Background and about the e-Tax guide
The development in technology over the last decade has fueled a boom in e-commerce that has drastically changed the way most consumers buy goods and services. Even before COVID-19, there has been an increasing number of online marketplaces, with little to no shop front or brick-and-mortar presence. The COVID-19 pandemic and the restrictions in countries across the globe has added more fuel to the e-commerce “fire”.
Arising from the changes and growth in e-commerce, then Finance Minister Heng Swee Keat announced in Budget 2021 that Singapore would expand the scope of its GST to plug two remaining gaps in the taxation of imported goods and services.
Firstly, the taxation of low value goods (LVGs) by way of the existing overseas vendor registration regime (OVR) or the reverse charge (RC) mechanism, depending on the GST status of the buyer.
Secondly, a wider expansion of the OVR which currently only taxes “digital services”, to also tax any supplies of “remote services”.
Extension of the GST regime - taxing remote services
This update focuses on the first change relating to LVGs and the resulting compliance obligations and GST treatment with effect from 1 January 2023. The ultimate driver of the changes is to achieve parity in GST treatment for all imported goods (and remote services) consumed in Singapore regardless of whether they are procured from an overseas supplier or locally.
To assist taxpayers with the changes, the Inland Revenue Authority of Singapore (IRAS) published an e-Tax guide “GST: Taxing imported low-value goods by way of the overseas vendor regime (First Edition)” on 30 July 2021 (e-tax guide).
Key highlights of the LVG changes from 1 January 2023
Impact for non-resident businesses
Under the OVR, any non-resident supplier that has a global turnover exceeding SGD 1 million and makes Business-to-Consumer (B2C) supplies of LVG (and remote services) to Singapore consumers exceeding SGD 100,000 is required to register, charge and account for GST. The registration threshold applies on a retrospective and prospective basis.
LVGs refers to goods which at the point of sale:
- are not subject to customs or excise duties (or are dutiable, but payment of the customs duty or excise duty chargeable is waived under section 11 of the Customs Act)
- are not exempt from GST
- are located outside Singapore and will be delivered to Singapore via air or post; and
- the value of which does not exceed S$400.
The SGD 400 “sales value” threshold for LVGs is determined by the amount of consideration (eg money) received for the goods but excludes any charges for:
- transportation and insurance costs
- any duties payable to Singapore Customs; and
- any GST chargeable.
It is important to highlight that this valuation method differs from the Cost, Insurance, and Freight (CIF) value that is normally used for customs purposes, which potentially leads to issues of double taxation.
For example, double taxation is when the OVR vendor charges GST on the sale of the goods to the customers and then the goods are also subjected to import GST by Singapore Customs.
Depending on the commercial incoterms, either the customer pays the import GST making the goods more expensive (viz unhappy customer), or the OVR vendor bears the import GST and suffers a lower profit margin.
OVR vendors whose systems and business processes enable them to determine the CIF value may elect to use this value for the purposes of the S$400 threshold, upon submission of a self-declaration form, thus mitigating the risk of double taxation.
Notwithstanding the two valuation methods, the supplier will be liable to charge and account for GST on the sales value plus any transportation and insurance costs paid by the customer (viz the total price paid by the customer).
The e-tax guide also provides other common scenarios where double taxation may arise, should they not use the mitigation techniques available, namely:
- multiple goods shipped as a single consignment (ie increasing the consignment value at importation); and
- differences in the exchange rate used by the businesses and Singapore Customs.
It is key to reiterate that the OVR regime only applies to B2C transactions. Therefore, even once registered under the OVR, if the customer provides a Singapore GST registration number, the supply is treated as out-of-scope and the OVR vendor must not charge GST on the imported LVGs.
Any GST onerously charged by the OVR vendor cannot be claimed as input tax by the GST-registered customer who is expected to seek a refund of the GST from the overseas vendor.
To ease the compliance burden for OVR vendors, they will be registered under the existing simplified pay-only regime. Under the simplified pay-only regime, OVR vendors will be exempt from the normal compliance requirements of local invoicing, price display and record keeping.
There are special provisions that treats the online marketplaces and/or redeliverers as the supplier and require them to register, charge and account for GST as if they were the supplier of the LVGs to the Singapore consumers.
Impact for Singapore businesses
Whilst a GST-registered business will not be charged GST on the purchase of LVGs from an OVR vendor, the scope of the RC has been extended to ensure that they are also subject to tax via the RC if the business is partially exempt.
Unless the LVGs are directly attributable to a taxable supply, a GST-registered business who is subject to the RC (ie makes exempt supplies or non-business receipts and is not entitled to fully input tax credit) is required to account for GST under the RC and declare the transactions in its GST returns.
Whilst the proposed rules are new to Singapore, they are neither groundbreaking nor a new phenomenon on the global stage.
The Organisation for Economic Co-operation and Development (OECD) has previously recommended that GST/VAT regimes be updated to cope with the ever-evolving digital economy to retain their purpose as a consumption tax. Countries such as Australia, New Zealand and the United Kingdom already have regimes that impose their respective VAT/GST on low-value goods and services.
It was just a matter of time before Singapore casts her net to ensure that its GST system remains broad-based and current with international developments.
In accordance with its typical business-friendly approach, non-resident suppliers will be pleased to learn that Singapore has retained its high registration thresholds (pari passu SGD 1 million local registration threshold) and removed much of the local invoicing, record keeping, and price display requirements for OVR Vendors.
One of the main areas of concern, is the complexity of the valuation rules to determine whether a supply is one of LVGs and subject to GST. Whilst the IRAS has tried to clarify the valuation mechanisms and implement solutions to reduce the risk of double taxation, there is perhaps room to further streamline the rules and reduce the risk of double taxation.
From a direct tax perspective, the IRAS has confirmed that having an OVR registration is not, on its own, a determining factor to conclude whether a non-resident company has a permanent establishment in Singapore for corporate income tax purposes.
Given that the new rules are likely to require businesses to implement new processes and system changes, non-resident vendors in the business of selling or redelivering LVGs should consider their compliance obligations now and pay special attention to the transitional provisions for supplies that stagger the 1 January 2023 implementation date.
OVR vendors will be subject to the same penalty regime and enforcement action as local businesses. One common area of skepticism is how the IRAS can enforce the rules and penalties on non-resident companies which do not have any physical presence in Singapore.
However, this is not a problem faced just by Singapore, but by any other regime that requires an overseas vendor to register to meet local GST or VAT requirements. Other jurisdictions have been known to use publicly available lists (list of registered suppliers from overseas tax authorities), technology to track online transactions, information gathered from internet service providers (ISPs), and information gathered from financing institutions and the payment channels processing the transactions.
At the end of the day, most businesses are expected to comply so as to avoid reputational risk.