Budget 2021 & Beyond

Combatting the downturn – Protection of, and diversification of GST revenues

Jeremy O’Neill Jeremy O’Neill

Where we currently sit

In the Fiscal Year (FY) 2019/20, GST revenue rose marginally by 0.8% to $11.2bn. This equates to 21% of total tax revenues and roughly 2.2% of GDP[1].

Previous estimates anticipated that GST revenues would slightly increase in FY2020/21[2]. However, considering recent events, estimates now predict a 14% decrease in FY2020/21 GST revenues. One of the concerns for the Ministry of Finance (MoF) is how they can help “plug” this reduction in tax revenues at a time when budgets are coming under pressure.

Given the global trends over the last few years, and to ensure Singapore can fund the necessary increase in social and welfare care spending, the MOF took decisive steps to protect and further diversify its tax revenues.

As most of you are aware, Singapore’s GST regime is designed with a very broad tax base with few exemptions and concessions. In the Budget 2018 statement, Deputy Prime Minister and Finance Minister Heng Swee Keat announced some changes to the GST system. Firstly, an increase of 2 percentage points in the rate of GST (to 9%). Secondly, that Singapore would widen its GST tax base by implementing the reverse-charge and the overseas vendor registration (OVR), both of which became effective 1 January 2020.

During the same statement, he also announced that Singapore was considering its position in relation to the taxation of low-value imports, but would not take any action at this juncture.

As we see it, there are still several “levers” the MoF could consider pulling to achieve their goal.

  • Increase GST revenues:
    • Increase the rate of GST. A 2% increase is already proposed and will take effect at some time between 2022 and 2025.
    • Expand the GST regime to include the taxation of low-value imports (i.e. B2C e-commerce sales)
  • Protection of GST revenues:
    • Widen the scope of the domestic reverse-charge
    • Implement e-invoicing requirements
    • Implement split-payment mechanisms

In this article, we will focus on how we foresee MoF might increase tax revenues – primarily through expanding the regime to include the taxation of low-value imports.

Taxation of low-value imported goods

Current position

Following the implementation of the reverse-charge and OVR regime, low-value imports are the only in-bound supplies not subject to Singapore GST. More specifically, any non-dutiable goods imported into Singapore with a Cost Insurance Freight (CIF) value not exceeding SGD400 are not subject to import GST and fall outside the GST net.

In line with policy objectives of having a broad-based, low-rate GST system, we expect the MoF to change its position on low-value imports and thus widen the tax base within the next couple of years.

Background

One of the key driving forces behind the MoF’s decision to implement the reverse-charge and the OVR regime was to level the playing field between domestic and international businesses.

The non-taxation of low-value imports places overseas businesses at a competitive advantage over domestic ones. This is because domestic businesses are liable to charge and account for GST on all local B2C sales of goods, whatever their value. The recent uptick in e-commerce buying trends, accelerated by the COVID19 pandemic, has only exacerbated and further highlighted this competitive disadvantage.

We understand the MoF has previously considered expanding the GST regime to cover low-value imports, but concluded that the cost of implementation, administration, and the additional complexity created outweighed the additional tax revenues.

With the rapid growth of online shopping and e-commerce over the past few years, there has been an increase in the volume (and thus value) of low-value imports entering Singapore and thus the potential GST at stake. Some conclude that this may even be enough to tilt the scales of the previous cost benefit analysis.

How does Singapore compare?

The taxation of low-value imports is a relatively recent phenomenon but has become popular amongst policy makers and tax authorities across the world. A large proportion of the world’s developed economies have expanded their tax net to include low-value imports, including but not limited to:

  • Australia
  • New Zealand
  • The 27 European Union Member States
  • The United Kingdom and
  • United States of America (Note: Moved towards a “close nexus” basis of State and Local Taxes since the infamous Wayfair case)

Considerations when implementing new tax legislation

When considering whether to implement new tax policies, the MoF looks at multiple factors, such as:

  • Coherence – the ease with which taxpayers can understand the policy.
  • Compliance and administration costs – what is the administration cost (for the IRAS) incurred per SDG1 of tax revenue collected?
  • Fairness and progressivity – will the policy result in a fair distribution of the tax burden across the population (i.e. low-income earners should experience a lower burden of tax)?
  • Revenue integrity – how robust is the policy against avoidance and evasion?
  • Revenue volatility – will the policy create a short spike in tax revenue (“peaks and troughs”) or generate long-lasting year-on-year increases in tax revenues?

We address each one of these in turn.

Coherence

From a design and implementation perspective, Singapore can take a cue from the tax authorities in Australia and New Zealand who recently implemented such rules (1 July 2018 and 1 October 2019, respectively.) It is also worth noting that the rules adopted by these two countries are akin to the rules Singapore used for the OVR regime.

Therefore, if the MoF were to use rules similar to those of other tax regimes, and Singapore’s own OVR regime, the rules should be relatively easy for non-resident businesses to understand and comply with.

Compliance and administration costs

Studies performed by tax authorities in Australia[3] and New Zealand[4] estimated that the value of tax forgone prior to implementing a low-value import regime was between 0.6%-0.8% of their annual GST revenues.

Singapore’s annual GST revenue for 2019/20 was $11.2bn[5] and therefore, using the estimates from Australia and New Zealand the estimate amount of tax forgone is around $78.4m.

For 2019/20 the IRAS’s administration and collection cost equated to $0.0078 per $1 of tax revenue collected[6]. On the basis the OVR regime is extended to include low-value imports (i.e. simplified registration and reporting requirements), the proportionate increase in administration and compliance costs is likely to be negligible.

There will, however, be material one-off costs relating to implementation and taxpayer engagement, which will impact the additional net tax revenues generated in the year of implementation.

Fairness and progressivity

Given that estimates put the additional GST revenues at a meagre 0.70% of the annual GST revenues, fairness and equality would be at the center of such policy change.

The move will address the current competitive distortion and thus create a fairer tax system. And, given that this was a key driver for the implementation of the reverse-charge and OVR regime, we feel this is likely to follow suit here.

To facilitate a level playing field, we would anticipate a similar two-tier threshold - as seen under the current OVR regime - for overseas business (global revenue over S$1 million and Singapore supplies over $100,000 per annum), which allows overseas businesses to equally benefit from a GST registration threshold.

On the matter of progressivity, Singapore’s e-commerce market value was estimated at around $4.9 billion in 2019[7], with the largest segments being: consumer electronics (17.9%); clothes and apparel (15.5%); and household goods (8%).

Whilst some of these segments include essential goods, required by all, most of them lean towards non-essential “luxury” goods. As such, low-income earners are likely to spend less on cross-border e-commerce purchases than higher-income earners.

The taxation of such cross-border transactions should, therefore, increase the proportional amount of GST being borne by high-income earners compared to low-income earners, thus increasing the overall progressivity of the tax.

Revenue integrity

Most jurisdictions that tax low-value imports have managed to do so in an efficient manner. In similar fashion to Singapore’s approach with the OVR regime, these jurisdictions often treat the Electronic Distribution Platforms (“EDPs”), through which most e-commerce goods are sold, as principal, and therefore as liable to account and pay for any GST due.

This approach has number of benefits:

  • it consolidates the number of non-resident businesses liable to register and pay GST, while ensuring such goods are still taxed (i.e. it eases tax compliance and costs of administration)
  • it consolidates risk of non-compliance to fewer and larger businesses within the sector.
  • It reduces the cost and administrative burden of implementing the rules for smaller non-resident businesses (i.e. most EDPs are already complying with similar rules in other tax jurisdictions)

Revenue volatility

The e-commerce sector is driven by consumer demand and generally not impacted by changes in tax legislation or policy. Therefore, the introduction of such legislation is unlikely to change consumer spending or, trigger a one-off spike/drop in tax revenues.

It is generally accepted that the recent shift towards e-commerce buying will not reverse but continue to grow over the years to come. A recent study predicts that New Zealand will experience a 14% year-on-year increase[8] in the number of consignments of low-value imports.

Similarly, the value of tax revenue forgone resulting from not expanding the scope of the tax base for low-value goods, will only continue to grow.

Route forward and practical challenges for Singapore

As previously stated, we expect MoF to take a cue from the tax authorities in Australia and New Zealand, who recently implemented such rules, and simply elect to expand the scope of the existing OVR regime to cover low-value imports. This approach would also enable the MoF to “piggy-back” off the time investment, systems infrastructure upgrade, and insights gained during the implementation of the OVR regime.

One specific challenge that the MoF would need to overcome is how the non-resident will clear goods through Singapore customs. Currently, non-resident suppliers cannot import goods in their own name because, they do not have a Unique Entity Number (“UEN”), which is a Singapore Customs requirement for any import declarations. Instead, they must appoint an agent.

Tax authorities in Australia and New Zealand, overcame this challenge by directing non-resident businesses to submit a specific (new) import declaration form to customs while importing the low-value goods. The MoF could collaborate with Singapore Customs to adopt a similar mechanism, although this is likely to require substantial system development, engagement and support.

Conclusion

Expanding the GST regime and implementing new legislation always has its challenges. In the case of low-value goods, we feel that the MoF and IRAS can leverage-off much of the time and infrastructure investment from the implementation of the current OVR regime. In that way, they can reduce the number of challenges to the legislative process, systems development or upgrades to the Singapore customs infrastructure, and taxpayer engagement and support.

In conclusion, given the ever-changing economic landscape and trends in consumer spending patterns, we foresee that it is only a matter of time before the MoF expands the tax base to include low-value imports. This will address one of the last areas of competitive distortion between domestic and overseas businesses within the GST system, whilst increasing tax revenues to support the Government’s future fiscal policies.

 

[1] IRAS Annual Report FY2019/20 (link here)

[2] Revenue and Expenditure Estimates for the Financial Year 2020/2021 (link here)

[3] Australian Government Productivity Commission, Collection Models for GST on Low-value Imported Goods (link here)

[4] Inland Revenue of New Zealand, GST on low-value imported goods: An offshore supplier registration system (link here)

[5] The Inland revenue Authority of Singapore, Annual Report 2019/20 (link here)

[6] The Inland revenue Authority of Singapore, Annual Report 2019/20 (link here)

[7] J.P. Morgan 2019 Payments Trends – Global Insights Report: Data provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via E-commerce in Singapore Statistics and Trends, 2017.

[8] Office of the Minister of Customs New Zealand, Low-Value Imported Goods: Update and Next Steps (link here)