Tuesday, 1 May 2018

GST at the border - hitting the big guys

The Government will release a discussion document on Tuesday proposing to make foreign firms levy GST on items valued at less than $400 that they ship to customers in New Zealand from October next year.

The proposal would change the current regime under which most consumer items valued at less than $400 can be bought from overseas tax free. A lower threshold has applied to goods that still attract import duty such as clothes and shoes.

Import duty and biosecurity fees on low value goods will be axed, softening the blow for consumers. Foreign firms that sell less than $60,000 of goods to New Zealanders each year would be excluded from the obligation to levy GST.
In a first-best world, GST would apply regardless of whether goods were sourced domestically or from abroad. But transactions costs will wind up mattering.

I've had two worries around GST at the border.

The first is that collection costs can easily outweigh the amount collected on low-value items - and the particularly worrying collection costs are those faced by consumers. Unless foreign vendors find it worth collecting tax for the New Zealand government in order to have access to the New Zealand market, the hassles facing consumers at the border if they had to run the same drill as they have to run currently for goods over $400 would be a massive non-tariff barrier.

Where GST would be collected by Amazon and remitted to the government, that worry's gone. Amazon will face some costs in submitting GST returns to the NZ government, but that's not particularly different to the costs facing any other NZ retailer - and Amazon's scale is big enough that it's worth it to front the fixed cost of learning how to do that. Not applying import duty or biosecurity fees on low-value goods also avoids imposing that border-barrier. That does mean that there continues to be some cross-subsidisation of biosecurity services from higher-value to lower-value imports, but that's the same under either regime. I'd expect there would have to be some additional cost to Customs in somehow tracking which foreign-based retailers are nosing up on their $60,000 threshold, but it isn't nearly as bad as it would have been if Customs were having to run GST on each package coming through.

The second worry I've had is that requiring foreign retailers to submit GST to the New Zealand government might dissuade smaller ones from dealing with New Zealand at all. Firms hovering near the $60,000 threshold might decide it's not worth the hassle of learning how to deal with New Zealand rather than risk going over the threshold. Firms doing multimillions of business in NZ will comply; smaller internet vendors might not unless they're shipping through an aggregator like Amazon that might handle the tax issues for them.

That worry is still live - but it's an empirical question.

It'll be interesting to see the paper that's released later today. So far it sounds rather pragmatic, but it'll be hard to tell without reading the full paper. The pragmatic version would just get the larger outfits that ship to NZ to comply, keep half an eye out for firms whose shipments become large enough to worry about, and not worry about fringe imports.

I'd have wanted a much higher threshold than $60,000 in shipments, and I worry that could deter some small players - if those firms are making, say, 5% profit on each shipment, then once you're earning $3k per year in profits from shipping to New Zealand, you must learn how to keep track of all your NZ shipments for sending tax to the NZ government. Would the accounting fees for that be less than $3k, if you're based outside NZ?

Overall, it's far less bad than it could have been. No holding goods up at customs pending payment, no separate rigamarole for customers, and no extra customs handling fees. I'd consequently expect only small effects on the proportion of goods purchased online from abroad.

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