In late June 2001, the Government released a discussion document setting out a number of proposed changes to the Goods and Services Tax Act 1985, which would have the effect of imposing GST on imported services. If enacted, the proposals will have implications for the importation of telecommunication services into New Zealand, namely:

- non-resident suppliers of telecommunications services will be required to register and account for GST if they exceed the $40,000 registration threshold; and

- New Zealand consumers of overseas telecommunications services will pay GST on their bills for those services.

Background
In the strategy paper E-Commerce: Building the Strategy for New Zealand (published November 2000), the government identified as a key principle the requirement for a predictable, simple and consistent legal environment for electronic commerce. In a tax context, the document identifies the importance of having clear and simple rules across jurisdictions, and neutrality in the treatment of equivalent electronic and non-electronic transactions. The GST treatment of imported services (especially those provided electronically) was acknowledged as an area requiring special attention.

New Zealanders are now importing many more services than when GST was first introduced. The scope and volume of these services are likely to grow significantly in the near future, as electronic commerce broadens the range of services which New Zealanders are able to purchase from overseas suppliers. Under current law, supplies of services by New Zealand suppliers to New Zealand customers are subject to GST, whereas supplies of services by overseas suppliers to New Zealand customers are not. There is also a discrepancy between the GST treatment of imported goods and imported services. While imports of services are not subject to GST, imports of goods are.

Telecommunications Services
The identification of the place of supply of a good or service is central to most value added tax systems. Under New Zealand's GST Act, for example, if a supply takes place in New Zealand, then as a general proposition, it will attract GST.

The nature of telecommunications services, which involve the sending or receiving of material or information by electronic or similar communications systems, makes it difficult to establish where they have been supplied. Because of this, many jurisdictions have included specific provisions in their value added tax legislation to deal with the place of supply of telecommunications services. New Zealand is following suit with the current proposals.

Deregulation of the telecommunications market, along with technological advances, has meant that New Zealanders are free to choose between overseas-based and New Zealand-based telecommunications service providers. This is especially true in the case of Internet service providers ("ISPs"), where the customer's physical location has little or no bearing on his or her ability to access services from any ISP, whether based in New Zealand or overseas. As noted above, the current anomaly in the GST legislation means that consumers would pay GST on the provision of ISP services from a New Zealand-based ISP, but would not if those same services were being provided by an ISP based solely in (for example) Australia.

Overseas Approaches
In the United Kingdom, international businesses supplying telecommunications services to UK-based consumers are required to register for and return VAT in relation to those services. A similar approach is taken in Canada, which requires non-resident telecommunications suppliers to register and account for GST if they provide services in the course of carrying on business in Canada and if they have a telecommunications facility located in Canada, or if the signal is emitted and received in Canada, or if the signal is either emitted or received in Canada and the billing location for the service is in Canada.

Under the Australian GST legislation, when Australian consumers receive telecommunications services from offshore, the overseas suppliers must register for and return GST in Australia. However, if supplies are made by an overseas entity that has no permanent presence in Australia, and the collection of tax is deemed by the Federal Commissioner of Taxation not to be feasible, there is a discretion for him to treat those supplies as non-taxable.

Proposal
Under the New Zealand government's proposal, a taxable supply of services would occur when a New Zealand customer initiates the supply of telecommunications services from a non-resident telecommunications supplier, such a supply being deemed to be made in New Zealand. The discussion document identifies two possible methods of determining whether a customer is a New Zealand customer:

- The first method is to treat the customer as a New Zealand customer if the customer is a person who is usually resident in New Zealand and initiates the supply of telecommunications services.

- The second method is to treat the customer as a New Zealand customer if he or she is physically present in New Zealand when the supply is made.

The discussion document states that the first method, while not completely accurate (in that it could result in a services being deemed to be supplied in New Zealand even if the recipient is outside New Zealand when performance occurs), provides a simple and certain result, and is the government's preferred option. If adopted in this form, the amendments would require a non-resident telecommunications supplier which, in a 12-month period, makes or will make over $40,000 worth of supplies of services to customers usually resident in New Zealand and who initiate the supplies, to register and account for GST.

Following the Australian model, it is also proposed to include a discretion for the Commissioner of Inland Revenue not to enforce the rule in relation to telecommunications suppliers operating wholly offshore, if this enforcement would not be cost effective.

The discussion document notes that the definition of what constitutes telecommunications services should be as comprehensive as possible, to ensure that the definition will not be made obsolete by changes in telecommunications technology.

If a non-resident customer initiates the provision of telecommunications services from a New Zealand telecommunications supplier, that supply will continue to be zero-rated for the purposes of GST, this being the position under current law.

Comment
The proposed amendments will allow New Zealand-based telecommunications providers to compete on an equal footing with overseas providers. One key issue to consider is how the IRD will determine the "cost effectiveness" of requiring overseas providers who operate wholly offshore to comply with this proposed rule. Given Inland Revenue's duty to collect the maximum amount of tax possible within the law, the discretion to exempt some suppliers on the grounds of cost effectiveness is unlikely to be exercised if those suppliers are economically significant. Smaller offshore suppliers are more likely to be beneficiaries of the discretion.

Submissions
Submissions on the discussion paper must be made by 31 August 2001. An electronic copy of the discussion paper is available at http://www.taxpolicy.ird.govt.nz/publications/index.php?catid=2

This is a general summary only and should not be taken as a substitute for specific advice.

x-tech group Simpson Grierson Web site: x-tech group Simpson Grierson

Contacts
Jan James, Partner, jan.james@simpsongrierson.com
Michael Sage, Partner, michael.sage@simpsongrierson.com
Earl Gray, Partner, earl.gray@simpsongrierson.com
Jan Kelly, Partner, jan.kelly@simpsongrierson.com


October 2001