GST is back on the agenda for the national conversation with the Treasurer confirming at the recent Council on Federal Financial Relations Meeting that GST will be charged on electronic imports into Australia. The policy justification for this position is obvious – the failure to impose tax on such services encourages consumers to shop offshore (harming Australian businesses) and reduces Australia's tax take (harming the budget).
In this article we look at particular aspects of the approaches taken by South Africa and the EU and consider what lessons their experiences provide for Australia. We also examine whether Australia can impose an electronic services tax on non-residents that have no presence here, and how this could be enforced.
Digital imports in the crosshairs
It is clear from the Treasurer's comments that digital imports of online television, music and games from foreign giants such as Netflix and iTunes are the key targets of the proposed policy reforms, with transactions over recent years increasing significantly and leading to potentially large revenue gains.
Other digital imports including educational and news services are also likely to be taxed in order to level the playing field between local and foreign service providers.
These issues associated with taxing digital imports are not unique to Australia. Rather than adopting an approach of seeking international consensus, a number of jurisdictions have already introduced (or are in the process of introducing) a tax on digital imports to provide equal opportunity between residents and non-residents, as well as protecting revenue.
Example 1: South Africa
From 1 June 2014, suppliers of ‘electronic services’:
- to South African residents; or
- where payment for such services originates from a South African bank, are obliged to register for and charge South African VAT.
South Africa's approach, as one of the first jurisdictions to amend its VAT regime to tax digital imports, does face some potential hiccups.
First, its reach could be farther than intended. For example, an individual with a South African bank account could be subject to VAT in South Africa for purchases made from e-commerce providers regardless of whether they are consumed in South Africa. This places significant compliance costs on foreign digital suppliers by requiring them to verify the residency status and bank account details of South African customers.
Secondly, by making payment from a South African bank account the trigger for paying VAT, it is likely to encourage consumers to use other methods of payment for digital services, such as bitcoin and Apple iTunes cards that are not captured.
The South African Revenue Service (SARS) has set out specific types of e-commerce transactions that constitute 'electronic services' such as educational services, internet-based auction services, games, as well as sales and subscriptions for digital media. In doing so, SARS has sought to exclude any business-to-business transactions that would not provide net revenue on the basis that businesses would normally claim offsetting credits.
The list of services was amended from its original draft form to account for the business-to-consumer focus, most significantly by deleting the supply of 'software'. This raises an issue as whether business-to-consumer software transactions should also be excluded from such a regime in Australia.
Only a year since introduction, it is still too early to definitively conclude whether South Africa's 'go it alone' approach has yet been successful.
Example 2: The European Union – the MOSS system
On 1 January 2015 the European Union introduced a new regime to tax cross border electronic supplies which includes a useful compliance scheme. The VAT Mini One Stop Shop (VAT MOSS) scheme is designed to make the VAT payment process easier by allowing businesses supplying digital services to consumers in member states, in which they do not have an established presence, to account for the VAT due on those supplies via a web-portal. The scheme ensures that these businesses are not required to register for VAT in each member state to which they make supplies.
From a practical perspective, businesses who register with HM Revenue and Customs (HMRC) are only obliged to submit a single quarterly return and payment which HMRC will then forward to the relevant tax authorities in the member state(s) where consumers are located. The MOSS returns are additional to the VAT returns a taxpayer must submit in its own jurisdiction. It may be that this system could form the basis for an agreed global approach to ensuring the application and collection of GST/VAT in the place of consumption, irrespective of the location of the supplier.
Lessons for Australia
The form that the new regime takes will likely be influenced by political sensitivities and lobbying from the competing interests of consumers and local digital service providers. Noting South Africa's experience, any proposed legislation should:
- focus on capturing business-to-consumer transactions – as these are the transactions from which net revenue will be generated – meaning that a broad exemption should be available for acquisitions made by GST registered entities;
- clarify the scope of such a regime – should it allow for the existing concessions such as education and health services? And should it extend beyond digital services to apply to advisory, agency or broking services?
- simplify the process for calculating and collecting GST to maximise the likelihood of compliance;
- contain rigorous procedures to ensure there is no easy 'work around', while also providing for meaningful and significant adverse consequences for non-compliance;
- ensure that any changes to the 'where the supply is done' test do not unintentionally impact on the supply of other non-digital online services – for example we want to avoid a situation where advice given in an online forum attracts GST, however the same advice given over email does not;
- ensure that only those services that are consumed in Australia are subject to GST.
Treasury has not given an indication of timing or structure for new legislation. In the meantime, Australian suppliers of digital services should consider how to make themselves more competitive as foreign suppliers continue to reap the benefits of making tax free supplies to Australian consumers.