Productivity Commission supports current tax collection model for low-value imports

After evaluating a range of GST collection models, the Productivity Commission has concluded that the legislated model used for high-value goods should also be used for low-value goods.

The Productivity Commission has said the Australian government's legislated model for the collection of goods and services tax (GST) on low-value imports is the best available option.

The commission was tasked by the Australian government to evaluate whether the current model for GST collection is the right one to implement on July 1, 2018 when new tax laws around low-value imported goods come into effect, or whether other models could improve the cost‑effectiveness of levying GST.

Under the legislated model, foreign suppliers, as well as re-deliverers and electronic distribution platform providers such as Amazon and eBay, will be liable for GST on low-value imported goods sold to an Australian consumer, and only those foreign suppliers that generate more than AU$75,000 in sales annually in Australia will be required to register with the Australian Taxation Office (ATO) for the collection of GST on all goods sold online.

In addition, foreign suppliers will be expected to include a GST component in the price of their goods, as domestic businesses do, and periodically remit this to the ATO.

The Productivity Commission believes this model is the most feasible moving forward as it "should" improve tax neutrality between imported and and domestically retailed low value goods; it will bring partial rates of GST collection, though revenue generated is expected to outweigh administrative and compliance costs; and it "should" avoid major disruption to consumers when importing goods, even though companies such as eBay have warned they may disable foreign suppliers from selling to consumers in Australia.

"Applying the GST to goods costing $1,000 or less is a win for Australian retailers," Australian Treasurer Scott Morrison said in a statement. "It removes the unfair advantage for foreign businesses and creates a level playing field to help Australian businesses grow and create more jobs and opportunities.

"The report confirms the government's approach is the most practical and achievable option and provides industry with certainty."

While the government is under no obligation to accept its recommendations, the commission has concluded that the other proposed models are flawed and impractical. For example, the feasibility of "transporter-based collection models" that require the delivery agent to collect GST are constrained by the "paper‑based declaration processes still used for international mail; and the difficulties for Australia Post to negotiate agreements with myriad other postal services," according to the Productivity Commission, which added that such models would also impose high administrative and compliance costs.

The commission is similarly hesitant about the "purchaser" collection model, where the purchaser is required to self‑assess and remit GST on purchases of low value imported goods, as well as the "financial intermediary" collection model, where the obligation to collect and remit GST is placed on intermediaries in the supply chain.

While these models centre on the use of technology to minimise high compliance and enforcement costs, the commission remains unconvinced due to their efficacy being untested and their lack of readiness for deployment by July 1, 2018.

The "border" collection model, where custom authorities collect GST on high-value goods, was also deemed "unworkable" for low-value goods as the administrative and compliance costs associated with the model would outweigh the revenue generated. It is also expected to cause delays and disruptions to the delivery of goods.

In response to critics who argued that the legislated model relies too heavily on voluntary compliance, the Productivity Commission presented some potential improvements such as enabling the ATO to "name and shame" non-compliant foreign suppliers or requiring them to establish an Australian agent.

"A stronger enforcement option, recommended by several inquiry participants, would be to supplement the legislated model by applying "border" processes to imports from persistently non‑compliant suppliers," the Productivity Commission added in its Collection Models for GST on Low Value Imported Goods Inquiry report, admitting that it hasn't been able to properly evaluate these suggested improvements.

The commission noted, however, that there could be costs and complications associated with these improvements that require careful consideration.

"For example, publicising non‑compliant suppliers might backfire by alerting Australian consumers to websites offering (tax‑free) bargains. And a comprehensive program of stopping all goods from non‑compliant suppliers at the border would be very costly to administer (although there may be scope to devise a more limited, targeted approach, particularly for the cargo stream)," it said in its report.

The ATO admitted in a Senate hearing in April that it is relying on a foreign organisation's "good will" and the possibility of reputational damage to prevent them from skirting the legislative requirement to collect GST on its platform.

"If we were to notify another jurisdiction that an organisation in their jurisdiction was deliberately not complying with a known regulation in Australia, then the revenue authorities in that jurisdiction would then have the information to know an organisation's attitudes towards compliance," an ATO representative said in April.

In response to how it would identify and penalise non-compliant organisations, the ATO representative did not rule out the possibility that such organisations could have their websites blocked.

"I'm aware the [website blocking] provision exists, the ATO hasn't applied that provision previously, so at the end of the day we'd have to look at whatever was available to the ATO as we progress down the path of encouraging organisations to comply," the ATO said at the time.

The Productivity Commission has also said that it has not found sufficient reason to recommend delaying the July 1, 2018 date for the GST changes to come into effect.

The Australian Labor Party was successful in getting the original July 1, 2017 date to be postponed by one year. In June, it had argued that businesses and consumers had just a fortnight to change their models and implement the new regime.

The Productivity Commission acknowledged that delaying implementation would have some benefits in that it would allow time for Australia to learn from other countries' choices and experiences with vendor-based collection models.

"There are several overseas initiatives in the pipeline, the most significant one being that of the European Union, which is scheduled to take effect from 2021. The prospect of moving after other countries, or concurrently, could abate the risk of EDPs disabling foreign vendors from selling to consumers in Australia," the commission stated in its report, adding that this is not sufficient.

"While it is possible that superior collection models may eventually emerge, the pivotal issue is whether the legislated model would preclude their subsequent adoption. The commission sees only limited 'lock in' risk and, as such, the value of waiting for potentially better models is low."

As such, the commission has suggested that the legislated model and the suitability of alternatives be reviewed in 2023, or sooner if there is evidence of "unduly low compliance, unintended impacts on consumers, or adverse trade policy responses."

Ecommerce giants eBay, Alibaba, and Etsy had previously argued in a Senate hearing in April that they are not sellers, as they neither own the goods sold on their respective platforms nor sell or supply them, meaning they should not be subject to enforcing the GST laws.

With the use of third-party payments systems such as PayPal, eBay said it isn't even involved in the payment or shipping of any goods sold on its platform.

"We are different to online retailers ... we merely connect buyers with sellers. We are an online version of Westfield," eBay's managing director for Australia and New Zealand said. "Just like Westfield, eBay is not in a position to collect GST from the sellers that sell on our platform."

The federal government found that there are more than 3,000 overseas organisations that would be subject to the current GST collection proposal. The majority of sellers, or 38 percent, are from the United Kingdom, while the United States accounts for approximately 27 percent, followed by China and Hong Kong, both of which account for 8 percent of overseas sellers.

The GST changes are expected to raise AU$300 million over three years from vendors that the government believes will voluntarily register with the ATO.

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