zealand consumers being forced out of the New Zealand market due to increased compliance costs. Submission 5: Determining residence of the recipient We support the use of the indicia in new section 8B to determine the residence of the recipient on the basis that they are consistent with OECD guidelines and current European practice. We consider that the use of indicia that are consistent with current international practice should, to the best extent possible, avoid the double taxation or non-taxation of supplies. Further, the ability of a non-resident supplier to rely on two non-conflicting indicia is an appropriate trade-off between compliance costs and capturing all transactions that could attract GST. It is pleasing to see a practical and reasonable approach being taken. We understand from the RIS that Inland Revenue intends to provide guidance in relation to the Remote Services rules. We consider that it is important that the guidance is clear on the types of indicia that will be accepted as other commercial information so that non-resident suppliers can establish systems and processes to comply with New Zealand rules KPMGsubRLWTandGST 12

13 Guidance on the process for the Commissioner prescribing other methods to determine a recipient s residence pursuant to new section 8B(3)(b) would also be desirable. Submission 6: Non-double taxation rules The Bill proposes to allow a New Zealand resident supplier to deduct foreign GST paid on remote services supplied to another country. (In other words, in circumstances which are the equivalent of those which New Zealand would seek to tax under the proposed Remote Services rules.) This proposal is to reduce the double taxation of the services in New Zealand and that other country. Issue 1: Exported service We submit that the supply of remote services which are subject to consumption tax in another jurisdiction should be zero-rated. If the equivalent of the Remote Services rule applies in another country, this means that the place of consumption is properly considered to be that other country. The policy of a GST is to tax consumption in New Zealand and not elsewhere. By definition, the services are not consumed in New Zealand. If this position is not accepted, this means that the proposed definition of remote services in the Bill is incorrect as it does more than tax consumption in New Zealand. Issue 2: Refund of foreign GST As drafted, the Bill allows a deduction to the extent of output tax paid (which must be foreign output tax in context). There does not appear to be any limit to that deduction. If the foreign GST rate exceeds New Zealand s rate, the suppler will be entitled to a refund. This problem does not arise with a zero-rated solution to the double taxation problem. Issue 3: Inbound double taxation The Bill does not deal with double taxation of remote services supplied to New Zealand consumers. A supply could be taxed both in the supplier s country and in New Zealand. (The proposed solution for outbound supplies means that this is more than a theoretical issue.) This means that New Zealand is relying on the following to prevent the double-taxation of remote services supplied to New Zealanders: the zero-rating rules; or an equivalent to new section 20(3)(dc). We submit that New Zealand should have a plan to address this. This might include the following to ensure either a zero-rating or deduction rule is applied: working with the OECD; or legislating the ability for our Double Tax Agreements to extend to GST and its foreign equivalents KPMGsubRLWTandGST 13

14 . Submission 7: Transition We submit that transitional provisions be included in the Remote Services rules. It is possible that the introduction of the new registration system may bring into question historical practice. For example, the new rules may identify persons that: have been incorrectly returning GST (and could now seek a refund); and those who should have been returning GST. In relation to the latter, the incentive to register under the proposed rules may be lower because of the historical position. For the former, the Crown is at risk of having to refund GST already collected. On balance, we consider that a pragmatic approach not to open up historical positions is the appropriate answer. This is particularly in light of the fact that the introduction of a new registration system is a unique and one-off event. We submit that the Bill should include a transitional rule which: allows a period after commencement of the new rules to register under the new rules, without retrospective registration under the existing rules; allows a period for an existing registered person to change the nature of their registration; and prevents retrospective de-registration (i.e. from disputing existing registrations on the basis that the existing rules do not apply to supplies made). Submission 8: Fair Trading Act While we have not considered the application of the Fair Trading Act in detail, we understand it applies to a person: carrying on business in New Zealand to the extent that such conduct relates to the supply of goods or services within New Zealand. [Emphasis added] Accordingly, consideration should be given to whether the supply of remote services under the Remote Services rules would fall, or is intended to fall, within the ambit of this legislation. We understand the Fair Trading Act requires that prices include or be clear about the GST payable. It is unclear whether online sales by non-resident suppliers, where the consumer s New Zealand GST is not likely to be known until the online checkout, would meet this requirement. If the Fair Trading Act does apply to such supplies, an appropriate amendment to that Act may be required KPMGsubRLWTandGST 14

15 Supplies to New Zealand GST-registered businesses Submission 9: Remote services supplied to GST registered persons We support remote services supplied to a GST registered recipient being deemed to be supplied outside New Zealand under section 8(4). This is subject to the non-resident supplier and recipient agreeing otherwise, and the fact that this would allow a non-resident supplier to register for GST voluntarily if such an agreement is made. We believe that this approach is appropriate in light of consistency with international practice and minimising compliance costs. Submission 10: Determining whether a recipient is registered for New Zealand GST We consider that the documentary evidence outlined in new section 8B (notification of registration or provision of a GST registration or business number) to support a recipient as being registered for GST is appropriate. It is pleasing that the proposed Remote Services rules allow a non-resident supplier to rely on documentary evidence provided by the recipient. This is a practical approach, as the cost of requiring a non-resident supplier to verify that a business is registered would, in our view, have resulted in significant compliance costs relative to the potential revenue foregone. The application of new section 5(27) and knowledge offences should also buttress the risk of recipients misrepresenting their GST registration status. The flexibility to agree an alternative method to determine whether a supply is to a GST registered recipient is also pleasing as we consider it should provide a practical mechanism to deal with circumstances outside of the norm. Inland Revenue guidance on the process to obtain the Commissioner s approval to use an alternative method will be required. Submission 11: GST inadvertently charged and invoicing requirements simplified refund process For supplies over $1,000, the supplier is required to make an adjustment of the tax payable in the period when the incorrect treatment becomes apparent. Due to the quarterly GST return filing requirements for non-resident suppliers, we are concerned that the timeframe for obtaining refunds may be seen as unreasonable. Further, we assume that non-resident suppliers will be unwilling to release any refund until such time as a refund is received from Inland Revenue. A delay in the processing refunds could, therefore, have adverse commercial consequences. We believe that a simplified refund process should be introduced to address this issue. We acknowledge that this process would require the non-resident to provide evidence of the output tax inadvertently charged and of the payment to Inland Revenue to address revenue concerns KPMGsubRLWTandGST 15

16 Electronic marketplaces Submission 12: Requirement to register We do not support the compulsory GST registration of an electronic marketplace operated by a non-resident. We consider that that electronic marketplaces should be able to register and also be able to act as agent for their non-resident suppliers. However, the ultimate liability should be on non-resident suppliers to comply with New Zealand GST rules. This is consistent with the current scheme of the GST Act. The risk we see is that a requirement for an electronic marketplace to register for GST could result in them ceasing to make supplies to New Zealand consumers. This would limit access to an entire electronic marketplace as opposed to a single supplier not wishing to register for GST. We, therefore, prefer a regime that is consistent with New Zealand supplier norms (the supplier has the liability for tax). We note that clear and simple rules which allow an electronic marketplace or other supplier to act as a GST intermediary would also be useful. These rules should be designed to minimise registration and compliance costs and checks. We consider that this would encourage nonresident supplier compliance. GST on cross-border supplies of insurance Submission 13: General insurance Issue 1: Third party input tax For foreign insurers, the key issue is the ability to deduct cash payments as well as actual input tax paid. The insurance rules achieve neutrality between an insurer reinstating at its cost or cash settling either provides an input tax deduction. The Bill proposes: to standard rate insurance supplies to consumers; and to zero-rate insurance supplies to business customers. A cash settlement to such a customer is not chargeable with GST and the insurer is prevented from deducting a cash settlement. This approach appears consistent. However, we submit that that clause 55(2) be amended to include after section 11A(1)(x): and to which section 5(13)(d) applies. This would ensure that an insurer s payment to a third party supplier (for example, of a replacement) would clearly be able to be deducted. Issue 2: Complexity of insurance In our view, insurance is a complex area that will require further consideration. This being the case, it would be prudent to carefully review the application of the proposed rules to insurance KPMGsubRLWTandGST 16

17 Supplies of remote gambling services Submission 14: Remote gambling services As with insurance, gambling services are a specialised area. We recommend that Officials are given the ability to consult with providers of gambling services if specific submissions are not received. However, we believe the following issues need to be considered: The boundary between one gambling or prize competition and another may lead to disputes and uncertainty. We note that for a New Zealand resident supplier this may be less important as all supplies are typically GST taxable supplies. This will not be the case for an offshore gambling supplier who will have resident and non-resident customers. We also note that there are commercial drivers for linking competitions which may be seen as independent (e.g. taking a bet on a particular game in a cup competition.) The rules that are established should take into account the commercial drivers and should not allow Inland Revenue to substitute its own judgement. The ability to claim a refund or to carry forward a loss from one competition to another. The taxable amount is amounts bet less prize money. It is possible that a particular competition will result is prize money exceeding bets. We would expect such a result for a New Zealand supplier to be offset against other competitions where there is a net positive. As a foreign supplier may, in a particular period, have insufficient other supplies to offset this loss, explicit rules for either a refund or to carry forward the negative amount should be considered. Administering the offshore supplier registration system Submission 15: Taxable periods Consistent with our comments regarding the application date for the Remote Services rules, we submit that the initial six monthly interim filing period should be removed. We support quarterly filing for non-residents that are only supplying remote services in New Zealand. Submission 16: Misrepresentations We submit that the new section 5(27) and the knowledge offences should be amended to make clear that they apply where the information is provided with the purpose of avoiding New Zealand GST rather than leaving their application to administrative practice. As you are aware, it is not uncommon for the recipient of remote services to provide facts or information in order to access services otherwise not available to New Zealand resident persons. A common example would be the use of a VPN (or other technology to obtain an IP address in another jurisdiction) or an overseas billing address to access content that would otherwise be geo-blocked. Inland Revenue has stated in the commentary on the Bill that: KPMGsubRLWTandGST 17

18 If a customer provided incorrect false information to access content that is geographically restricted, which consequently resulted in GST not being charged, the reverse charge in proposed section 5(27) and the existing knowledge offences would not be expected to apply. We consider that this is an appropriate approach, and one that New Zealand consumers would expect. However, this approach is not covered in new section 5(27) and we consider that the proposed section would prime facie apply in the situation where a New Zealand resident recipient provided facts or information to obtain geo-blocked content. In our view, new section 5(27), and the knowledge offences should be amended to make clear that they only apply where the information is provided with the purpose of avoiding New Zealand GST. We consider that this approach should be legislated for rather than left to administration practice to provide certainty for consumers. Submission 17: Holding records offshore We support the proposed amendments to section 75. Submission 18: Foreign exchange We support the proposed amendments to section 77. Submission 19: Interaction with other regulatory regimes We have highlighted the potential impact of the Fair Trading Act, as well as submitting that a transitional rule is required for the GST Act itself. Similar issues arise with specific legislation that deals with insurance, gaming and copyright protection. The application, or not, of these rules may impact on the willingness of a non-resident to register for GST. Although we accept that compliance with these regimes should not be conditional on the application of GST, we submit that New Zealand s regulatory response should be considered. In particular, it would make sense to consider: The interaction of Inland Revenue and other regulators with respect to GST registration of non-residents; and The appropriate regulatory response for historical positions KPMGsubRLWTandGST 18