Consumer spending habits are changing the world over. More and more of us are turning to our computers or smartphones to find the products and services we want at least some of the time. Here in New Zealand, I have noticed an explosion of ‘bricks and mortar’ shops shifting their attention to the creation of websites and attracting online sales. Over the last few years my inbox has slowly become ever more crowded with internet deals, while online websites attempt to entice me with every google search – especially if I have recently been ‘googling’ a product they sell. Many websites now offer free shipping, further inducing consumers.
This trend is raising questions about how international internet sales should be taxed and what our international taxation system can do to capture the income they earn. One question is how domestic goods and services taxes are applied to these products when they enter the country – currently overseas online sales normally escape domestic taxes meaning that they’re given a competitive advantage over domestic retailers. An article from Forbes claims that for years avoiding sales taxes was the prime company strategy for Amazon.
On top of that, further competitive advantages can be gained by big online companies if they cleverly shift their income to low tax jurisdictions and carefully avoid becoming tax residents in others. In businesses where profit margins are thin, this advantage can be huge in cutting out the competition. New Zealand is currently part of an international effort to clamp down on income shifting as a result of increasing concern about this practice.
In New Zealand there is also debate at the moment about whether our goods and services tax (GST) – the equivalent of VAT – should be applied to overseas online purchases at the border. Currently it is only imposed if the GST, charged at 15%, amounts to more than $60 (meaning on goods over $400). As an aside, I have had a number of friends make big online purchases without even realising this, and then get stung at the border when the purchase has already been made. Having a threshold does make sense because one quality of any good tax collection system is that tax collected shouldn’t exceed the cost of its collection. Is it really worth the bother to collect small amounts?
Some domestic retailers are arguing yes! They are screaming ‘no fair’ and claim that they are struggling to compete. For example New Zealand company, Hallenstein Glasson, claims that it is making much lower profits because of overseas online websites undercutting it. Research conducted by BNZ bank would seem to support this. It found that New Zealand consumer spending with overseas online retailers grew at almost four times the rate of domestic web-based spending in the month of November last year. The bank estimated that for the 12 months to 30 September 2013, total online retail sales across the categories monitored amounted to $2.7 billion (excl GST), with 60% of those sales being made at domestic retail online shops. It also observed that free or low shipping and no obligation returns now being offered by many international sites was one cause of increased overseas online sales. Stephen Bridle of Market View, specialists in analysing transactional data, comments that:
“[New Zealand is] a billion dollar export market for international online retailers. It’s worthy of attention, hence the increasing number of sites offering free or low-cost shipping and no-questions-asked returns.”
So is this issue worthy of the attention of governments such as New Zealand’s? Some argue no – they pay quite enough tax already thank you. Others argue that digital shopping isn’t going anywhere, so why should countries not be making an effort to catch it in the tax net. While our tax systems shouldn’t be overly complicated or expensive to run, they also need to be fair and neutral to give all enterprise a fair go, so where to draw the line?