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Indirect tax

Extending GST to digital products and services imported by consumers

The Government has released draft legislation that proposes to amend the goods and services tax (GST) law to give effect to the 2015-16 Federal Budget measure to ensure digital products and services provided to Australian consumers receive equivalent GST treatment whether they are provided by Australian or foreign entities.

The new measures are to apply to supplies made on or after 1 July 2017 and the consultation period on the draft legislation is open until 7 July 2015. While the delayed start date is likely to be welcomed by industry, experience in the European Union (EU) (where similar laws have recently come into force) may suggest that a longer time frame is required to properly implement system changes. The consultation period is also surprisingly short for industry to comment, particularly when viewed against the proposed implementation date of July 2017 and the complexity and broad scope of the proposed law.

The proposed changes involve extending the meaning of 'connected with Australia' to include supplies made to 'Australian consumers'. An Australian consumer is broadly defined as an Australian resident other than a business. However, an entity will also be an Australian consumer if it is carrying on an enterprise but is not registered or required to register for GST because its turnover is less than the GST registration threshold. The new measures will therefore not apply to 'business to business' transactions.

There are likely to be significant implementation issues regarding the information available on whether a customer is an 'Australian consumer'. The draft explanatory material released with the legislation notes that the Australian Taxation Office (ATO) will work with taxpayers to agree what steps need to be taken to determine whether a customer is an Australian consumer. It is likely that industry may want greater certainty on this key issue, particularly given the number of customers who contract with offshore digital content providers, the volume and diversity of transactions and the difficulty of implementing system changes on such a large scale. Customer experience may also be a consideration here, as many digital content providers will be wary of adding further 'red tape' to the customer on-boarding or sale process. Further draft legislation or regulations may be appropriate to establish clear, practical and workable criteria to determine when a customer is an Australian consumer. For example, other jurisdictions, such as South Africa and the EU, have adopted proxies such as ISP addresses and the locations of bank accounts from which payments originate for residency.

The draft explanatory material notes that the proposed law changes will result in supplies of digital products, such as streaming or downloading of movies, music, apps, games, e-books as well as other services such as consultancy and professional services receiving similar GST treatment whether they are supplied by a local or foreign supplier. The previous announcement had focused on imported digital products but it appears that the measures are intending to pick up other types of imported services supplied electronically to consumers.

The new measures may require the supplier to register and account for GST. In this regard, the draft law contemplates that regulations may be introduced which allow for the implementation of an elective simplified registration mechanism. These amendments appear to be aimed at simplifying the administrative burden for offshore entities caught by the proposed rules to promote compliance. The draft law also provides an integrity measure under the simplified registration mechanism to prevent participating taxpayers from claiming input tax credits on related costs.

In many circumstances, responsibility for the GST liability that arises under the amendments will be shifted from the supplier to the operator of an electronic distribution service. This will occur where the operator controls any of the key elements of the supply such as delivery, charging or terms and conditions. The provisions have been drafted broadly and may extend to payment processors and potentially banks and credit card providers. Shifting responsibility for the GST liability to operators is stated to minimise compliance costs as operators are generally better placed to comply. However, this additional collection responsibility may add significant compliance costs for the intermediary. The electronic distribution service provisions appear to be a carbon copy of equivalent EU rules. Experience in the EU has been that these provisions have caused a great deal of confusion and uncertainty between suppliers and operators as to who is liable for the GST and have caused a number of related contractual and pricing problems as between suppliers, intermediaries and consumers.

The new measures do not raise significant revenue but are consistent with the Government's desire to address the base erosion and profit shifting (BEPS) agenda in the GST space. In this regard, the new measures are in line with Organisation for Economic Cooperation and Development (OECD) guidelines and recent law changes in several other GST/VAT jurisdictions. However, it is worth noting that there are still some differences in laws between territories. These differences, particularly the lack of clear and consistent rules across jurisdictions for determining the place of consumption, will continue to create unintended instances of double tax or double non-tax in relation to supplies of digital content across borders. Work needs to be done at the OECD level to agree on a set of consistent legislative principles to harmonise the application of GST/VAT rules for cross-border supplies. This, and a number of other compliance and practical issues, will need to be addressed in the coming months.

Other GST measures

  • The previously announced measure to implement reverse charge rules for going concerns and farmland sales will not proceed.
  • The Government will provide $265.5 million to the ATO over three years from 2016-17 to promote GST compliance.

Contact us

Peter Konidaris

Managing Partner Melbourne, PwC Australia

Tel: +61 (3) 8603 1168

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