Taxing the supplies of low-value imported goods
The new taxation issues arising with imported goods are complex and involve a number of key stakeholders. The accounting community should be well-versed in the consequences for taxpayers.
As with many technical issues on the reform agenda at the moment, there is a likelihood of changes after the time of writing. However, professionals should be well across the key issues surrounding the changes to taxing the supplies of imported goods.
On 21 August 2015, the government announced an intention to introduce legislation which will require non-residents – overseas suppliers – to remit GST for sales of goods to Australian customers i.e. a vendor collection model. This was also contained in the 2016 federal budget papers. Broadly, the measures provide that from 1 July 2017, non-resident suppliers with an Australian GST turnover of $75,000 or more will be required to register for, collect and remit GST for goods sold to Australian consumers. At the time of writing, draft legislation has not yet been released.
These announcements coincide with other measures to deal with the digital economy such as the application of GST to digital products and services supplied by non-residents to Australian consumers. Unlike intangibles, in relation to the taxing of goods, there are border controls and various intermediaries that can assist in the process of the collection of tax for the sale of goods. However, the growth in online sales has meant that tax collection mechanisms may not be working as effectively as intended. These challenges were addressed in a recent OECD report:
“The exemptions for low-value imports have therefore become increasingly controversial in the context of the growing digital economy. The difficulty lies in finding the balance between the need for appropriate revenue protection, avoidance of distortions of competition and the need to keep the cost of collection proportionate to the VAT/ GST collected on imports of low-value goods. As the VAT/GST exemption thresholds in many jurisdictions were established before the advent and growth of the digital economy, countries may need to review their policies on taxing e-commerce to ensure that they are still effective.”
When the proposal was announced, then-treasurer Joe Hockey expressed the view that administering a vendor collection model will have a relatively low cost compared with lowering the $1,000 LVT and taxing goods on importation. The 2016 federal budget measures stated that this measure should also ensure that Australian and foreign suppliers of goods are treated equally under the GST law. Furthermore, imposing GST on the foreign supplier, rather than on the entry of the goods into Australia, should ensure that goods are not unduly delayed during customs clearance procedures.
Only vendors with an Australian turnover of $75,000 or above will need to register and account for GST. Subject to these registration limits, this will mean that all goods sold into Australia will be subject to GST. This will be a significant change for online retailers and could present a number of practical issues including pricing and determining whether a sale is made to an Australian customer.
Given the registration threshold, it should not impact smaller retailers selling into Australia unless an intermediary or platform model is introduced, i.e. requiring an online marketplace to account for the GST rather than the underlying supplier. The proposed commencement date of 1 July 2017 coincides with the application of GST to the importation of digital content/services by Australian consumers, so it is possible that the goods measures will take a similar approach i.e. impose tax obligations on the intermediaries.
If there is alignment between the two measures, it may well result in a number of online platforms and other intermediaries in the supply chain becoming liable for GST on goods imported into Australia. Such intermediary measures may mean that a smaller supplier is not required to remit GST on direct sales but the same goods will be subject to GST when sold through a marketplace.
A key challenge of the vendor collection model is to ensure compliance by non-resident vendors. This model could increase the revenue risks for tax authorities given that it may move away from the traditional customs process of collecting the VAT/GST at the current point of entry i.e. at the border.
Compliance can be facilitated and encouraged by simplifying procedures. While we do not have any details yet, it seems likely that the government will consider a simplified registration model similar to the Limited Registration Entities provided for in Schedule 1 to the digital changes in the Tax and Superannuation Laws Amendment (2016 Measures No 1) Act 2016). Further, we expect that the government will seek to harness technology to support compliance and administration.
Other jurisdictions are also looking at whether reform is required in relation to the sale of goods by offshore suppliers.
On 6 May 2015, the European Commission announced its strategy for the EU digital single market. The strategy will seek to remove the VAT exemption for the importation of small consignments from suppliers in third countries and extend the one-stop shop mechanism to EU and non-EU countries online sales of tangible goods to final consumers. The EU Action Plan for implementing this strategy was announced on 7 April 2016 and proposes a future VAT system where VAT is charged under the rules of the originating country on sales that are made across borders to another country in the EU, at the rate applicable in the country of consumption. The VAT on a cross-border sale of goods will be collected by the tax authority of the originating country and transferred to the country where the goods or services are ultimately consumed.
The VAT Action Plan also sets out plans to remove the VAT exemption for the import of small consignments from suppliers in third countries. With around 150 million parcels imported free of VAT into the EU each year, this system is open to massive fraud and abuse, and creates major distortions against EU business. In future, VAT on imports of small consignments will, to a large extent, be collected through the single web portal, by sellers or intermediaries acting on their behalf.
In the 2016 budget, the Chancellor of the Exchequer proposed to impose new obligations on non-EU e-commerce businesses. The legislative changes proposed work in two limbs. First, the existing rules will be altered to allow Her Majesty’s Revenue and Customs (HMRC) to compel an overseas entity to appoint a VAT representative with joint, and several, liabilities. Second, a new provision will be introduced which will enable HMRC to hold an online marketplace jointly and severally liable for any unpaid VAT of an overseas entity that sells goods into the UK via that marketplace.
HMRC does not plan to apply these new provisions automatically, but will instead target them against the highest risk cases to tackle non-compliance. HMRC considers that any increase in the compliance burden will be small, as the online marketplace population is small, and these businesses often already have existing processes in place for the removal of sellers that break the rules of the marketplace. It is anticipated that by 2021 that these changes will allow HMRC to collect an additional £365 million (AU$639 million) VAT per year.
New Zealand has explored lowering the de minimis limit under which GST is not collected on small consignments. Currently, small consignments under $60 duty owing value do not have GST collected on them.
As in other jurisdictions, this threshold is considered to disadvantage local retailers and erode the GST base by allowing overseas suppliers of low-value goods to have a price advantage over domestic retailers. However, there is no immediate proposal in place to rectify this issue. If it is to change, it is proposed that the exemption is reduced to a $200 de minimis level defined by the value of the small consignment, rather than the duty owing, and that this change will occur in 2018-19.
These are complex issues that a number of stakeholders – purchasers, domestic and non-resident suppliers, marketplaces, transporters, financial intermediaries, border control, tax administrators – and the Treasury department will have to work through. However, it will be important that draft legislation is released and understood soon to ensure that taxpayers are compliant by the proposed start date. It will also be worthwhile to monitor other jurisdictions and reforms in this space.
Suzanne Kneen, director, PWC and Claire Harrington-Johnson, senior consultant, PWC