Draft legislation for GST on digital purchases unveiled

The Australian government will begin taxing ebooks, streaming services, apps, games, and music downloads should its legislation pass Parliament.
Written by Corinne Reichert, Contributor

The Australian government has taken the wraps off its draft exposure legislation that will see GST added to all digital products and services purchased online by Australians, outlining plans to begin taxing intangible goods including streaming services, apps, games, music downloads, and ebooks by mid-2017.

The Tax Laws Amendment (GST Treatment of Cross-border Transactions) Bill 2015 [PDF] amends the legislation to apply the 10 percent GST to all supplies and intangible goods bought digitally by an Australian consumer from an overseas entity operating within the Australian tax zone.

"This change will result in supplies of digital products, such as streaming or downloading of movies, music, apps, games, ebooks, 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 explanatory material [PDF] for the exposure draft says.

"When the GST was introduced in 2000, such transactions were relatively unusual, especially for consumers. However, cross-border supplies now form a large and growing part of Australian consumption.

"The growing importance of these types of transactions has highlighted the fact that the GST system was designed with a focus on Australian-based, rather than cross-border supplies ... This harms the integrity of the GST tax base and can disadvantage local suppliers."

The Australian government announced plans in May to introduce this so-called Netflix Tax, with former Treasurer Joe Hockey claiming that such an amendment would raise AU$350 million within four years.

Newly minted Treasurer Scott Morrison then flagged the government's intention to release the legislation on Wednesday morning during a press conference with Commissioner of Taxation Chris Jordan.

"An exposure draft for the legislation of implementing that policy decision, to extend the GST to digital products, will be released later today," Morrison said.

"And of course there's the government's policy decision on the low-value threshold for GST removal that will impact on these matters as well."

In order to achieve this, the Australian Taxation Office (ATO) will request companies that sell over AU$75,000 worth of goods and services to customers in Australia, or AU$150,000 for non-profit entities, to register their products for GST collection.

Charging tax on foreign goods has been the subject of debate for years, since online shopping began taking business away from domestic bricks-and-mortar suppliers, but has faced issues of the cost effectiveness involved in determining the value of each and every product imported into the country.

"One of the impediments to delivering on this integrity measure in the past has been the enforceability of it, and that is because previously, there were proposals that each parcel that comes into the country should be inspected and determined whether that was less than a certain value -- quite frankly, that was ridiculous," Hockey said.

Subdivision 84-B of the draft legislation now provides that the GST charged on intangible services being imported would be payable by the operators of the electronic distribution platform, rather than the suppliers of the goods, in cases where the operator controls key elements of the supply, including pricing, teams and conditions, and delivery arrangements.

Australian streaming companies Quickflix, Stan, and Presto, and subscription pay-TV service Foxtel have been supportive of the introduction of the Netflix Tax, as they claim it will level the playing field in regards to its competitor Netflix.

"The government's move to enforce GST for the supply of digital content services is the right one. The digital marketplace is an increasingly competitive space, and it's critical to ensure that all players that do business in Australia do so on a level field, with no one player advantaged through tax loopholes," Foxtel's group director of corporate affairs Bruce Meagher said in a statement in May.

"The introduction of this legislation will not only help to maintain consistency across the competitive landscape, but it will also ensure that Australia gets its due taxes from the companies that choose to do business here, which benefits all Australians."

The Organisation for Economic Cooperation and Development (OECD) is also working on measures to address the taxation of cross-border digital purchases, according to the exposure draft's explanatory material, in order to prevent the "adverse effects on countries' GST revenues and on the level playing field between resident and non-resident vendors".

"The OECD is in the process of developing guidelines for the taxation of cross-border supplies of services and intangibles," the explanatory material said.

"Guidelines concerning the place of taxation rules and collection mechanisms for business to consumer supplies are expected to be finalised by the end of 2015."

It added that several countries have already passed laws on the matter and begun taxing digital goods and services, such as the European Union's member states, along with Japan, South Korea, South Africa, Norway, Iceland, and Switzerland.

The Australian government has also been working on preventing tax avoidance by multinational corporations doing business in Australia, after documents revealed that AU$31 billion made inside of Australia in one year had been funnelled through Singapore by 10 major companies.

The commissioner of taxation revealed on Wednesday that 80 companies are being targeted by the government to be "potentially affected" by the tax-avoidance crackdown.

"We know there are billions of dollars of sales that are booked overseas from activities that directly occur here in Australia," Jordan said on Wednesday.

During a Senate inquiry into tax dodging in April, tech giants Google, Apple, and Microsoft confessed to being audited by the ATO.

The Senate standing committee on economics also released a draft report in August that called for the remainder of the companies involved in tax avoidance to be named and shamed.

"[The committee] was also taken aback by the reluctance of some companies to disclose information to the committee, or, of greater concern, where some companies seemed not to be in possession of what seemed important information about their company's operations in other countries," the report said.

"The committee, however, is dismayed by the ingenuity shown by some companies in avoiding answering questions posed by the committee. This reluctance verged on contempt for the committee process, exhibited disdain for Australian taxpayers, and overall reflected poorly on those particular companies."

On Monday, the OECD announced the final recommendations from its two-year, G20-commissioned base erosion and profit-shifting (BEPS) project.

The OECD's recommendations aim to regain up to $240 billion lost globally in revenue every year thanks to tax avoidance -- around 10 percent of worldwide corporate income tax revenue, according to the organisation.

"They will put an end to double non-taxation, facilitate a better alignment of taxation with economic activity and value creation, and, when fully implemented, these measures will render BEPS-inspired tax planning structures ineffective," OECD secretary-general Angel Gurria said.

"BEPS is depriving countries of precious resources to jump-start growth, tackle the effects of the global economic crisis, and create more and better opportunities for all. But beyond this, BEPS has been also eroding the trust of citizens in the fairness of tax systems worldwide."

The BEPS recommendations include new minimum standards for corporations to report in every jurisdiction they operate in, and prevent companies from setting up shop in tax havens.

"The implementation of the OECD's work will limit the ability of multinational companies to exploit loopholes and the differences between jurisdiction's domestic laws that shifts profits to no or low-tax jurisdictions and therefore allows them not to pay tax in the jurisdiction where the economic activity that generates their profit actually occurs," Jordan said.

"The widespread and consistent implementation of these measures by countries around the world will be crucial to their success. With G20 backing there is every reason to believe that they can be successfully implemented and the ATO will continue to support the government in any way it needs to get this global implementation right."

More than 90 nations have committed to fulfilling the BEPS measures, with work by all due to be complete by 2016.

"We are committed to ensuring that Australia remains firmly on track when it comes to ensuring that multinational companies are paying their fair share of tax here in Australia," Morrison said.

"The tax office is working very closely with these companies to ensure the sort of positive cooperative relationship that is necessary to ensure that the right thing is done but equally that these businesses can get on, do the business in Australia, create the jobs, drive the investment that is so critical to the future of our economy."

Domestic laws on corporate multinational tax avoidance will be introduced into Parliament and, if passed, will come into effect on January 1, 2016.

The law governing GST on digital products, if passed, is set to come into effect on July 1, 2017. The Department of Treasury is accepting submissions on the draft exposure legislation until October 21, 2015.

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