Introducing Overseas Vendor Registration and the Reverse Charge Mechanism.
In October 2018, the Goods and Services Tax Act was amended so that Goods and Services Tax (“GST”) in Singapore will extend to imported services from 1 January 2020 onwards.
Starting from 1 January 2020,[1] GST will be introduced on imported services via:
- an Overseas Vendor Registration (“OVR”) Regime for business-to-consumer imported digital services; and
- a reverse charge mechanism will be imposed on business-to-business imported services.
Overseas Vendor Registration
Where a supply of digital services is made from an overseas supplier to a local customer (who is not GST-registered), the OVR regime will impose GST on the overseas supplier. This will only apply to digital services; these include (but are not limited to) the supply of software, databases, music, films, games, mediums for e-learning, search engines, automated help-desk services, listing services for the right to put goods or services for sale on any online market and online streaming services.
An overseas supplier must register for GST only if it supplies digital services to customers in Singapore exceeding S$100,000 or if it has a global turnover exceeding S$1 million. [2] Therefore, overseas suppliers such as Netflix and Spotify are required to register for GST.
Under some circumstances, operators of electronic marketplaces may also be considered as supplying digital services to local customers and will fall under the OVR Regime.[3] They will thus be liable to charge GST on behalf of their overseas suppliers. [4]
Overseas suppliers under the OVR Regime are subject to the same penalties for non-compliance as domestic GST-registered persons.
Reverse Charge Mechanism
Where an overseas supplier supplies services to local GST-registered suppliers, GST is chargeable via the reverse charge mechanism. Unlike the OVR Regime, these taxable services are not restricted to digital services. They include management services, accounting services and IT services.
The recipient of the supplies who:
- is GST-registered, or is not GST-registered but imports taxable services that have a total value of more than S$1 million in 12 months;
- imports taxable services;
- for the purpose of carrying on his business; and
- who is not entitled to claim the full amount of input tax credit,[5]
will be subject to a reverse charge.[6] This means that the recipient must pay GST directly to the Inland Revenue Authority of Singapore (“IRAS”) for the imported services as if he himself supplied the service in Singapore.[7] The recipient will still be able to claim the GST as his input tax, subject to the usual input tax recovery rules.[8] The reverse charge will not apply if the supply is not a taxable supply (i.e. land and financial services).[9]
For example, where foreign supplier A supplies a software application that is fully managed and operated by him to local supplier B, and foreign supplier A onward supplies this service to local customer C, local supplier B will be liable to pay GST on the supply from foreign supplier A to local customer C. Local supplier B can later claim back this GST paid as his input tax according to the usual input tax rules.
Reverse charge will also not apply if the supply has been taxed previously.
Customer Accounting for Transactions with the Government
Previously, the GST Amendment Act 2017[10] introduced customer accounting for the sale of mobile phones without mobile subscription plans, memory cards and off-the-shelf software to non-government customers. This means that customers will pay the GST directly to IRAS to prevent the supplier from absconding with the collected GST.
The changes introduced in 2018 extends this customer accounting to transactions with the government as well, in an effort to ease business compliance.[11] Companies selling the above prescribed goods will no longer need to differentiate between their transactions between the government and other non-government customers when paying GST to IRAS.
Conclusion
As it is becoming increasingly common for services consumed in Singapore to be obtained from overseas suppliers, the Bill serves as a tool to level the playing ground between local suppliers and overseas suppliers.
Overseas suppliers under the Overseas Vendor Registration scheme and local suppliers who are required to pay GST under the reverse charge mechanism should ensure that their legal documents address the imposition of GST under the new rules. With the new changes there is a need to reevaluate your legal documents to ensure that they are up to date and compliant.
[1] Clause 37 of the Bill amending Section 92 and 93 of the GST Act.
[2] Clause 38 of the Bill amending the First Schedule of the Act.
[3] Clause 40 of the Bill inserting the Seventh Schedule, section 4 of the Act.
[4] Clause 40 of the Bill inserting the Seventh Schedule, section 3(1)(b)(ii)(B) of the Act.
[5] Input tax is the GST paid on business purchases and expenses. Input tax may be claimed back from IRAS if certain conditions are fulfilled. This mechanism ensures that tax is only levied if value has been added at that stage of the supply chain.
[6] Clause 6 of the Bill amending section 14 of the Act.
[7] Clause 6 of the Bill amending section 14(2) of the Act.
[8] Clause 16 of the Bill amending section 19 of the Act.
[9] Clause 40 of the Bill inserting the Eight Schedule into the Act.
[10] https://sso.agc.gov.sg/Acts-Supp/37-2017/Published/20171027?DocDate=20171027
[11] Clause 21 of the Bill amending section 28 of the Act.
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