Thursday 6 January 2011

Transactions costs and tax

New Zealand doesn't charge GST on imports whose value is less than $400. The costs of collecting the tax outweigh the generated revenues. It isn't worth the government's time to collect $15 on a $100 purchase coming in from abroad. Lots of small value packages then need to be held at Customs pending payment; it's rather unlikely that the costs at the border would be less than the taxes collected.

Kiwi retailers, following their Aussie counterparts, have decided to get a bit angry about this differential treatment.
John Albertson, chief executive of the NZRA, said New Zealand Customs had sent out a discussion paper seeking comments on where the GST exemption should be set, and the association would call for the level to be cut to zero.

"We believe that the Government is losing considerable GST and it's also leaving New Zealand retailers at a distinct disadvantage ... It's impossible to know how much is being lost but what we do know is that it will be growing," Mr Albertson said.

"Rather than having a discussion about the level at which it [the exemption] should be set we believe it should be set at zero and we work on finding a solution to collecting it."

Mr Albertson said the association had not worked out how to collect the GST on online purchases would work, but he believed there "must be" a way to divert the tax to the Government when the purchases were made, with most of the transactions made on credit or debit cards.

"Our feeling is that there must be some way within the electronic transaction process for that 15 per cent to be diverted to the Government electronically; it shouldn't be beyond the wit of man to devise a system."
I think the retailers are rather underestimating the costs of setting up that kind of system. First off, having foreign retailers comply with anything NZ wants would just have those retailers block shipments to NZ, which might be what the NZ retailers want. Any solution would have to run through NZ issued credit cards bumping up purchases by 15% and transferring the money to the IRD. A few of the obvious problems:
  • How could Visa tell that you're purchasing something to be shipped to New Zealand? I often buy gifts online for foreign relatives that are shipped within North America and never enter New Zealand. Kiwis don't have to pay GST on products purchased abroad that they don't bring back to New Zealand.
  • How could Visa distinguish between purchases and charitable donations? I sent Patri $100 to help him meet the Thiel Foundation's matching donation threshold before the new year. I used my Visa. But I could have been buying $100 worth of t-shirts and bumper stickers. How could Visa tell?
  • If the foreign merchant directs payment through PayPal, how could Visa tell whether the PayPal purchase is then routed domestically (where GST would already be in place) or internationally? Would NZ have to put some kind of mandate on PayPal to effect that? Would that just cause PayPal to refuse to handle NZ transactions?
These seem pretty big problems, and they're kinda obvious on a half-minute's thinking about what would be required.

I can't help but figure that the NZ Retailers' push for a $0 limit is pure rent-seeking trying to make small scale arbitrage around stupid NZ inefficiencies either impossible or too difficult to be worth the hassle.

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