04 Mar The Proposed GST Rule Changes and What They Mean For Foreign Enterprises
Among all the announcements made in the 2021 Singapore Budget, the proposals related to GST were among those that captured the most attention, namely:
1. GST rate increase: Reiterating his announcement in the 2018 Budget, DPM Heng Swee Keat indicated that the rate change, from 7% to 9%, would take effect sometime between 2022 to 2025 (“sooner rather than later”).
2. Scope: The scope of GST will be expanded with effect from 1 January 2023, as follows:
• Low-value goods imported via air and post that are valued up to and include the current GST import relief threshold of SG$400; and
• Business to Consumer (“B2C”) Imported services
DPM Heng made these proposals with the intention of helping finance Singapore’s spending needs ahead, as well as to ensure a level playing field for local businesses versus their competition overseas. Yet despite all the attention the GST announcements have received, two observations can be made. Firstly, further clarity is required as to exactly what will change and how these changes will impact businesses and Singaporean consumers. Secondly, few Foreign Enterprises are scrutinising the potential impact of these proposals will have on their GST compliance obligations.
First, let’s remind ourselves of what the existing GST rules are. Since 1 January 2020, the scope of Singapore’s GST rules has been gradually expanding, as reflected in the table below:
As of 1 January 2020, the scope of GST applied to business-to-business (B2B) imported services and business-to-consumers (B2C) imported digital services in Singapore. Look carefully at the table again: it may be that many of the GST “changes” you are anxious about may actually already apply!
Currently, where B2B transactions take place with a Singapore GST registered customer, the reverse charge mechanism applies. Under the reverse charge mechanism, a GST-registered person who belongs in Singapore and receives services from outside Singapore must account for GST on the value of its imported services as if it were the supplier of those services. (Note, there is an exception: when the recipient is fully taxable for GST services, such services are excluded from the scope of reverse charge.)
Conversely, where B2C transactions are subject to GST, collection is achieved through the Overseas Vendor Registration (OVR) regime. In this case, overseas vendors providing digital services to non-GST registered customers in Singapore will charge and account for GST on such services.
Foreign enterprises that provide digital services must register under the OVR regime if their annual global turnover exceeds S$1 million and they make more than S$100,000 of B2C sales in Singapore per calendar year. Registration is also required if the foreign enterprises expect that the above thresholds will be exceeded in the next 12 months.
So, if you buy ebooks from Kindle or subscribe to Netflix, you have already been paying GST for those services since 2020.
Impact of Proposed GST Rule Changes on Singapore Consumers
The impact on Singapore Consumers is relatively simple. Consumers residing in Singapore can expect GST to be applied in future when purchasing non-digital services or low value goods from foreign suppliers. In addition, do note that there are no GST scope changes that affect Singapore GST Registered Customers.
Impact of Proposed GST Rule Changes on Foreign Enterprises
Under the proposed GST rules, foreign enterprises that have customers in Singapore will need to grapple with some added complexities. Under the GST regime that came into effect during 2020, much of the compliance burden would have been felt by either Singapore-registered businesses or foreign digital providers. Foreign digital service providers would generally have been exposed to similar digital taxes in other jurisdictions.
This time, the net will be cast wider to non-digital service providers and sellers of low-value goods. Here, I provide a short list of the key considerations that foreign enterprises will need to consider.
Does my Business need to Register in Singapore under the OVR Regime?
The OVR regime for non-digital imported services and low-value goods are still subject to public consultation discussions. However, it is likely that the OVR rules already applied for digital services will come to apply across the board, such that the SG$100,000 threshold will become a consolidated one applied to the cumulative digital, non-digital imported services and low-value goods to Singapore consumers.
In this case, foreign enterprises that have global revenues in excess of S$1 million will need to assess whether the following threshold is met. If the answer is “yes”, then your business will need to register under the OVR regime.
Digital services + Imported Non-digital Services + Low Value Goods > S$100,000
(where sales are made to non-GST registered consumers in Singapore)
Am I Providing a Service that Falls within the Scope of Non-Digital Imported Services?
As of now, the scope of the reverse charge mechanism applies to imported services which would be standard-rated if supplied by a local GST registered business.
In 2020 when the reverse charge mechanism was introduced in Singapore in respect to B2B imported services, the compliance burden of implementing the reverse charge rules fell on the shoulder of Singapore enterprises. The transition was relatively smooth as such enterprises would have been familiar with how to determine which services should be standard-rated vs zero rated under Singapore GST rules (as this was a parameter to determine if the service fell within the scope of Singapore GST).
As part of the draft tax guide, the IRAS has provided general guidance that the scope applies to “remote services” – services where there is no necessary connection between the physical location of the recipient and the place of physical performance at the time of the performance of services. For instance, this could apply to professional, educational, personal and support services. In addition, such services would be subject to GST only if GST would similarly apply if the service was supplied by a local GST registered business.
As a result, foreign enterprises, will need to ensure that there is a good understanding of Singapore zero-rating rules as they apply to international services (i.e. to ascertain whether GST should be applied to the specific imported service).
Where the service is determined to be within the scope of GST, GST will apply with GST charges made through the OVR regime.
Do my Customers Belong in Singapore?
Under the OVR regime, overseas vendors are required to determine whether the imported services are supplied to customers “belonging” in Singapore. In the case of consumers, the usual place of residence will be the determining factor. Acceptable proof of residence would include at least two pieces of non-conflicting evidence of customers’ belonging status, comprising one payment proxy and either a residence proxy or access proxy.
Interestingly, this proof of belonging requirement will not be limited to Singapore customers, as enterprises may need to defend the position where GST is not applied on the basis that the customer belongs overseas: for example, where an enterprise provides services to a customer residing in Singapore but who has an overseas billing address.
While digital service providers have had to address such requirements as part of global digital tax service developments, foreign enterprises that provide non-digital imported services will need to become familiar with rules that apply as well as implement systems that can capture such information.
Do my Customers Have a Singapore GST Registration Number?
Different rules apply to B2B vs B2C transactions whereby the foreign enterprises will not need to charge GST via the OVR to customers with a Singapore GST registration number.
Foreign enterprises that are required to register under the OVR regime will need to ensure that they are able to ensure no GST is charged on services provided to GST registered customers.
Foreign enterprises that may be subject to the new GST rules will need to monitor the rules as they are finalised, be aware of OVR registration requirements and the consequential systems changes that are required. An added complication arises from the potential increase in GST rate that has been proposed to take place during 2022 to 2023. If the rate change occurs after the GST proposals are implemented, foreign enterprises will need to be prepared to implement two sets of system changes.
Foreign enterprises who have a view of how the rules should be implemented may wish to provide feedback to the Inland Revenue Authority of Singapore on the rules to be proposed through the Public Consultation Process that ends on 19 March 2021.
Annalise Foong is the Director of Financial and Tax Advisory at the Future-Moves Group. She has extensive experience in this field, in particular with a focus on Compliance, Tax Policy and Transaction Advisory. If your organisation is grappling with a complex tax puzzle and looking for professional and practical consultancy support, do get in touch at email@example.com.