Understanding the Importance of Categorising Your Transactions

The digital economy has transformed how services are delivered, creating new challenges for GST systems worldwide. New Zealand has responded with specific rules for digital services, affecting both local providers and international companies serving the New Zealand market.

What Qualifies as a Digital Service?

For GST purposes, digital services (sometimes called "remote services") generally include:

• Digital content: E-books, music downloads, streaming services, digital publications, apps, and software
• Online services: Cloud storage, web hosting, software-as-a-service (SaaS), database services
• Online platforms: Subscription access to online marketplaces, dating sites, gaming platforms
• Online professional services: Remote consulting, online education, webinars, digital marketing
• Online advertising: Digital advertising services, including social media advertising

These services are typically delivered online with minimal or no human intervention.

GST Registration for New Zealand Digital Service Providers

Standard Registration Requirements

New Zealand-based providers of digital services follow the standard GST registration rules:

• Mandatory registration if taxable supplies exceed NZ$60,000 in any 12-month period
• Optional voluntary registration if below the threshold

For digital businesses, all sales to New Zealand customers count toward this threshold, while sales to overseas customers are generally zero-rated.

Determining Customer Location

For digital service providers, determining whether a customer is in New Zealand (and thus subject to GST) or overseas (and potentially zero-rated) is critical. Indicators of customer location include:

• Customer's billing address
• IP address location
• Payment method details (e.g., country of the credit card)
• Customer's declaration of their location
• Mobile phone country code

It's generally best to use multiple indicators where possible to establish customer location reliably.

GST on Imported Digital Services

Overseas Provider Registration Requirements

Since October 2016, overseas providers of digital services to New Zealand consumers must:

• Register for New Zealand GST if their supplies to New Zealand consumers exceed NZ$60,000 in any 12-month period
• Charge 15% GST on their supplies to New Zealand consumers
• File GST returns and remit the GST to Inland Revenue

This is sometimes referred to as the "Netflix tax" as it was designed to ensure that international streaming services and digital providers pay the same GST as local companies.

Business-to-Consumer vs. Business-to-Business Supplies

The overseas provider registration system primarily targets business-to-consumer (B2C) supplies. For business-to-business (B2B) supplies:

• If the New Zealand business customer is GST-registered, they can zero-rate the supply under certain conditions
• The New Zealand business may need to apply the reverse charge mechanism

Overseas providers need systems to identify whether their New Zealand customers are consumers or GST-registered businesses.

The Reverse Charge Mechanism

For GST-registered businesses in New Zealand that receive digital services from unregistered overseas suppliers, the reverse charge mechanism may apply if:

• The services would be taxable if supplied in New Zealand
• The services are used for making non-taxable supplies (less than 95% taxable use)

Under the reverse charge, the New Zealand recipient must:

• Account for GST output tax as if they were the supplier
• Claim an input tax deduction to the extent the services are used for making taxable supplies

This ensures GST is paid on imported services used for non-taxable purposes.

GST on Low-Value Imported Goods

The 2019 Rules

Since December 2019, overseas suppliers (including electronic marketplaces) must:

• Register for and charge New Zealand GST on low-value goods (under NZ$1,000) sold to New Zealand consumers if their annual sales exceed NZ$60,000
• Collect and remit this GST to Inland Revenue

This extends the digital services GST regime to physical goods, creating a more level playing field between domestic and international retailers.

Electronic Marketplaces

For electronic marketplaces (like Amazon, eBay, or Etsy):

• The marketplace operator, rather than individual sellers, is typically responsible for registering and collecting GST
• This applies when the marketplace facilitates the sale and directly or indirectly sets terms and conditions
• Marketplace operators need systems to identify sales to New Zealand consumers and apply GST appropriately

Practical Implications for Digital Service Providers

Systems Requirements

To comply with GST rules, digital service providers need systems to:

• Identify customer location reliably
• Distinguish between business and consumer customers
• Apply the correct GST treatment based on customer type and location
• Generate compliant tax invoices
• Maintain required records

Many e-commerce and subscription management platforms now include features to handle these requirements.

Pricing Strategies

Digital service providers should consider GST in their pricing strategy:

• Whether to display GST-inclusive or GST-exclusive prices (noting that consumer law generally requires GST-inclusive pricing for consumers)
• Whether to maintain consistent pricing across all markets or vary pricing to account for different tax treatments
• How to communicate GST obligations to customers

Compliance Simplification

For overseas providers, New Zealand offers some simplifications:

• A simplified registration process
• Quarterly filing (rather than monthly or two-monthly)
• No requirement to issue full tax invoices to non-business customers
• The ability to maintain records in a foreign currency and convert to NZD for GST returns

These measures aim to reduce the compliance burden while ensuring GST is collected appropriately.

GST on Specific Digital Services

Streaming Services

For providers of streaming content (video, music, etc.):

• Subscriptions to New Zealand consumers are subject to 15% GST
• Providers need to determine customer location at the time of subscription and periodically thereafter
• Major providers like Netflix, Spotify, and Disney+ are registered for New Zealand GST

Software and SaaS

For software and SaaS providers:

• One-time purchases and ongoing subscriptions to New Zealand consumers are subject to GST
• Business customers may require tax invoices to claim GST input credits
• Multi-user licenses may need special consideration if users are in different countries

Digital Marketing Services

For digital marketing and advertising services:

• Services targeting New Zealand consumers are generally subject to GST
• Google, Facebook, and other major platforms are registered for New Zealand GST
• New Zealand businesses receiving these services can generally claim input tax credits if registered

Online Education and Consulting

For providers of online education or consulting:

• Services to New Zealand consumers are subject to GST
• The level of human involvement doesn't necessarily exempt the service from GST
• Whether delivered live or as pre-recorded content, GST typically applies

Record Keeping for Digital Services

Essential Records

Digital service providers should maintain:

• Evidence of customer location and status (business/consumer)
• Transaction records including GST treatment
• Tax invoices issued (where required)
• GST return workpapers and calculations

For overseas providers, records can be kept in a foreign language and currency, but must be convertible to English and NZD if requested by Inland Revenue.

Retention Period

As with other GST records, those related to digital services must be kept for at least 7 years from the end of the tax year to which they relate.

GST and Digital Marketplaces

Marketplace Operators

Operators of digital marketplaces (platforms where third parties sell goods or services) have special GST responsibilities:

• They're deemed to be the supplier for GST purposes in many cases
• They must register for GST if total facilitated supplies to New Zealand consumers exceed the threshold
• They need systems to identify the location and status of customers
• They must collect and remit GST on qualifying sales

Underlying Suppliers

For businesses selling through digital marketplaces:

• Understand whether the marketplace operator is handling GST on your behalf
• Clarify the GST treatment in your agreements with marketplace operators
• Maintain appropriate records of marketplace sales and their GST treatment

Challenges and Solutions for Digital Service Providers

Multi-jurisdictional Compliance

Many digital service providers operate globally and face GST/VAT obligations in multiple countries. To manage this:

• Consider tax compliance platforms designed for digital businesses
• Maintain clear documentation of the tax treatment applied in each jurisdiction
• Stay informed about regulatory changes in key markets
• Consider external tax advisors with international expertise

Changes in Customer Status or Location

Digital service providers face challenges when customers change location or business status. Best practices include:

• Periodically verifying customer location information
• Allowing customers to update their location and status
• Having clear processes for adjusting GST treatment when changes occur
• Documenting the basis for GST treatment decisions

Non-compliance Risks

The risks of non-compliance with digital services GST rules include:

• Penalties and interest charges
• Retrospective GST liability
• Reputational damage
• Potential restrictions on market access

Inland Revenue has increasingly sophisticated methods to identify non-compliant overseas providers.

Recent Developments and Future Trends

Enhanced Enforcement

Inland Revenue has been increasing its enforcement activities for digital services GST, including:

• Data matching with payment processors and banks
• Information exchange with other tax authorities
• Direct outreach to potentially non-compliant providers

Emerging Digital Services

New types of digital services continue to emerge, raising questions about GST treatment:

• Cryptocurrency exchanges and services
• Non-fungible tokens (NFTs) and digital collectibles
• Metaverse platforms and virtual goods
• Artificial intelligence services

The general principles of New Zealand's digital services GST rules typically extend to these new services, but specific guidance may evolve.

Conclusion

New Zealand's GST rules for digital services aim to ensure that GST applies consistently to both domestic and imported digital services. These rules create obligations for both New Zealand-based digital businesses and overseas providers serving the New Zealand market.

While compliance can be complex, particularly for businesses operating across multiple jurisdictions, the simplified registration system for overseas providers helps manage the administrative burden. By understanding these rules and implementing appropriate systems, digital service providers can ensure compliance while providing a seamless experience for their customers.

As the digital economy continues to evolve, we can expect further refinements to these rules. Staying informed about developments and maintaining flexible compliance systems will help digital service providers navigate the changing GST landscape.