Globally, the rapid growth of e-commerce in recent years has left tax administrators worldwide scrambling to find and implement mechanisms to secure a piece of the (untouched) digital tax pie.
Consumers are spending an ever-increasing amount on “digital services” such as games, streaming services and online news subscriptions and this is largely driven by the ubiquity of the smartphone and the vast array of mobile applications, which have changed forever the way which businesses reach out to and deliver services to their customers. The Internet of Things has also resulted in businesses gravitating towards “Product-as-a-Service” business models where the outcome of using the product is sold rather than the product itself.
Currently, digital services procured from offshore vendors are not subject to goods and services tax (GST) in Singapore as these vendors would not typically be registered or be required to register for GST in Singapore. This is because the GST rules were designed more than two decades ago for a brick and mortar economy, where the supplier and the consumer of goods and services are located in the same country.
The current landscape and increased digital consumption have therefore created an uneven playing field (at least from an indirect tax perspective) between offshore and local suppliers of such digital services.
This is all set to change from January 1, 2020 as individual consumers of music and video streaming services, digital downloads, online subscriptions and the like from offshore vendors would have to pay GST on such imported digital services, as announced by the Minister for Finance during Budget 2018.
Overseas digital service providers and overseas electronic marketplace operators (such as app stores) will be liable for GST registration in Singapore if their global turnover and the value of digital services made to non-GST registered customers in Singapore exceeds S$1million ($738,000) and S$100,000, respectively, in a calendar year or are expected to exceed these thresholds in the next 12 months.
With this change, Singapore joins a growing list of countries, such as member states of the EU, South Korea, Japan, New Zealand and Australia, which have already imposed similar measures to tax business-to-consumer (B2C) imported digital services.
Services supplied by offshore vendors to Singapore GST-registered businesses (B2B) will be taxed by way of reverse charge (where the GST-registered customers in Singapore will self-account for the GST on imported services under certain circumstances). Reverse charge will also be implemented from January 1, 2020.
Definition of “Digital Services”
The Inland Revenue Authority of Singapore (IRAS) has issued a GST guide which includes a list of services that it would regard as “digital services” for GST purposes. A definition of the term is also provided, and businesses would need to rely on the definition to evaluate if their service offerings fall within the scope of digital services if the service is not part of the list set out by the IRAS. Specifically, the term “digital services” is defined as:
“any services supplied over the Internet or other electronic network and the nature of which renders its supply essentially automated with minimal or no human intervention, and impossible without the use of information technology.”
Interestingly, the human intervention factor in the definition may present some uncertainties in scenarios where the services are provided by real persons but supplied electronically via the internet. For example, it is unclear if the following scenarios would fall within the scope of digital services:
- provision of distance learning services where a portion of the lectures is conducted in real time by the trainers; and
- subscription fees from live video streaming involving performances by real persons where real-time interaction between the audience and the performer is possible in the form of “likes” and “comments” (in social media parlance).
As a first step, businesses should therefore assess if their service offerings fall within the scope of digital services and seek clarification from the IRAS ahead of time should there be any doubt.
What Should Affected Businesses Do?
Track and Monitor
After determining that their service offerings fall within the scope of digital services, overseas businesses (with global turnover of over S$1 million) would need to monitor the value of their digital services supplied to non-GST registered customers in Singapore to assess if the GST registration threshold of S$100,000 in a calendar year is exceeded.
To determine if a customer belongs in Singapore, information such as credit card information, billing/home addresses and IP addresses would be required. Businesses would need to ensure that they capture such information as part of its processes.
If the Singapore customer base is mainly made up of business customers, it is also necessary to determine if these customers are registered for GST in Singapore. If so, the value of digital services provided to such customers should be excluded from the GST registration threshold of S$100,000.
On the other hand, if the Singapore customer base is made up of individuals, it would be prudent to count all receipts from such customers towards the GST registration threshold, as it is unlikely for them to be GST-registered in Singapore.
Preparation for GST Registration
For businesses which have determined that a liability for GST registration exists or is likely to be triggered, there would be a need to review and make changes to its systems and processes to ensure the following:
- GST is included in its pricing after GST registration;
- proper identification of customers belonging in Singapore based on the guidelines prescribed by the IRAS;
- an avenue for Singapore customers to provide their GST-registration number and for this information to be captured in the system;
- GST is only charged on supplies of digital services to non-GST registered customers in Singapore;
- the system is able to generate GST listings to facilitate preparation and filing of GST returns; and
- adequate resources are allocated for GST compliance (e.g. filing GST returns on a timely basis, dealing with audit queries, etc.).
Application for GST Registration
Generally, affected businesses would need to apply for GST registration online via the IRAS website if the value of digital services to be supplied is expected to exceed the registration threshold in the next 12 months or has exceeded the registration threshold in the preceding calendar year. Under certain circumstances, the due date for applying for GST registration can be as early as November 1, 2019.
More details on the application procedures will be released by the IRAS in due course.
Impact on Electronic Marketplaces
In most cases, the operators of electronic marketplaces will be required to step into the shoes of the offshore digital service providers (e.g. the app developers) and be deemed to be the supplier of such digital services. Hence, both local and offshore electronic marketplaces will need to consider the system and process changes as mentioned earlier.
The impact of the new rules on offshore electronic marketplaces is largely the same as that of offshore suppliers of digital services as discussed above. However, the offshore electronic marketplace would also have to take note of the following:
- for determining its GST registration liability, it will need to aggregate both the value of its own supply of digital services (e.g. listing and support services provided via electronic means) to non-GST registered customers in Singapore and the “deemed” supply of digital services that it is accounting on behalf of the underlying offshore service providers;
- inform the underlying offshore service providers that it will be accounting for GST on their supplies; and
- explore if it is feasible or practical to charge and account for GST on all B2C digital services made through the marketplace by both local and offshore suppliers. If this is the case, it needs to seek the approval of the IRAS to do so. If this is not the case, the marketplace should only charge GST on supplies made by offshore suppliers. This requires the marketplace to have information on the belonging status of all the underlying suppliers of digital services (e.g. app developers).
Next on the Horizon?
The GST leakage created by the digital economy is not restricted to the supply of digital services by offshore vendors.
Currently, the online sale of low-value goods shipped from overseas directly to the consumers in Singapore is also not subject to GST. Under the current GST regime, there is a GST import relief for importation of goods by air or by post if the value does not exceed S$400.
Countries such as Australia and Switzerland have already implemented an offshore vendor registration model to tax low value imports and New Zealand will do so from October 1, 2019.
With the government publicly indicating that it is looking at the best way to tax such transactions, one does not need a crystal ball to predict that a GST on low-value imported goods is just a matter of time and may not be too far away.