Tax avoidance and the on-line economy

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For those of you not in Australia, there is currently a campaign going on relating to the GST and on-line purchases.

Background:

  1. On-line purchases from overseas of less than $1000 are officially GST ‘free’;
  2. I suspect that a lot of on-line purchases above $1000 are effectively GST ‘free’ because the declared value for any official purposes is less than $1000;
  3. The bricks and mortar retailers do not like this and are threatening to set up their own overseas based web sites to avoid GST;
  4. More over, the bricks and mortar retailers want something ‘done’ (e.g. they also get the GST exemption on sales of $1000 or less); and
  5. The media seem to be vehemently against the retailers’ campaign so the campaign is going no-where fast.

On the latter point, an article by Terry McCrann is here.

McCrann is correct when he notes that such a campaign is unlikely to succeed. But the campaign is not silly. Using the internet to buy a product allows for either (legal) GST avoidance or (illegal) GST evasion. This creates an issue for both the bricks and mortar retailers (as competitors) and for the government (as tax collector).

The difficulty of tracking and taxing goods bought overseas using the internet means that unless the government is going to check a large number of parcels (or require freight companies to do so) and monitor on-line digital purchases, then internet-driven international trade will make it harder to levy domestic taxes on goods and services.

This is the opposite of history. In the middle ages, taxes on imports and exports were easy for a government to enforce. That is why they were so common. Goods had to move through ports and the government was there to check the goods and make sure taxes were paid. Navies made sure the boats didn’t move until the government was happy that it had got its share.

The internet, and digital commodities like music, video, eBooks, games, etc, make taxes at borders extremely difficult to enforce. Add in improvements to physical transport, so it is not that expensive to ship products from overseas to an individual customer, and ‘border taxes’ now look like a loser.

So while the retailers are the first to make a noise about differential tax treatment and the internet, the people that really should be paying attention are the government. As on-line commerce grows over the next decade it will be harder and harder for the government to track – and tax – goods and services.

8 Responses to "Tax avoidance and the on-line economy"
  1. Point 1 is wrong. It is imports of less that $1000 that are GST free. Whether purchased online or not is irrelevant. Indeed, I suspect most of this concession is provided to international travellers rather than online purchasers. Similarly, most online sales to Australians are from Australian-based firms who have to pay GST.
    So, just as important as the internet is the falling cost of international postage and courier services.
     

  2. Thanks Bruce – apologies for the error. I have corrected it. The rest of the post was written for overseas internet purchases.
    I agree on transport costs – it is the combination of advances in transport and the internet that are driving the benefits for consumers.

  3. Stephen, the terminology of tax avoidance is incorrect. The  law provides for the exemption. There is no blatant, artificial or contrived arrangement involved. I argue on my blog that the big retailers are rent seekers and this is a forlorn attempt to protect their economic rent from internet competition. Tax the rich retailers, not us. http://enpassant.com.au/?p=8961 

  4. From the retailer’s POV, of course, the compliance costs of lowering or eliminating the $1000 threshold is a feature – in fact the main feature – not a bug.  They’re not seeking a level playing field, but one tilted strongly against overseas suppliers (whose customers will bear those compliance costs in the form of clearance fees and long delays).  They really couldn’t care less about the 10%.

    It’s a classic non-tariff barrier aimed at preserving sectoral rents, and one that deserves every bit of the scorn being directed at it.

  5. The point about government and taxes at the border are well made.  But Gerry H also has a point – the long term loser here will be the Australian community.  Exporting sales – and thus jobs – overseas has been going on for a long time.  Take manufacturing:  it died in the 1970’s because the local market was too small to offset the price advantages of overseas competitors.  Once, we made radios televisions and a host of other things.  All gone:  the replacements are cheaper, but the jobs and skills that capability represents are long gone.  automotive is going down this route too – slowly, but it’s happening.  The govt should be watching this with a bit more care than just for the fiscal bottom line – jobs are important too.  So when all there is in retail is amazon or the equivalent . . . what then for us, or our kids???

  6. I am so grateful that I found the best tax consultant. He took a very unpleasant situation and made it bearable. The IRS is no longer breathing down my neck, and thanks to him and his staff, I can now sleep at night.


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