How to seal in the tax moisture

Bernard Hickey says John Key is right to try to protect New Zealand's broad based and low rate tax base from an evaporation into the stateless cloud

22nd Mar 15, 5:00am by Bernard Hickey

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

By Bernard Hickey

Prime Minister John Key grappled this week with one of the toughest tasks any modern Government has to deal with - how to tax the 'new' economy that is rapidly evaporating into the stateless and tax-free cloud.

Even this master of the political and financial worlds stumbled in explaining it, let alone doing it.

Mr Key talked about getting Apple to collect 2 cents of GST on the sale of every NZ$1.29 digital download.

He was 17 cents sort of the mark, but still 2 cents more than for any completely online purchase at the moment.

He even talked about New Zealand potentially going it alone and requiring online stores to collect and pay GST, even if the OECD can't get everyone on the same page.

It is an issue that every tax collector in the world is scratching their heads over, and increasingly doing it together in airless conference rooms.

Armed with Excel spreadsheets and countless Powerpoint packs, the bean counters are dreaming up ways to interrupt and cajole and niggle the online giants of the this new world to collect some cash from every transaction.

They then want the likes of Amazon and Google and Apple and Netflix and ASOS to hand it on to governments to pay for all the services that used to be paid for from GST, PAYE and corporate taxes.

It is the financial and diplomatic equivalent of herding cats and organising them into a synchronised swimming display for a live streaming version of Youtube. The irony is such a display of synchronised swimming cats would make Google a mountain of tax free cash from the advertising running on Youtube.

Many of these online behemoths and not a few consumers are hoping these tax collectors and finance ministers will throw their hands in the air and go back to their cheque books and PAYE forms. Those consumers, who are also taxpayers, should think again though.

As hard as it is, Mr Key was right to back up his Revenue Minister Todd McLay. The minister quietly told a conference of financial advisers in Queenstown last week he had asked officials to look at the unilateral moves some Governments have taken to impose consumption taxes on online sales of both physical goods, and the much tougher virtual services.

South Africa changed its tax rules to require suppliers of digital services to South African consumers to register for VAT (Value Added Tax) and collect the tax at the point of payment from June 1 last year. Initial signs are positive.

This more robust approach from the Government follows years of waiting for the herding of the tax collection cats by the OECD. The question now is how long New Zealand and the rest of the connected world can wait for a negotiated and coordinated international solution.

The economy is rapidly evaporating into the cloud as the services sector, which unlike manufacturing has yet to be truly globalised, is dragged out of its offices and shops and sucked in the world of apps and GST-free purchases in the cloud. Financial services, retailing, medical services, education, accounting, advertising and television are dissolving into bits and bytes before our eyes.

Take the world of advertising, for example. The Advertising Standards Authority released figures this week showing NZ$589 million was spent by New Zealand companies on online advertising last year, which was the first year it had surpassed newspaper advertising, which was NZ$484 million. Online advertising was only just behind TV advertising on NZ$614 million and is up from NZ$15 million in 2004. Back then newspaper advertising was NZ$790 million. The trouble for the likes of TVNZ, TV3 and the newspaper companies, which diligently pay their tax and collect GST, is that most of that online advertising is being spent with Google, Facebook and a plethora of overseas sites that don't pay tax here.

The numbers are just as big in retailing. The monthly BNZ/Marketview survey of online retailing estimates that New Zealanders are now buying NZ$1.2 billion a year worth of clothes, shoes, music, hardware, electronics and all manner of tangible and intangible items from overseas sites. It's growing at a rate of 14% per annum, which is almost quadruple the growth rate of sales from 'bricks and mortar' stores here. Total online sales are still just under 7% of total retail sales, but Marketview thinks total online sales could grow by NZ$3.5 billion over the next decade as the online share grows to the current British levels of 15% of total sales.

A jumbo jet full of clothes flies into Australia every week to be distributed from ASOS' warehouses there to front doors all over Australasia. No GST is paid, given New Zealand's tax-free threshold is NZ$400 and Australia's is A$1,000.

The Retailers Association reckons the Government is missing out on NZ$400 million a year of GST and it is at the vanguard of many other services sectors feeling as if they are paying a 'reverse tariff' where their competitors don't have to pay corporate, income or consumption taxes. Treasury reports GST receipts have consistently under-performed forecasts in recent months.

This was highlighted again this week when Netflix announced it would offer its service in New Zealand from its overseas base and would therefore not collect or pay GST. Spark was among the first to protest the unfairness of this, given its Lightbox service does charge GST. Sky TV will be the next to protest.

Mr Key and Labour Leader Andrew Little, who supported the move to charge GST on overseas purchases online, should be congratulated for trying to reinforce the seal on all the juice in New Zealand's remarkably efficient broad based and low rate tax system.

The alternative in the long run if more of the tax base evaporates into the cloud is higher income taxes or fewer Government services. Google, Amazon, Apple and ASOS may not notice or care about the holes that will eventually open up in our social safety nets if this continues. Let's hope they can be herded back into a box somewhere in the cloud where they collect and pay their taxes. With the cats.

* No cats were harmed in the writing of this column.

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A version of this article was also published in the Herald on Sunday. It is here with permission.

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36 Comments

by Kakapo | 22nd Mar 15, 8:08am 1426964902

They're already charging GST on overseas purchases, plus duties on some items, plus some hefty fees. Only reason it isn't charged on everything is that it costs more than it collects. So if they can come up with a way to collect that doesn't cripple trade or cost more than it gathers, or overcharge punters with hefty fees that go way beyond the GST, then go for it. I'll wait here.

If the primary concern genuinely is erosion of the broad, low-level tax base rather than pandering to the squealing retail lobby, then there are other angles which could be more effective and deserve to be explored. How much of a hit has the GST and PAYE take taken because of policies encouraging erosion and suppression of pay rates, and a workforce where a significant percentage are scraping along, their employers' payrolls heavily subsidised through WFF and accommodation supplements, paying minimal to zip PAYE, and buying the minimum because all the money's going to GST-free items like rent?

We talk a lot about how overvalued real estate and inflated rents are parasitising and depressing the rest of the economy, but this is a really blatant example of it. $500 on rent = 0 GST. $300 on rent + $200 on other stuff = $30 GST, $170 to retail, hospitality, entertainment, other sectors. Sure, in the $500 rent scenario some would presumably stay in the country and get spent, but a good chunk will disappear into the black hole of interest payments, or overseas bank accounts.

Which makes the most difference? Paying a fortune to chase down $60 or so each from 1000 people who buy $250 worth of perfume, or collecting $20 a week extra from hundreds of thousands of people who can afford a bit more at the supermarket, or an occasional meal at a restaurant?

by Stephen Hulme | 22nd Mar 15, 9:17am 1426969035

Thank you for bringing much needed sanity to the situation.

We also need constant exposes, of the type undertaken by Chalkie at Stuff, to unearth the foreign corporate tax irregularities that should demand the attention of IRD.

Another overseas-owned lines company, Wellington Electricity Distribution, has an even higher proportion of related-party debt than Powerco and in Chalkie's reading of its accounts has paid no company tax at all since its sale by Auckland-based Vector in 2008.

The tax losses came despite healthy profits at ebit level of close to $50m a year.

Wellington Electricity Distribution, incidentally, is owned by Hong Kong-based Cheung Kong Infrastructure through a holding company in the Bahamas. Read more

by Roger Witherspoon | 22nd Mar 15, 11:36am 1426977370

Shhh, careful now. You are close to the heart of the matter. It is why I think property based businesses are preferable to production/consumption ones at the moment.

The whole world has gone mad giving special concessions and privileges to banks. It has taken place over centuries, particularly since the Napoleonic Wars. Britain found it could wage longer wars if it got the banks to raise money to lend to the government. The Napoleonic Wars led to income tax being invented. Not sure of the details but I think many of the special privileges date to this period, specifically the right to fractional reserve banking. Hopefully someone more knowledgeable will fill in the details for me.

So today we have fractional reserve banking, we have no GST on property (all lending is always against collateral, specifically property), no GST on interest payments, no GST on insurance. All other goods and services pay a turnover tax, ie GST. Result, property and banking is the place to be. I think it's nuts but there you go.

I used to be very cautious about mentioning this stuff but no one seems to understand it. In fact I even asked a senior cabinet minister if they considered broadening the GST base to include interest instead of increasing the rate on everything else. He was a little pussled by the question, but having thought about it said no-one had suggested it so it had not been considered. He obviously thought I was a bit screwy in the head. Whilst that may well be the case at times, my takeaway was that banking and mortgages have nothing to fear from the government.

by iconoclast | 22nd Mar 15, 2:48pm 1426988904

kakapo hits the nail right on the head

Third paragraph on the effect of the shift of Auckland property out of the owner-occupied category into the investor-owned category, resulting in more an more people paying an ever-increasing share of their disposable income on zero-rated non-GST expenditure (rent) which is then siphoned straight into the hands of the banks as non-GST liable interest, and then siphoned straight out of the country, un-taxed, to the foreign lenders. An ever-increasing percentage is never touching the sides of the GST suction pump

But, don't worry. John Key is right on top of it

by Kakapo | 22nd Mar 15, 2:49pm 1426988961

Something that occurs to me now, post-coffee and braining more coherently, is that another individual and collective positive which would come from the $300 rent + $200 other stuff scenario, is that the other stuff would very likely include debt repayment and/or savings, not forgetting that earnings on savings are taxed as income.

by iconoclast | 23rd Mar 15, 10:51am 1427061082

Stephen Hulme

you might be interested in this

NSW is in State election mode and the Nationals policy platform is selling off the power lines and poles

check this out - it reinforces your point - doubles it

http://www.smh.com.au/business/comment-and-analysis/tax-strategies-may-distort-power-sales-20150322-1m4w52.html

Add it to you list for next time

by Stephen Hulme | 23rd Mar 15, 11:37am 1427063838

Thanks iconoclast..

Check this out from the notes to the accounts: "100-year loan to Victoria Power Networks at a fixed interest rate of 10.85 per cent per annum. The loan is repayable at the discretion of the borrower."

Says it all . But state finances that necessitate the sale of this infrastructure is due to the excessive reliance on the build up of global government sponsored cheap debt issuance.

And while BIS is bringing down the hammer, I don't hold out for positive outcomes since central bankers are there to please politician's demands for ZIRP rated funding and the state subsequently privatising over valued assets when lobbyist's calls for new subsidised infrastructure have to be met.

..the BIS now says the solution to an asset bubble is not some incomprehensible jibberish of "macroprudential regulation" or a "bubble-busting" SWAT team at the Fed, not another asset bubble (especially not one which leads to house price deflation, the same that is slamming the Chinese economy at this moment), which by now has become clear to all is the only "tool" in a central banker's aresnal, and the remedy to debt is not even more debt. Read more

by KH | 22nd Mar 15, 8:11am 1426965091

Put a levy on every single cash transfer out of the country. Would catch the small fry like my credt card $9.99 ebook last night. And the big fish such as banks, despite their transfer pricing tricks.

by Austin Vane | 22nd Mar 15, 11:16am 1426976199

Business to Business sales like advertising are irrelevant. It they don't pay GST on the purchase they cannot claim it as an input, so in effect the NZ business is collecting the GST.

The quid pro quo of forcing foreign companies to collect NZ GST, will be that NZ businesses will not be able to sell to foreign consumers unless they invest in complex systems and tax advise to ensure they are collecting the correct GST/VAT/Sales taxes in the customer's country.

And with intangible products and services, customers could just claim they live in a country with no GST.

And what about if you buy goods and services while on holiday?

Its a zero sum game, a customers save money buying shoes overseas, then can afford to buy a coffee in a local cafe.

Probably more efficient to have an annual threshhold ber taxpayer, so IRD can focus on the big importing consumers, rather than having to get the GCSB to report on everyones internet purchaces.

by Kakapo | 22nd Mar 15, 11:55am 1426978517

If retailers are genuinely so concerned about GST as a handicap, why aren't they doing more to sell to overseas customers who aren't subject to GST? Get a clue, retailers. But then, I suppose they'd price themselves out of the international market as well.

In my experience it's the niche minnows who are doing well here. Know of several craftspeople/artisans who have an international following hovering over their sites, pressing F5 at 3.00am waiting for an update, and who can sell out in less than a minute as the customers stampede to grab what they can and beat the others to the checkout. All of it subject to be taxed as income in NZ.

Meanwhile, local Big Retail is lumbering along with a brain the size of a walnut, screwing staff and salaries to the floor, thus neatly eliminating much of their potential customer base, and trying to make up the sales by charging more to a dwindling pool of people with disposable income, who have better options anyway. Doesn't work. It'll never work.

Likewise, if the government wants to nudge up the tax take, there are better ways. Treat the problem of unliveable wages and high welfare dependency and living cost subsidies, rather than this wild goose chase after GST on iTunes downloads.

by don'tgetmegoing | 22nd Mar 15, 11:20am 1426976432

Scrap GST introduce a tiny percentage financial tax - job done. Xero would be a bit nervous about that

by Apple tree | 23rd Mar 15, 5:48am 1427042904

I agree. GST should be scrapped. The increase to 15% is particularly harmful to the economy. Tax policy should encourage desirable behaviours and discourage the undesirable. That is why a transaction tax is good as much of the behaviour of the financial sector is parascitic and unproductive.

by Andrewj | 22nd Mar 15, 11:29am 1426976950

I thought we had a broad based high tax rate?

Throw in compliance costs and it feels like its most of the economy, which is why we need WFF in the first place.

by Roger Witherspoon | 22nd Mar 15, 11:41am 1426977661

Certainly anyone in business feels like an unpaid tax collector gathering GST and income tax and ACC from its customers and staff.

by notaneconomist | 23rd Mar 15, 12:42pm 1427067724

Roger there's no feel about it....we are unpaid tax collectors.......I am nothing more than a State Slave..........it would actually make more sense for me to sell everything off to a foreign owner and call it quits from NZ......and I am not the only SME thinking this way........we are screwed over from every possible direction.........AndrewJ is right we are broad-based and high!!!

Dear Burnhard Trickey,

"You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time". Abraham Lincoln..

by steven | 23rd Mar 15, 1:09pm 1427069349

Please do.

by notaneconomist | 23rd Mar 15, 1:17pm 1427069860

Please What?

by steven | 23rd Mar 15, 1:21pm 1427070062

"call it quits from NZ"

by notaneconomist | 23rd Mar 15, 1:54pm 1427072096

And why would you want that?

by Kakapo | 23rd Mar 15, 2:43pm 1427074982

Oh, get a room, you two.

All this sexual tension is becoming a distraction.

by notaneconomist | 23rd Mar 15, 2:52pm 1427075542

Ah Kakapo there is only one tension in here and that is between a capitalist and communist !!!

by Kakapo | 23rd Mar 15, 2:56pm 1427075818

Who will tame that wild Capitalist filly?

by notaneconomist | 23rd Mar 15, 5:43pm 1427085780

Like this comment thread......some things are best left well alone!!!!

by Roger Witherspoon | 22nd Mar 15, 11:49am 1426978177

Hang about a minute:

We should put the threshold up to $1000 to match Australia. It's only fair.

by ngakonui gold | 22nd Mar 15, 12:34pm 1426980891

Why don't we just get rid of all these accountants that are paid to reduce payments of tax by companies and some individuals.

by Kakapo | 22nd Mar 15, 1:04pm 1426982646

What would the GST take be for staging gladiatorial battles between accountants and wild boars at the stadium, I wonder? Say $120 for an adult ticket, $80 for beer, hot-dogs, parking and a vuvuzela from the souvenir stand, GST component $30. All it takes is a bit of lateral thinking.

People would cough up even more for gladiatorial battles between politicians and wild boars. They just need to show some guts.

by meh | 22nd Mar 15, 4:12pm 1426993924

The accountants are only paid to do this because that's how the tax laws are written. Redo the tax law and the problem is solved.

by cowboy | 22nd Mar 15, 10:00pm 1427014833

That doesn't even make sense... kiwi educated huh...

The accountants are just normal accountants.

You think it would be better having non-accountants doing the books??

Or just bad accountants that don't understand tax laws...

by iconoclast | 22nd Mar 15, 2:13pm 1426986831

It's big - getting bigger - bigger than you think

On the same day - Tax and Bernard Hickey and Michael West - different views

http://www.smh.com.au/business/comment-and-analysis/city-state-singapore-has-a-taste-for-our-taxpayers-20150320-1m3me9.html

The business lobby continues to act like the one-trick pony, calling for lower interest rates while failing to call for profit shifting to be policed more effectively

by Kakapo | 22nd Mar 15, 5:11pm 1426997519

Nothing to see here! Carry on fiddling about plugging tiny leaks whilst ignoring the fact that the whole back of the boat's been sawn off.

by Mike B | 22nd Mar 15, 7:40pm 1427006447

We are really worried about you not paying your 15cents GST on a music download.

They will move heaven and earth to make shure the little guiy pays every last cent of GST while turning a blind eye to the corporates billions.

Sucks

by scarfie | 22nd Mar 15, 10:29pm 1427016581

The battle for unearned income continues, it will only get worse though.

A pretty stupid debate really, I mean we are not talking about anyone doing anything productive here, well at least not in New Zealand. Unfortunately for the merchants finance will trump them everytime, probably the government also, local and central. With so many others also trying to get a slice of the pie it become a real problem if the pie starts to shrink.

by cuttystock | 23rd Mar 15, 8:38am 1427053125

Why does the government not change one of the biggest tax rort 's in this country.Charitable Trusts.

eg Maori Trusts and the Brethern church businesses.

last year the government missed out on $45million in tax revenue from Ngaio Tahu Alone.

I'll actually tell you why because they are scared of the greedy powerful IWI and the powerful Brethern church.

just as they are they are scared of Greedy Australian Banks.

Middle Nz and small business are a much easier target and do not get the Media attention that the big boys would get if the IRD pursued them,

jist like commerce commission they are a toothless wonder who pick on the easy small business target because the political pressure brought to bear on them is too great ,so they just pick on the small business .

by notaneconomist | 23rd Mar 15, 1:01pm 1427068913

Some Cultural and All religions are highly protected species.......so it is never gonna happens......Both Clark and Key in their position as PM have made statements regarding Europeans having no culture.......Why the hell they would make those statements I'll never know.....but they sure as hell don't want Europeans having a culture other than the one they want to dictate......best to form a religion and claim the benefits......loopholes are always left for the few.......You could be Pope/Shaman/High Priest Cuttystock from the Church of NO Free lunches!!

by skudiv | 23rd Mar 15, 1:32pm 1427070751

"No cats were harmed in the making of this article" Gareth Morgan will be displeased

by Happy123 | 23rd Mar 15, 3:57pm 1427079478

Shall I summerise this tax discussion for you all...

"You all want more tax collected on everything you don't do and everyone that's not you, what's good for you is clearly the best thing for the country"