Online GST: Another Dinosaur Law Impacts Tech

chance-copyThe Revenue Minister announced recently that the government was to collect GST on overseas purchases. In subsequent comments, he also said that people using a VPN to get around the process, could be fined up to $25,000. Once again, a well-intentioned piece of legislation roars like a dinosaur and creates more problems that it was trying to solve, while missing the opportunity.

I guess you kind of expect this thing when you have Ministers that really aren’t IT savvy. It isn’t the first we’ve seen with this government and it won’t be the last. While the GCIO has a good IT strategy the only policy that the current ruling party has is “build more UFB.”

Here’s the problem.

With over 4,500 Cloud services in the wild and 100s’ of “as a service” (e.g. Uber) out there as well, the chances of them collecting GST are pretty much zero. It is going to cost them to implement changes to their systems and their processes. So why would you? And what will the Government be able to do? Ban them? Shut them off at the National Firewall?

Worse, the Revenue Minister has apparently said that people using VPN technology to avoid paying GST could be fined up to $25,000. If you were a conspiracy theorists you could be forgiven for thinking that this was a deliberate attempt to get people to stop using VPN’s, because they can’t spy on you when you are.

But following that old rule, don’t attribute to malice what you can stupidity, this is unlikely.

Here’s the problem. I use around a dozen different Cloud services to run my company. None of those are onshore. I also use a strong VPN because the cost of my company having a privacy breach could run to $250,000. Using a VPN is just smart. A pain in the butt, but smart.

So. If some of those fifteen companies don’t collect GST and I continue to use a VPN can I then be accused by IRD of trying to dodge tax, ending up with a $25,000 fine?

IF that happened, then the only way I could prove innocence is by giving them access to my systems. And we’re back to the privacy issue again.

How are they going to tell anyway? The garden variety, “free”, VPN’s are most easily tracked. This is true. But the professional VPN’s are not easily tracked, nor blocked.

They tend to be hardware based, or able to be run on your router, and run in “stealth” mode. The stream is encrypted once, then encrypted again, and your IP address changes about every sixty seconds, as does the routing across the net. Astrill and TorGuard are just two examples.

That type of VPN defeats deep packet inspection and VPN blockers. They are very, very hard to break. So good luck trying to actually track who is using a VPN to start with. It is going to be an exercise in futility.

Their seems to be an argument by the Revenue Minister that collecting GST from overseas providers is fairer to all. This is undeniably true. But let’s be realistic here. People are still going to buy overseas product, because it is cheaper.

The only thing that changes overseas buying patterns is the value of the dollar. The less our dollar is worth the more likely we are to buy locally. The reality is that price gouging in certain retail sectors is a massive problem, one that this law does not address. There are many examples of products being sold locally with a hugely inflated price.

The law does not encourage our retailers to “get with the program” and start building their own online presence. Instead, it entrenches them within a rapidly dying business model. This law does more to hurt retailers when you take that perspective.

As for tax take. Why is the Revenue Minister, like other smart countries, not focusing on the fact that these massive multinationals are paying way under what is fair.

Recently Radio NZ looked at Apple’s tax bill in New Zealand. On revenue of more than half a billion dollars, Apple paid only $6 million. Pick any large multinational and you will find the same. That’s not fair. The Minister would be well-advised to shut down that kind of behaviour.

Internationally, it is becoming more and more the norm.

That would generate (literally) billions more in tax revenue, far more than the peanuts online GST will.

The other online reaction, from the younger generations, to this tax has been simple. Hundreds of people have already said, “I’ll just go back to piracy.”

So this well-intentioned law introduces a vast amount of complexity, is confusing in how it will be policed (it may not be able to be policed), entrenches “bricks and mortar” thinking, will be fantastically expensive for everyone to implement and manage, will see an increase in software and media piracy once again, potentially will increase the use of VPN’s, and won’t deal with those overseas tax havens which is where the real money is being hidden.

It’s a dinosaur. Worse, it’s a huge missed opportunity.

So what should we do?

If we are going to play the fairness card then deal with the multinationals that are stripping cash from New Zealand and not paying their fair share in tax. That has to be first. That by itself would pay dividends. An army of IRD auditors descending on those multinationals operations and financial statements would be a great investment.

Recognise that “bricks and mortar” is a dead business model and start educating New Zealand business to that fact. If you look at the majority of the NASDAQ listings, they are now “zero asset” companies. They own nothing. Everything has been commoditised. Everything is sold as a service. All the old business models are collapsing.

Set aside more funding to allow New Zealand companies to compete on a global stage. Play the game in reverse. If we can get “bricks and mortar” companies and tech companies selling services internationally, then the money will flow naturally back to us. Building New Zealand business into global markets rather than trying to extract a tiny amount of GST, comparatively, makes more sense.

Government themselves persist in buying expensive solutions from multinationals rather than local operators. Unfortunately, when the TPP is signed, it will become worse as anything that appears to be a trade barrier (such as favouring New Zealand Inc) will be illegal and subject to international lawsuits. Even the GCIO panel system is likely to be broken as multi-nationals who are not part of a particular panel will be able to call foul.

Therefore, government must somehow push supporting local business more. That keeps the money in New Zealand and is likely to increase the GST (and general tax) take naturally. How they do that without falling foul of the TPP is tricky. But it can be done.

The National Party must spend time understanding ICT. It’s complex, it’s worse than rocket science, and its the fastest growing export market we have. Not having a policy on ICT is leading the government into these kind of silly laws. A good policy would have prevented this from happening.

It’s a complex problem and this Dinosaur law has just set us back in time, yet again.










  1. Excellent write-up on this issue Ian. I agree 100%. Why doesn’t the IRD properly investigate the huge tech multi-nationals for tax evasion, which is essentially what the loopholes they are using to pay minimum tax are – is the IRD ‘scared’ of these companies likely response? That has to stop, and not just here.

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