GST on Imported Services
Starting 1st January 2020, consumers and businesses who buy imported services from overseas suppliers with no establishment in Singapore will have to pay goods and services tax (GST).
This change does not apply to goods purchased online from overseas suppliers. The current GST-free threshold of $400 and below will continue to apply to the goods imported into Singapore (excluding intoxicating liquors and tobacco) via air, post or online shopping. The Government will review overseas development and monitor the S$400 Low Value Consignment Relief.
As a GST at 7% is imposed on services (other than an exempt supply) procured from a taxable local vendor, an overseas supplier has an unfair 7%-point pricing advantage over the local supplier – all else being equal. Moreover, the GST rate is set to rise from 7% to 9% between 2021 to 2025.
To level the playing field for local suppliers, Budget 2018 announced that GST will be applied to imported services from suppliers based overseas with no business/fixed establishment here.
The GST will be introduced via:
- Reverse Charge (RC)mechanism to tax services imported by GST-registered persons.
- Overseas Vendor Registration (OVR) regime to tax digital services (e.g. apps downloading, video, music streaming) imported by non-GST registered persons (including private individuals).
Imported services include accounting, IT, marketing, management, HR, legal, and royalties/licenses. The above two mechanisms are adopted by Japan, South Korea, Australia, and New Zealand on imported services.
- Reverse Charge (RC)
Under the RC regime, the recipient of the services account for GST on the services he/she imports, as if he were the supplier. He/She, in turn, claims input tax, subject to normal input tax recovery rules. For example, a Singapore subsidiary (Singco) who pays a royalty of S$1.2m to its overseas head office is now required to collect GST of S$84k on behalf of its HO. Assuming Singco has an input tax recovery rate of 80%, it can in turn, claim input tax of S$67,200on the royalty, netting the Inland Revenue Authority of Singapore (IRAS) at S$16,800.
RC does not affect businesses which use imported services and make taxable supplies of goods and services only, i.e.those entitled to full GST input tax/refunds on those services, since the input tax refund will entirely erase the output GST collected on the imported service.
Who is subject to RC
RC is applicable to a GST registered business (i.e. Companies, Partnerships, Sole-Proprietors, Charities and Voluntary Welfare Organisations) or GST groups that uses imported services to make non-taxable supplies of goods and services, i.e. entitled to a partial credit of input tax claims only.
RC is also applicable to businesses not yet registered for GST but will import services exceeding S$1m in a 12-month period.
Businesses applicable to RC are those that:
- Make substantial exempt supplies
- For example, banks, insurance companies, developers of residential or mixed-use properties, and businesses that derive interest income from loans or
- Carry out non-business activities(such as charities, non-profit organisations, hospitals, educational institutions, and holding companies that derive dividend income).
Does RC apply to all imported services?
All imported services are subject to RC except: –
- Exempt services, for example, financial services.
- Services that qualify for zero-rating under S21(3), i.e. International services.
- Services provided by the government of a jurisdiction outside Singapore, if the services are of a nature that fall within the description of non-taxablegovernment supplies under the Schedule to the GST (Non-Taxable Government Supplies) Order.
- Services directly attributable to taxable supplies, excluding RC businesses that are prescribed a fixed or special input tax recovery formula unless otherwise allowed by IRAS (i.e. banks that elect for direct tracking).
Preparing for RC
Businesses must ascertain if they fall under RC business.
If not, RC does not apply;
- Identify and keep track of their imported service for the periods in question.
- Monitor the value to ascertain if they are liable to register for GST.
- Ensure that the GST registration is on time.
- Set up tax codes in the accounting system for imported services and output/input ta
- Overseas Vendor Registration (OVR)
From 1 January 2020, overseas vendors are required to register for and charge GST on supplies of digital services made to Singapore consumers if they:
- Have an annual global turnover exceeding $1 million (in the last calendar year or the next 12 months); and
- Make B2C supplies of digital services to customers in Singapore exceeding or expected to exceed $100,000.
Business-to-Consumer (B2C) supplies refer to supplies made to non-GST registered persons, which include individuals and businesses not registered for GST. This means a private consumer in Singapore must pay 7% GST from now on towardsonline music or Netflix subscriptions.
Global turnover refers to supplies that would have been taxable had they been made in Singapore.
The threshold levels are applied retrospectively or prospectively. Overseas Vendors liable for GST registration are to apply to IRAS within 30 days of
- End of the relevant calendar year. (retrospective basis)
- Of making the forecast. (prospective basis)
Scope of Digital Services under OVR
Digital services include those supplied over the Internet or an electronic network, which is essentially automated with minimal or no human intervention and is impossible without the use of information technology. Examples include:
- Downloading mobile applications, e-books and movies;
- Online subscription-based media such as news, magazines, TV shows, music and online gaming;
- Software programs (for example, downloading of software, drivers, website filters and firewalls);
- Website hosting, online data warehousing, file-sharing, and cloud storage services.
Legal services where human input/advice is required by a lawyer via emails and online notifications will not be considered as a digital service.
Digital Service excludes those that are currently zero-rated (via exclusion list) or exempt (via S8(2A)) to maintain parity with such services provided by local suppliers.
Who is subject to OVR?
B2C supplies of digital services made by:
- Overseas Suppliers
- Local or Overseas Electronic Marketplace Operators
An electronic marketplace operator (EMO) such as App Store, Google Play Store, and iTunes may be regarded as the supplier of digital services made by overseas suppliers through the marketplace whereby he/she authorises delivery, influences pricing, payment methods or sets the terms under which supply/delivery is made.
In such cases, the EMO is required to include the value of the digital services supplied by the overseas vendors to determine his GST registration liability. For example, if EMO A’s 2020 taxable turnover is S$900,000 and the sale of mobile applications via A’s marketplace is S$150,000, A is required to register for GST as his combined turnover of S$1,050,000 is more than the S$1m threshold. Therefore, A is required to register for GST by 31 Jan 2021.
Once A registers for GST, he/she must charge and account for GST on:
- B2C supplies of digital services made through his marketplace to customers in Singapore on behalf of the overseas suppliers (new).
- Digital services made by A directly to customers in Singapore (as before).
To ease extra-territorial compliance burden, an overseas operator will be registered for GST under a simplified regime, with reduced registration and reporting requirements.
What’s Next for OVR/EMO?
Overseas Suppliers and EMO need to check:
- If they are required to register for OVR (when supply of digital services to consumers in Singapore exceeds S$100k).
- If their digital service fall within the scope of OVR (for example, telecommunication service, VOIP, advertising service on an intangible media platform circulated wholly outside Singapore is excluded).
- How their accounting systems:
- Identify a customer belonging to Singapore.
- Allow GST-registered persons in Singapore to provide their GST registration numbers (So GST would not be applied here as it would be applicable only to non-GST registered persons).
We welcome the opportunity to discuss whether RC or OVR applies to your business and the steps needed for compliance.
All materials have been prepared for general information purposes only. The information presented in this document is not legal advice, is not to be acted on as such, may not be current and is subject to change without notice. Professional advisory should be sought before taking or refraining from any action as a result of the contents of this document.