Untaxing activity: Netflix says it won’t charge GST on its local streaming television service, which launches next week.

Sparks are flying after Netflix said it would not charge GST on the New Zealand version of its online television service which launches next Thursday.

Andrew Pirie, spokesman for Spark, which owns rival internet television service Lightbox, said it was "yet another example of the lack of a level-playing field in this rapidly changing digital world".

"Lightbox has been set up as a New Zealand-based company, working under New Zealand rules and paying New Zealand tax and we think other companies should be doing the same," he said.

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The argument over whether GST should be charged on digital imports, such as online television, music and games services that are hosted overseas, flared up last week when Revenue Minister Todd McClay instructed officials to look at the steps other countries were starting to take to collect such taxes.

The tax status of Netflix' local service versus Lightbox and Sky's Neon service looks set to highlight what is at stake.

United States-based Netflix, Sky Television and Spark are locked in a bidding battle to secure the best programmes for their streaming televisions services and to win over consumers in what is expected to become a fiercely competitive market.

But Netflix will have a 15 per cent cost-advantage over Lightbox and Neon because it will not have to charge viewers GST.

A company spokesman said Netflix would not collect GST in either New Zealand or Australia, where it is also launching a local service, as it was "not a local entity".

"There have been discussions in both countries about changing the law on this to collect even from non-local entities, however that's something to look at in the future," he said.

Netflix has registered a subsidiary in New Zealand that is owned by another Netflix company in Holland, but Victoria University professor John Shewan said that would not necessarily be enough to make the company's localised television service liable for GST if the service was delivered from overseas.

But Spark could not avoid GST on Lightbox by moving it overseas, because of its base here, he said.

Inland Revenue said it could not comment. Legislation prevents it from commenting on the tax affairs of individual companies, a spokesman said.

McClay announced on Friday he had asked officials to report back to him soon on the measures other countries were taking to collect taxes on digital imports such as internet television, saying they appeared to be effective.

South Africa became the first country to "go it alone" in June, when it required overseas firms to register for GST on electronic services they supplied to South African customers.

But Prime Minister John Key said that all countries would eventually need to deal with the loss of tax that was resulting from online purchases and stressed the importance of work the Organisation for Economic Cooperation and Development was doing in finding a solution. "It looks a lot easier if you can move as part of an international approach," he said.

Key acknowledged that closing any tax loophole might not be popular with consumers. "[But] most people are realistic enough to say a lot of jobs are supported by retailing in New Zealand and we just want people to be on a level playing field," he said.

PWC tax partner Eugen Trombitas said McClay was moving in parallel with Australia which was also looking at the issue.

If New Zealand was to charge GST on imported digital services it would need to persuade overseas suppliers to register for GST and then pay the tax on consumers' behalf, he said.

Although it would be hard to apply sanctions on overseas companies that did not register, the South African experience suggested multinationals would play ball, he said.

"The registration of foreign sellers is easy and works well. About 80 to 100 foreign sellers have registered. All the 'big ones' are in."

Collecting GST on the international flow of bits and bytes might be easier than collecting GST on physical goods, which usually fall under the GST net if they cost less than $400 to buy and import, Trombitas said.

Although a similar registration system could be set up for overseas web businesses that shipped low-value physical products to New Zealand, it could be hard for consumers and Customs to know whether tax had been paid when goods passed across the border, he said. "You could end up in a double-tax situation."

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