EY recently released its annual publication exploring the trends, challenges and implications of indirect tax developments around the world, “Indirect Tax in 2014”. We have outlined the five global trends below and what they may mean for New Zealand.
The indirect tax shift continues
The International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and the European Commission continue to promote the shift from direct to indirect taxes to help promote economic growth. Studies indicate VAT and taxes on real property have the least impact on economic growth.
We continue to see the spread of VAT/GST around the world (the Bahamas and Malaysia are next in line to introduce indirect taxes), average rates continue to rise, bases are being broadened and there is a renewed focus on efficient and effective policy design.
New Zealand’s GST system is often regarded in the industry as “best in class”, being broad based with a single rate. However, as the Government considers ways to stimulate growth and reduce reliance on debt, it may look to generate higher GST receipts.
That will be a challenge for a National or Labour Government as both parties have pledged to maintain a single rate broad based system. The policy options are limited but could include an increase to the GST rate for some supplies (e.g. luxury goods) and decrease for other items (e.g. food). Another option could be to broaden the base further by reducing the scope of the financial services exemption, for example, by following Australia where certain financial services rendered for a fee and “arranging” services (i.e. where services are arranged on behalf of other people, for example, by insurance brokers) are taxable.
Rapidly changing legislation
EY’s global survey reveals that in more than 50% of the participating countries, the primary indirect tax legislation changes at least once a year (in the past year in New Zealand we have seen amendments to approximately 19 GST sections).
Apart from governments trying to improve their indirect tax systems to raise more tax revenue, one of the key reasons for the change of pace is the need to keep astride with technological developments. Comprehensive reform of the EU VAT system is underway, and in the US we are seeing an increasing number of states trying to expand their sales taxes to cover electronic goods and services.
Inland Revenue, together with Treasury and Customs has been considering the potential options for improving the collection of GST on online sales. That includes looking at physical goods purchased from offshore websites, as well as digital goods and services. However, a consultation paper due late last year was put on hold due to the challenges the issue presents and the broader debate concerning Base Erosion and Profit Shifting (BEPS).
Rising excise taxes
Excise taxes are increasingly being used to steer consumption of certain products considered to be harmful (See also our article “Tax on Sin” on the left). There are ongoing increases in the three important groups of “classic” excise taxes (alcohol, tobacco and mineral oils). In New Zealand we have seen significant rises in tobacco excise taxes.
A further trend globally is the introduction of new excise taxes, particularly environmental taxes such as airline and carbon taxes.
Fast-changing global trade landscape
The World Trade Organisation (WTO) identified 116 new trade-restrictive measures from June to December 2013. The measures were predominantly new trade remedy actions, in particular the initiation of anti-dumping investigations, tariff increases and more stringent customs procedures.
On the other hand, some countries are taking measures to facilitate trade and 2013 was another year in which a number of free trade agreements (FTAs) were signed.
The way customs authorities operate has changed significantly due to changes in the environment in which they operate, including increased expectations from businesses for customs to provide prompt and predictable processing. Many countries are taking steps to increase competitiveness through more efficient customs clearance procedures.
New Zealand is currently negotiating several new FTAs, including with India and Korea. We are seeing an increased willingness of Customs to work with businesses and the Inland Revenue to facilitate efficient import and export processing and to reduce compliance costs. The Comptroller of Customs has made it clear compliant importers will be given a light touch at the border, providing businesses with a further incentive to invest in their compliance processes.
Customs are promoting the use of FTAs and have noted that available preferential rates of duty are being underutilised, particularly in relation to the China FTA.
Cooperation between tax authorities and focus on enforcement
The increasing importance of indirect taxes and their contribution to countries’ revenue goals probably explain why tax authorities are investing heavily in their enforcement and audit capabilities. Inland Revenue and Customs are focusing on technology and people.
Globally, tax administrations are implementing electronic auditing of a business’s financial records and systems and we anticipate significant advances in this area by Inland Revenue.
The exchange of information between tax authorities is also increasing and the OECD is exploring further opportunities for automatic exchanges of information and joint tax audits. We can expect Inland Revenue to step up its cooperation with other tax authorities, such Australia.
If you would like more information regarding the above, please contact our indirect tax specialists:
Executive Director, Indirect Tax
Tel: +64 9 300 8210
Senior Manager, Indirect Tax
Tel: +64 9 377 4790