Transcript GST and financial services - AL

GST and financial
services
(the New Zealand
experience)
Marie Pallot
Policy Advice Division
Inland Revenue
New Zealand
Introduction

New Zealand recently introduced:
– zero-rating of financial services supplied to
businesses
– a reverse charge to tax imported services
supplied to businesses

Both measures apply from 1st January
2005
Background


New Zealand introduced GST on 1st October
1986 with very limited exemptions
Financial services were exempt (no input tax,
no output tax) because:
– interest is time value of money – it is not
consumed
– value of the “service” and interest are highly
substitutable, making full taxation problematic

Imported services were not taxed because
the costs of doing so were thought to be too
high relative to the revenue that could be
collected
Background continued
Taxation (GST, Trans-Tasman, Imputation
and Miscellaneous Provisions Act 2003)
 Enacted 25th November 2003 (but didn’t
apply until 1 January 2005)
 Administrative guidelines issued October
2004
 Reference material available at
www.taxpolicy.ird.govt.nz

Policy decisions




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Reason for zero-rating is that exemption is
generally undesirable, and there is a need to
reduce cascade effects
Result = more input tax credits to financial
services providers
The reverse charge is necessary to tax
imported services with globalisation etc
Both issues affect the financial services sector –
Government agreed to address them together
Fiscal costs of zero-rating partially offset by the
reverse charge
The New Zealand financial
services sector




Banking and insurance industries represent
about 6% of New Zealand’s GDP
Reserve Bank supervision of banks – 18
registered banks
Concentration of Australian ownership – 5
largest banks which account for 87 percent
of the banking system are Australian owned
Wider concerns relating to the income tax
treatment of banks reflected in the most
recent tax bill
Why limit zero-rating and reverse
charge to B2B?
Cascade effect is limited to B2B financial
services transactions
 B2C is under-taxed but interest/fees
substitutability leads to retaining
exemption rather than taxation
 Some changes in telecommunications area
and New Zealand keeping a “watching
brief” on B2C imported services in other
jurisdictions

Treatment of B2B financial
services: before and after
Before:
Financial services
Output tax
Business
Business
A
A
No output tax
Bank
Bank
No input tax
No input tax
Output tax
Business
Business
B
B
No input tax
Final
Final
consumer
consumer
Cascades as not tax neutral for business
Other businesses
Output tax
Business
Business
A
A
Input tax
Output tax
Business
Business
B
Input tax
Output tax
Business
Business
C
C
No input tax
Final
Final
consumer
consumer
Treatment of B2B financial
services: before and after
After:
Financial services
Output tax
Business
A
No output tax
Bank
Input tax
No input tax
Output tax
Business
B
No input tax
Final
consumer
Result = Financial services B2B transactions are GST neutral
in the same way as other B2B transactions
Treatment of B2C financial
services
Output tax
Business
Business
A
No input tax
No output tax
Bank
Bank
No input tax
Final
Final
Consumer
Consumer
Result = Financial services B2C transactions
are undertaxed, although denial of input tax
credits to the financial services provider
addresses this to an extent
Criteria for zero-rating financial
services
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
Suppliers of financial services must first be GST
registered either on the basis that annual
turnover exceeds $NZ40,000 or voluntarily if a
“taxable activity”
Suppliers must elect to zero-rate
Suppliers may zero-rate the supply of financial
services to a customer only if the customer:
– is registered for GST
– has a predominant activity of making taxable supplies
(that is, 75% or more of supplies made by the customer
are taxable supplies)

A customer can be an individual business or a
part of a group (a 66% ownership test)
Calculation methods for
zero-rating

Whether a supply may be zero-rated must be
based on either:
– information from the recipient about their ratio
of taxable and non-taxable supplies, or
– a method agreed with the Commissioner of
Inland Revenue

Administrative guidelines allow suppliers to
use ANZSIC (industry classifications produced
by the Department of Statistics) to make a
reasonable assessment as to whether or not
the 75% taxable supplies test would be met
Apportionment
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Limited change to apportionment rules
New Zealand adopts a “principal purpose” or
“change in adjustment” basis for apportionment:
– if more than 50% of supplies made are taxable full input
tax credits are allowed, with periodic adjustments
(output tax) to reflect non-taxable use
– if less than 50% of supplies made are taxable no input
tax credit is allowed, but periodic adjustments (input
tax) may be made to reflect taxable use

Administrative guidelines clarify that for
apportionment purposes the value of most
financial services is based on the fee charged, or
the net margin if there is no separate fee
A supply by a financial services provider
to another financial services provider
A supply between two financial services
providers cannot be zero-rated BUT
 A specific formula allows a separate input
tax credit to the supplier which reflects
the relative business to private consumer
ratio of the recipient financial services
suppliers’ customer base
 The input tax credit can ONLY be claimed
by the supplier based on a ratio given by
the recipient

Administrative issues
Suppliers will need to review their
customer classifications annually (or less
often if agreed with the Commissioner)
 In general if suppliers have complied with
the legislation and guidelines the
Commissioner will not reassess so as to
retrospectively adjust the level of input
tax credit claimed
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Avoidance concerns

Two main areas of concern were:
– over-valuing financial services where the
customer is related to the supplier so as to
increase taxable (which includes newly zerorated) supplies
– the ability to gain one-off input tax credits by
substituting the principal purpose from one of
making primarily non-taxable supplies to one
of making primarily taxable (including newly
zero-rated) supplies

Both issues have been addressed by
specific anti-avoidance legislation
Reverse charge for imported
services businesses
Scope limited to businesses making
exempt supplies (mainly suppliers of
financial services)
 Main issue for New Zealand is charges by
overseas head offices
 Charges are fully taxed with exclusions for
salary and interest
 Head offices and New Zealand branches
are treated as separate entities

Ongoing issues for zero-rating
Definition of financial services unchanged,
but now pressure to widen it
 Main issue raised is the treatment of
investment in shares – currently not a
financial service, as not a service
 If “pure” investment zero-rated,
implications for individual investors
 Extent to which zero-rating affects the
pricing of financial services to businesses
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Conclusion
Zero-rating achievable in New Zealand
because of particular factors:
 relatively contained financial services
sector
 elective regime
 compliance and administration costs
reasonably manageable
 was introduced in the context of the
reverse charge and wider banking
reforms
Conclusion continued
Need to monitor the impact of zero-rating
and the reverse charge in terms of:
 fiscal costs
 other costs
 behavioural changes