Dialogue: Plugging away at holes in GST tax base

By BRIAN FALLOW

Banks, or their customers, are likely to be the main casualties of Government plans to extend GST to imported services.

In principle, GST should apply to goods and services, included imported ones, consumed in New Zealand. Imported goods attract GST, but when GST was introduced in 1986 imported services were not included - on the grounds that it was to hard to tell whether services had been imported, and not many were anyway.

But a communications revolution since then has led the Government to look again at this hole in the tax base.

A discussion document just out leaves taxing most electronic commerce still in the "too hard" category. The information super-highway is not about to become a toll road.

The document proposes to impose GST on imported services, but:

* Only if the service would attract GST if supplied by a New Zealand supplier (so financial services are excluded), and

* Only if the buyer of the service is registered for GST purposes (in other words it applies to business-to-business but not business-to-consumer transactions), and

* Only if the service is required in producing goods or services which do not themselves attract GST. Buyers who would be able to claim an input tax credit anyway, need not worry about it.

The Government proposes to use the "reverse charge" method, common overseas, where the consumer of the imported service, not the supplier, will add GST to the value of the service and pay it.

An important exception to the reverse charge approach is the case of imported telecommunications services.

These include not only telephone calls but the services of offshore internet service providers, and satellite communications. If they sell more than $40,000 worth of services to New Zealanders a year they will be required to register for GST in New Zealand.

That might prove difficult to enforce, said Deloitte tax partner Peter Felstead.

While not challenging the underlying logic of the proposed changes or their consistency with international practice, Mr Felstead doubts whether the economic benefits will outweigh the compliance costs.

"The need to reverse-charge will apply only on business-to-business transactions and only where the recipient cannot claim back GST, ie mainly banks, which supply exempt financial services."

The rationale for the change is that the present rules place New Zealand suppliers of a services at a tax disadvantage compared with overseas competitors.

"However, this is true only to the extent that they were able to provide the services in the first place," Mr Felstead said. "But most software solutions are available only from offshore in any events. It will simply raise revenue and ultimately increase the cost of financial services."

In the New Zealand context, an increase in the banks' costs was likely to flow through to their customers in higher fees.

The changes would also hit banks which have moved a lot of their back office functions overseas. The need to calculate monthly the value of the services provided will involve considerable compliance costs.

The document raises the possibility that salaries would not be included, which would significantly reduce the potential tax yield.