The Minister for Finance announced that Singapore will implement reverse charge from January 1, 2020.
Currently, a Singapore company will usually pay 7 percent goods and services tax (“GST”) when it buys services from a Singapore GST-registered service provider. If the Singapore company is unable to recover the full amount of GST charged by the Singapore service provider, the GST paid will become an additional cost to the Singapore company.
On the other hand, if the Singapore company buys the same services from an overseas service provider (“imported services”), it will not be incurring any Singapore GST as the overseas service provider is unlikely to be registered for GST in Singapore. All things being equal, the current GST treatment creates an unequal level playing field between Singapore and overseas service providers as it will be more attractive to buy the services from overseas.
Many countries have adopted a GST/value-added tax ("VAT") “reverse charge” mechanism to address the uneven level playing field created by GST/VAT on the pricing of domestic and overseas service providers. These countries include Australia, Austria, Belgium, Canada, Denmark, France, Germany, New Zealand, Switzerland and the U.K.
Reverse Charge in Singapore
With the implementation of reverse charge, announced in Budget 2018, affected companies in Singapore will need to self-account GST to the Inland Revenue Authority of Singapore (“IRAS”) on imported services as if they were the service providers providing services to themselves.
For instance, if a GST-registered bank in Singapore engages an IT consultant in India in year 2020 and the IT consulting fee is S$1million ($738,000), the bank will need to assume the “reverse” role as the service provider and self-account a 7 percent GST (S$70,000) on the IT consulting fee to the IRAS.
At the same time, the bank (in its capacity as the customer) will be entitled to claim back a portion of the GST incurred on IT consulting. Assuming that the bank can recover 72 percent of the GST incurred, i.e. S$50,400, the costs of procuring the IT consulting services from an overseas service provider will increase by S$19,200 (i.e. 28 percent of the GST incurred on the IT consulting service fee which is not recoverable).
This “self-accounted” GST (which is the “reverse charge”) will translate into additional costs to the affected companies. In addition, the affected companies will need to make changes to their processes and systems to comply with the reverse charge rules. Companies that are currently not registered for GST may become liable for GST registration after the implementation of reverse charge as they step into the shoes of the overseas service providers.
Who will be Affected?
Companies in Singapore which are required to implement the reverse charge rules are:
(1) GST-registered persons who:
(a) buy services (which fall within the scope of reverse charge) from overseas persons; and
(b) are not entitled to full input tax credit on their business expenses.
Examples of such companies include mixed residential and non-residential developers, banks, insurance companies, finance companies, serviced apartment operators; and
(2) Non-GST registered persons who:
(a) buy services (which fall within the scope of reverse charge) from overseas persons in excess of S$1million in a 12-month period; and
(b) are not entitled to full input tax credit if they were registered for GST.
Examples of such businesses include residential property developers and voluntary welfare organizations. Investment holding companies which derive only dividend income are likely to be affected but this is subject to the confirmation by the IRAS.
What are the Challenges?
GST is a transactional-based tax which is embedded in different processes and systems within a company. It has never been easy to operationalize GST rules given the varying processes and systems involved. It can even be more challenging when it comes to the implementation of reverse charge. Below are some of the common challenges.
The Invisible Tax
Unlike GST charged by local service providers, the GST on imported services is invisible to the accounting staff who process the invoice. Invoices received from overseas service providers will look the same before and after January 1, 2020 as overseas service providers will not be charging Singapore GST. However, the accounting staff will need to self-account GST output tax on imported services after January 1, 2020.
The requirement to self-account GST on imported services could also go beyond the accounting department. For instance, payment of director fees to an overseas director is subject to reverse charge and the payment could be handled by the corporate secretariat or human resource department instead of the accounting department.
Therefore, changes must be made to the processes to identify all departments handling such overseas payments to trigger the action of self-accounting of GST on imported services.
To Charge or Not to Charge
Not all services provided by overseas service providers are subject to reverse charge. For instance, services which qualify for zero-rating or exemption will not be subject to reverse charge. See examples.
The GST rules applicable to a supply of service could vary depending on the nature of services and the industries.
As you will appreciate from the examples, it will not be an easy task for an accountant to know the GST treatment of all the services provided by the service providers, especially if the service relates to an industry that the accountant is not familiar with.
An “in-house GST expert” who knows the GST rules applicable to different types of imported services may now be needed. Otherwise, the company will have to refer to the relevant GST guides published by the IRAS for guidance or seek the assistance of its tax agent.
While the IRAS allows companies an option to self-account GST on all imported services, this approach may not be desirable for all. If the value of imported services is not significant, a company could opt to do so to simplify the GST compliance. If the value of imported services is significant and the input recovery rate of the company is low, this approach could be costly.
To Claim or Not to Claim
After determining that an imported service is subject to reverse charge, the company will need to assess if the GST that is self-accounted is claimable as an input tax (fully or partially). A process will need to be in place to classify the self-accounted GST into the various categories to determine the recoverability of the GST depending on the input tax recovery formula used or granted to the company or prescribed for certain industries.
Non-GST Registered Companies Liable for GST Registration
Affected companies will need to put in place a process to track the value of services procured from overseas service providers and apply for GST registration when the S$1million per annum threshold is breached or is expected to be breached.
Tracking of imported services will need to start in 2019 as a company will need to apply for GST registration by January 30, 2020 if the services procured from overseas service providers exceed S$1million for the year ending December 31, 2019.
Transitional Time Supply
Under the transitional rule, for transactions straddling January 1, 2020, reverse charge will not be applicable only if either of the following events take place before January 1, 2020:
- payment is made to the overseas service provider; or
- services are performed by the service provider.
If a company expects to receive advance billing in 2019 for services not yet performed by the overseas service providers, it would need to put in place a process to track such imported services and account for reverse charge unless it is prepared to process the payments for such invoices before January 1, 2020.
The above are merely some common challenges faced by companies in the implementation of reverse charge. They are not meant to be an exhaustive list. The challenges faced by each company could differ as the systems and processes of every company are not entirely the same.
The extent of work required by each company in preparing for the implementation of reverse charge depends on a number of factors such as the volume and types of imported service transactions, the number of processes and systems involved, the types of information currently captured in the system and the input tax apportionment formula adopted by the companies.
Below are some suggested steps a company could consider in its preparation for the implementation of reverse charge.
Determine Which Companies are Affected by Reverse Charge
Not all companies are required to implement reverse charge. It is important to review and determine which companies are affected by reverse charge and kick start the preparation process for the affected companies as soon as possible.
Monitor and Apply for GST Registration
For companies that are potentially liable for GST registration arising from the implementation of reverse charge, a process should be put in place to monitor the value of imported services and apply for GST registration on a timely basis.
Map the Reverse Charge GST Treatment and Input Tax Classification for the Imported Services
Different imported services could be processed by different process owners and captured in different systems within a company.
Companies should first take stock of the types of imported services they procure and the processes/systems involved in processing the suppliers’ invoices or making payments to the suppliers. For each type of imported services, the company should:
- determine whether reverse charge is applicable;
- if so, determine the input tax classification; and
- review the changes to be made to the affected processes and systems to capture the information relevant to the accounting of reverse charge.
Review and Implement Changes to Processes and Systems
Preparation for implementation of reverse charge will involve different process owners and systems. Companies could consider setting up a working group to ensure that efforts in preparing for the implementation of reverse charge are coordinated across different functions. Reviews to be undertaken by the working group should include:
- new tax codes to be created for reverse charge;
- changes to be made to vendor master file; and
- changes to be made to the processes and systems to capture the information relevant for the accounting of reverse charge, the assignment of tax codes and the posting of accounting entries for reverse charge.
Conduct Awareness and Training for Internal Stakeholders
Any changes to current processes and systems will require the buy-in of the relevant stakeholders. The affected process owners should also be equipped with the knowledge of GST rules on reverse charge. Providing training to the relevant stakeholders is therefore a critical step in the preparation for the implementation of reverse charge.
Reverse charge will become a reality in our GST system in less than 12 months. GST legislation has already been amended and a draft GST guide on reverse charge has already been issued.
As companies embark on their journey to prepare for the implementation of reverse charge, they will soon realize that the steps to be taken to operationalize new tax rules are never as easy as they seem.
Companies may also need to seek clarification or concessionary treatments from the IRAS as they encounter practical constraints/issues in implementing the new reverse charge rules. Hence, the preparation work for the implementation of reverse charge should start now.
Kor Bing Keong is GST Leader and Seow Seok Hong is GST Director, PwC Singapore