Advertising agencies: placement and creative services supplied to non-residents

Section 11(2)(e), Goods and Services Tax Act 1985 - Services provided for and to persons not resident in New Zealand

In November 1996, Inland Revenue published public ruling BR Pub 96/10 - GST: advertising space and advertising time sold to non-residents - (Tax Information Bulletin Vol. 8, No. 8, pages 13-17).  That ruling and its commentary discussed the supply of advertising space and advertising time on radio and television, by a GST registered person to a non-resident person who is outside New Zealand at the time the services are performed.

A taxpayer has asked whether zero-rating would apply to:

• services that are required to create an advertisement for a non-resident


• placement services provided to a non-resident.  

The ruling itself says that the supply of advertising space or advertising time means the service of communicating an advertising message, including all steps involved in providing the service by the supplier of the advertising space or time.  However, the ruling does not mention advertising agencies that supply creative and placement services, and deals only with the supplier of the advertising media.

This item explains Inland Revenue's view of how section 11(2)(e) applies and, in particular, whether the "directly in connection with" test is satisfied in the case of creative and placement services when these advertising services are supplied to non-residents.

Section 11(2)(e) states:

(2) Where, but for this section, a supply of services would be charged with tax under section 8 of this Act, any such supply shall be charged at the rate of zero percent where-…

5. The services are supplied for and to a person who is not resident in New Zealand and who is outside New Zealand at the time the services are performed, not being services which are supplied directly in  connection with-
   
   
   1. Land or any improvement thereto situated inside New Zealand; or
      
   2. Moveable personal property (other than choses in action, and other than goods to which paragraph (ca) of this subsection applies) situated inside New Zealand at the time the services are performed; -
      
   and not being services which are the acceptance of an obligation to refrain from carrying on any taxable activity, to the extent that the conduct of that activity would have occurred within New Zealand; ...

Creative services are simply services supplied that create the advertisement itself.  The creation of an advertisement involves ascertaining the client's general aspirations, defining the required product image, identifying potential market targets, identifying suitable advertising media and formats, and focussing more specifically on the generation of ideas, themes and concepts which best link these.  After evaluation and discussion with clients, a specific advertising product is finally developed and submitted to the client for approval. 

Placement services cover the "where and when" of advertising, and are services provided by agents in giving their advice on placing advertisements with the appropriate media.  This may involve the detailed planning of an advertising campaign, and negotiating and arranging the placement of advertisements with broadcasters and mass circulation publishers. 

The Commissioner's view is that placement services may be zero-rated, provided the other requirements of section 11(2)(e) are satisfied, i.e. the services are supplied contractually for and to a non-resident who is outside New Zealand at the time the services are performed.  It is considered that placement services are in the same category as other services such as the provision of advertising space which, according to Hillyer J in his decision in Wilson & Horton v CIR  (1994)16 NZTC 11,221 at 11,224, are supplied directly in connection with an advertisement but not directly in connection with whatever goods or services are advertised.  Placement services will always satisfy the requirement of section 11(2)(e) that the services are not to be supplied directly in connection with land or moveable personal property situated in New Zealand.

With creative services the situation is more complicated.  Since the finished advertisement does not yet exist while creative services are being performed, it arguably follows from the reasoning in Wilson & Horton that creative services should be considered to be directly connected with the subject matter of the advertisement. 

However, the Commissioner's view is that although the finished advertisement may not exist, it will nevertheless exist in a conceptual or embryonic form while the creative services are being performed.  Although the developing advertisement may be said to have an imaginary or intellectual existence, it would not be so elusive or insubstantial as to be said to have no existence at all for the purposes of the Act.  Accordingly, there will always be something intervening between the creative services and the subject matter of the advertisement.  On the basis of the "one step removed" test applied in Wilson & Horton, creative services and the advertisement's subject matter (i.e. the goods and/or services being advertised) may truly be said not to be directly connected with one another. 

In summary, creative services and placement services supplied to non-residents who are outside New Zealand at the time the services are performed will qualify for zero-rating, regardless of whether or not the goods to be advertised are situated inside New Zealand.