Stephen Graham: Online GST loophole drains economy

Stephen Graham

Retailers hoping for a plan of action in the Budget to address the thorny issue of online GST were left only with a confirmation that Government would make it a key focus in the tax policy programme.

It's now acknowledged that New Zealand must address this issue which, due to a tax law loophole, allows the majority of online purchases made by Kiwis from offshore websites under $400 to escape GST.

To put it bluntly, action is needed urgently. We're seeing companies such as Google, Amazon, Netflix and Apple selling digital goods such as music e-books and television services, without paying the 15 per cent GST - giving them a price advantage over local providers such as SKY TV or Spark Lightbox.

And while some consumers may not like the idea of the prospect of having to pay GST on these currently cheaper offshore offerings - the wider issue is that these companies are generating millions of dollars in profit from New Zealand consumers without a penny going back into the economy.

They don't pay tax, they don't create jobs and no services are purchased from New Zealand companies.

This is in turn can affect all New Zealanders whether they are digital users or not as lost revenue can result in an increase in tax to keep up an expected level of services - and no one I know likes paying taxes.

The Government has indicated the most likely solution is that New Zealand will follow the regime implemented in Australia - dubbed the "Netflix tax" - to charge GST on imported services such as digital downloads.

However, they will still need a solution to address the GST loophole for physical goods purchased from offshore providers.

Imposing a Netflix tax will help to level the playing field for local providers and will also increase the revenue collected by IRD that goes back into New Zealand society.

While it only makes sense for New Zealand digital users to look for value online when it comes to digital imports, an imposed Netflix tax will help ensure all companies have the same advantage and that money is being generated for the New Zealand economy.

Not only will taxing these companies bring in extra revenue for New Zealand it will hopefully make local providers think twice about taking their business offshore in order to avoid tax in the future.

The move to charge GST is likely to prove unpopular with consumers as it could push up subscription rates but without it New Zealand as a whole, not just retailers, is at risk of becoming severely disadvantaged.

- Stephen Graham is a business adviser and partner at BDO Rotorua.