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Of GST hikes and the digital economy: what lies ahead for Singapore's GST regime?

Shih Hui Lee, Wu Wenyu and Douglas Leow
Shih Hui Lee, Wu Wenyu and Douglas Leow4/1/2021 07:00 AM GMT+08  • 6 min read
Of GST hikes and the digital economy: what lies ahead for Singapore's GST regime?
Singapore’s GST regime has been in the limelight in recent years
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Singapore’s GST regime has been in the limelight in recent years. In 2018, Finance Minister Heng Sweet Keat first announced plans to increase the country's GST rate from 7% to 9%, with the hike occurring between 2021 and 2025. In line with announcements during the Unity Budget last year, the Finance Minister confirmed in this year's Budget that the GST rate would remain unchanged in 2021 but cautioned that Singapore "will not be able to put off the increase for too long".

The announcement comes at a time when the country is still addressing the economic challenges brought about by the coronavirus pandemic. Despite the fact that the GST hike will not take place in 2021, the Finance Minister reiterated that GST is a responsible way to pay for Singapore's major societal needs such as recurring healthcare spending, and that the GST hike will still be implemented by 2025. To ensure that the overall tax system remains progressive, Singapore will introduce a $6 billion Assurance Package to alleviate the impact of the GST increase on low-income households.

The Finance Minister also announced measures to further widen the GST tax base from 2023, following the first round of widening measures in 2020. Given that GST is a key instrument in funding Singapore's spending needs, it is unavoidable that Singapore will go beyond simply increasing the rate of tax, but also implementing measures to widen the tax base.

This approach is consistent with the global trend of increasing tax revenues through the widening of the tax base. Many countries have focused their attention on levelling the playing field between services supplied digitally or electronically from overseas, and services from local suppliers. Regionally, countries such as Australia, Malaysia, Indonesia, and Taiwan have already implemented measures to expand the indirect tax base, with Thailand’s measures expected to come into force in July this year.

Australia led the charge by introducing GST on electronically supplied services as early as July 1, 2017, and Taiwan similarly implemented a special VAT regime for business-to-consumer (B2C) electronically supplied services in the same year. In 2020, Malaysia and Indonesia, our closest neighbours, also imposed indirect tax on foreign suppliers of digital services, with Vietnam following suit in 2021.

Further north, Thailand passed an e-business tax bill to levy VAT on electronic B2C services from overseas suppliers and overseas electronic platforms through which these services are made, with the changes coming into force in September this year. Philippines is also in the process of introducing similar measures.

Since last year, Singapore has joined the ranks of these countries and implemented the overseas vendor registration (OVR) regime for B2C supplies of digital services. Similarly, on the same day, a reverse charge mechanism on the import of business-to-business (B2B) services also came into effect.

As part of the same trend, the Finance Minister announced in this year's Budget that the GST relief on the import of low-value goods would be phased out from 2023, and B2C import of non-digital services would be subject to GST via the OVR regime (which is currently only for digital services) from Jan 1, 2023.

These changes are in response to the rise in e-commerce and cross-border transactions becoming a larger share of the economy. Without these changes, we may see a slow erosion of the GST tax base as more local consumers move away from purchasing from local suppliers (which attracts GST) to foreign suppliers.

Although these changes are bemoaned by some local consumers (especially online shopping fans), they are a principled proposal consistent with the policy of tax neutrality, and ensure that local retailers are not unfairly penalised by the GST regime.

These changes are consistent with similar developments internationally. Australia has applied GST on importation of low-value goods with effect from July 1, 2018. The EU has relooked at the VAT exemption for importation of low-value consignments, and formulated new revised rules to facilitate the charging of VAT for such transactions.

In particular, platforms that facilitate B2C imports of goods into the EU with a value below Euro 150 will be deemed to receive the supply from the initial seller and to sell the goods onward to the final consumer. The online platform will therefore have to collect and pay VAT on those sales.

With the implementation of these new GST regimes on overseas suppliers, the Singapore government will need to look at new ways of proactive enforcement to ensure compliance, especially given that a majority of the GST-registered or GST-registrable businesses under the OVR regime will comprise overseas suppliers with minimal presence in Singapore.

Inspiration may be taken from the European Union (EU), which has already adopted rules imposing reporting obligations on payment service providers starting from Jan 1, 2024. The measures will allow EU member states to obtain payment transaction data from payment service providers to verify whether VAT liabilities on cross-border B2C supplies have been accurately reported. The Singapore government may resort to similar means to determine if overseas suppliers and marketplaces have indeed complied with the OVR regime.

For suppliers of digital services globally, this trend therefore needs to be carefully monitored. Given the number of new VAT / GST regimes emerging worldwide, it is crucial for companies to introduce internal procedures and controls framework to ensure compliance and stay updated with the latest tax changes globally.

Efforts to tax the digital economy will not stop there. As businesses continue to develop innovative solutions to provide products and services to consumers over the internet, the Singapore government will have to continue to play "catch-up" with technological developments.

In addition to expanding the tax base, the Singapore government has stepped up its efforts to provide tax certainty and clarity in respect of the digital economy. These efforts include amendments to the law on digital payment tokens, the publishing of administrative guidance on the GST treatment of digital payment tokens and the income tax treatment of digital tokens.

With effect from Jan 1, 2020, the supply of digital payment tokens as payment for goods and services (other than for fiat currency or other digital payment tokens) is disregarded for GST purposes, and GST-registered suppliers are required to account for GST on transactions if they are receiving digital payment tokens as payment. Essentially, with these changes, payment using digital payment tokens will attract the same GST treatment as payment in fiat currency.

Faced with the increased need to fund social spending, the Singapore government will continue considering ways to widen its tax collection base. In line with international trends, we foresee that the government will continue to rely on changes to broad-based taxes such as the GST to improve government revenue, while still ensuring that Singapore remains competitive for inbound business investments. The Singapore government will continue to extend and evolve existing GST rules to new aspects of digital payments, products and services to expand the tax base for GST, in tandem with the growth and evolution of the digital economy.

Shih Hui Lee is a principal (tax advisor), and Wu Wenyu and Douglas Leow are associates with Baker McKenzie Wong & Leow Tax & Trade practice.

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