Remote Services Provided in NZ from offshore - GST changes
We are into Spring, and that means icecream on the beach for some of us. But watch out for the middle of the year rule - the rule that brings in tax changes part way through the tax year. From tomorrow 1 October 2016 non-residents who don’t have a physical presence in NZ but who supply services by remote access (i.e. from offshore) may have an obligation to register for GST in NZ if their customers are in NZ and the customer is not registered for GST. This rule applies if the services that would be subject to NZ GST exceed NZ$60,000 pa.
If the NZ customer is GST registered (and they will need to provide proof of this) then they should not be charged GST on services to them. However, the overseas person may qualify to charge GST at 0%, and may elect to do this where they have GST expenses to claim back.
The type of services caught within this new rule include:
· sales of software, apps, music and gaming systems
· e-books, movies, on-line TV shows, newspapers and magazines
· webinars and distance learning courses
· insurance services
· gambling services
· website design and publishing services
· professional services such as legal, accounting, consultancy
· booking services for hotels and tourist activities (if not already subject to GST)
· telecommunications services (if not already subject to GST)
GST returns will be filed quarterly, with interim rules from 1 October 2016 to 31 March 2017 [note this is different to normal GST rules].
There will also be transitional rules where the overseas person has already entered into a supply contract as at 1 October 2016 and it is for a fixed term or a renewal term of 396 days or less.
So what's the problem?
The issue for businesses is whether the overseas supplier charges them GST or not - because the GST cost is not always able to be claimed back in their GST return, and only if the GST is less than $1,000.
GST should not be charged to GST registered persons. The most clear cut is where the supply is of something that would only ever be supplied in a commercial context, and where the customer is almost certainly GST registered (e.g. commercial insurance on a substantial commercial building). Another example, would be where the customer is purchasing a business type service (e.g. Office 365). The issue with this latter example, is that a business may purchase a business type service but still not be registered for GST.
On the other end of the spectrum, examples where the customer is probably not registered include movie, TV and gaming downloads. It is this type of supply that is the target of this new legislation.
Two different types of overseas registered persons
There will be two types of non-resident registered entities under this rule. The first type is the supplier who must charge and pay to the Inland Revenue the GST collected, but who cannot claim GST expenses back (typically because they have no NZ suppliers charging them GST). This type of registration will have a simplified GST filing criteria.
The second type will be non-residents who charge and account for GST collected, but who can also claim GST back on GST charged to them. Typically, this could be where the supplier is an insurance company, and as well as receiving premiums (at 15% or 0% GST) they incur GST costs in NZ in providing that service (e.g. paying for repairs or replacement of the goods claimed).
Charged GST in error? The problem with getting a refund
Some overseas suppliers, having determined they must register for NZ GST, may incorrectly charge their customer GST (i.e. where the client is GST registered so there should be no GST, or GST at 0%). If this is the case the legislation ONLY allows for the GST to be refunded to the client under one of two ways.
First, by applying for a refund from the supplier (and the supplier adjusts for this refund in their next GST return). Secondly, if the supplier refuses to refund the GST, the customer needs to obtain a “tax invoice” from the supplier, and then claim the GST in their own GST return. The second option is only available where the GST deducted is less than $1,000 (which is not a high amount).
In practice, it may be very difficult, bordering on impossible, to obtain the refund from the supplier, and even difficult to obtain a valid tax invoice from them.
The best method therefore is to front foot the situation and ensure GST is not deducted in the first place.
Mixed use supply – self charging - it gets complicated
If the NZ customer is registered for GST, but the supply received is not for their taxable activity, or only used partly for their taxable activity, the customer must “reverse charge” themselves the GST that would otherwise have applied. That is, the non-resident supplier no longer has the GST obligation and it passes to the customer who has to sort the GST out.
Typically, this situation could arise where say, software is purchased by a business, but a portion is used for private use, or where insurance is purchased for a property where a portion of the building is used for a taxable activity and a portion is used for an exempt activity (e.g. residential accommodation).
This rule does not apply where the private/exempt portion is less than 5% of the total supply.
Overseas person is resident in NZ for GST
A final note on GST. Overseas suppliers may already have an obligation to register for GST in NZ under the normal rules. Typically, this would be where they are physically in NZ, or the goods are in NZ, when they are performed or supplied. There are very complex rules concerning the requirement to register, and some default rules that remove the obligation to register in some but not all cases (e.g. where their client is registered for GST).
Clearly, this will be complicated if you fall into these situations. Many overseas suppliers are aware of their obligations. Some will not pass on the GST, because the administration costs are more than the GST cost, but many will. If you should not be charged GST but you are, then you need to be onto the situation immediately, because you may not be able to simply claim the GST back in your GST return as noted above.
If you would like further information on these issues then contact us.
Posted: Monday 3 October 2016