Kali Sanyal
In light of the ongoing surge in the business of digital
downloading, a growing proportion of consumption is not being caught by the
Goods and Services Tax (GST). Tax experts contend that ‘the absence of GST on
services and digital products imported by consumers represents an omission from
the tax base that has been increasingly untenable’.[1]
Under current law, things imported by consumers and which
are not goods or real property (including digital products and services) are
not subject to the GST. This results in forgone GST revenue, which would be
passed to the States and Territories. It also places domestic businesses, which
generally have to charge and remit GST on the digital products and services
they provide, at a tax disadvantage compared to overseas businesses.[2]
In order to maintain the integrity of the tax system and
offer a level playing field for domestic suppliers, the Government announced in
the 2015–16 Budget that it would extend GST to offshore intangible supplies to
Australian consumers with effect from 1 July 2017. The measure is estimated to
generate a revenue gain of $350.0 million over the forward estimates period.[3]
The key features of the ‘Netflix tax’ are as follows:
-
it will be imposed on intangible supplies such as supplies of
digital content, games and software—but will also extend to consultancy and
professional services performed offshore for customers in Australia
-
the liability for the GST will rest either with the supplier or
with the operator of an electronic distribution service
-
GST will be imposed at a rate of 10 per cent on the value of the supply
-
at this stage it would appear that all intangible supplies will
be caught, regardless of the value of the supply (currently goods valued of less
than $1,000 from overseas suppliers over the internet imported by Australian
consumers are not covered under the GST Act, hence it is likely there might be scope
for this value of intangible supplies to be changed by regulation) and
-
only supplies made to consumers will be caught: business-to-business
transactions will be exempt.[4]
Soon after the announcement of this budget measure, the
government released an exposure draft Bill titled ‘Tax Laws Amendment (Tax
Integrity: GST and Digital Products) Bill 2015’. Schedule 1 item 1 of this Bill
would extend the scope of the GST to offshore supplies of services and intangibles
to Australian consumers from 1 July 2017.[5]
The proposed Bill would also amend section 9-25 of the A New Tax System (Goods
and Services Tax) Act 1999 (GST Act)[6]
in order to make supply of goods and services connected with the indirect tax
zone (broadly, supplies made or done in Australia or made to Australia,
excluding those geographic areas where the GST does not apply–principally the
external territories) taxable supply for GST purposes, unless the supply is GST
free or input taxed (section 9-5 of the GST Act).[7]
The proposed amendments would permit the making of
regulations to provide for a modified GST registration and remittance scheme. If
a foreign supplier of digital services has established an Australian operator (for
example, iiNet/Netflix for the Netflix
global company) of an electronic distribution service, the operator will be
registered for GST purposes. However, entities will also be able to elect to
have limited registration for GST. They will not then be able to access input
tax credits. An industry-wide consultation will follow to determine the scope
of these rules.[8]
Responsibility for GST liability may be shifted from the
supplier to the operator. This would happen in certain circumstances where the
operator controls any of the key elements of the supply such as delivery,
charging or terms and conditions. Shifting
responsibility for GST liability to operators is aimed at minimising compliance
costs. It is expected that operators are generally better placed to comply and
ensure that digital goods and services sourced in a similar manner are taxed in
a similar way.[9]
Some pertinent issues that will still need to be considered
as part of the development of any regulations include the frequency of
remittance and what, if any, registration thresholds should apply.[10]
The experience of other countries
The measure will result in Australia being an early adopter
of guidelines for business-to-consumer supplies of digital products and
services currently being developed by the Organisation for Economic
Co-operation and Development (OECD) as part of the OECD/G20 base erosion and
profit shifting project, Addressing
the Tax Challenges of the Digital Economy.[11]
At the start of 2015, the European Union (EU) started to
overhaul its consumption tax (value added tax or VAT) to extend it to providers
of broadcasting and electronic services based on the location of their
customers, not where the companies set up their head offices.[12]
Digital downloads and services sold to European retail consumers are taxed at
VAT (value added tax) rates of up to 27 per cent making the digital retail
economy a significant source of tax revenue.[13] The complexity and
variation of VAT regimes in different EU member countries, however, created
huge challenges for the EU and the digital companies.[14]
The amendments in Australian law are broadly modelled on similar rules
currently in operation in the European Union and Norway.[15]
Comments
One aim of the Australian government in applying GST to
digital supplies is to create a level playing field for domestic suppliers with
their offshore counterparts. However, many of the difficulties of Australian
retailers have to do with the nature of the market–it is currently dominated by
offshore multinational companies operating with substantial economies of scale.
‘The difference in price between overseas online stores and domestic retailers
has little to do with the tax system. It is a market issue.’[16]
Administration of the measure will be complex. Two
particular issues are:
-
defining the operation of a business and sources and
-
excluding digital supplies related to education and health
services.
As one senior taxation expert said, ‘drafting law to broaden
the goods and services tax (GST) to overseas digital companies such as Netflix,
was easy. The challenge ... would be collecting the cash’.[17]
Additionally, the change will require the unanimous
agreement of the States and Territories before enactment of legislation.
[1].
R Miller, ‘The
“Netflix tax” - coming to a country near you’,
The Conversation, 22 April 2015.
[2]. Australian
Government, Budget
measures: budget paper no 2: 201–16 , p. 20.
[3]. The budget figures in this article have
been taken from the following document unless otherwise sourced: Australian
Government, Budget
measures: budget paper no 2: 2015–16.
[4].
Thomson Reuters, Weekly Tax Bulletin – Issue 20 - Special
Issue - 2015 Federal Budget Report, 12 May 2015.
[5].
Tax
Laws Amendment (Tax Integrity: GST and Digital Products) Bill 2015: Exposure
Draft.
[6].
ComLaw, A
New Tax System (Goods and Services Tax) Act 1999, Act No. 55 of 1999 as
amended, taking into account amendments up to Tax Laws Amendment (2013 Measures
No. 2) Act 2013.
[7].
Tax
Laws Amendment (Tax Integrity: GST and Digital Products) Bill 2015, Exposure
Draft Explanatory Material, 12 May 2015, p. 3.
[8].
Ibid., pp. 7–8.
[9].
Ibid., p. 6.
[10].
Weekly Tax Bulletin, op. cit.
[11].
Organisation for Economic Cooperation and Development (OECD), Base
Erosion and Profit Shifting, Addressing
the Tax Challenges of the Digital Economy, ACTION 1: 2014
Deliverable, 2014
[12].
J Lynch, ‘Netflix’
tax enforcement may be tough, Australian Financial Review, 27 April
2015, p. 36.
[13].
R Minor, ‘European
VAT: 10 things online sellers need to know about taxes on digital goods and services’, Forbes, 15 May 2014.
[14].
Ernst and Young, Overview
of EU VAT changes on digital products and services
in 2015, 2013, p. 9.
[15].
The Tax Institute, Tax
integrity: Extending GST to digital products and other services imported by
consumers, TaxVine Newsletter, Issue 17, 15 May 2015.
[16].
J Lynch, ‘Netflix
tax not a silver bullet’, The Age, 14 May 2015, p. 25.
[17].
Ibid.
All online articles accessed May 2015.
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