GST: Can Singapore and Malaysia learn from each other?
By Richard Mackender & Senthuran Elalingam
As published in the Business Times on 13 March 2015
TWENTY years after Singapore introduced a goods and services tax (GST), its neighbour is finally embarking on the same journey.
Malaysia's GST, which is due to take effect in a few days' time on April 1, will share many similarities with its Singapore counterpart but will also have some unique quirks of its own. After the Singapore government released its Budget in February, we focus on some of the key differences in the Malaysian GST vis-à-vis the Singapore GST and consider whether there is cause for either jurisdiction to learn from the other's GST model.
GST AUDIT FILE
In 1994, the Internet was still in its infancy and much of taxpayers' interaction with the tax authorities was in paper form. The growth of the Internet and the development of new technologies means that the world is considerably smaller now as vast amounts of information can be easily shared in real time.
Malaysian Customs, the government authority tasked with administering the GST, has recognised this and put in measures to standardise the way in which businesses present information during audits. While only recommended at this stage, the GST Audit File or GAF is an output that would be generated by a company's ERP (enterprise resource planning) system and contain information required by Customs, presented in a prescribed format. The information would, among other things, include detailed transaction data. This file could then be provided during an audit, which would enable easy verification through Customs' own data analysis tools.
This is very much representative of the 21st century method of auditing, with a shift from the labour-intensive, tried and tested methods to the use of technology. While this would represent a significant technology cost for most businesses to be able to produce a GAF, after this initial expense the cost of compliance is likely to be reduced over time, assuming it is properly implemented by businesses and the authorities.
Singapore's Inland Revenue Authority (IRAS) has not yet prescribed a GAF, but will no doubt be looking on with much interest to see if taxpayers in Malaysia are able to generate one with minimal configuration issues. If so, then they may well consider how they could request similarly formatted data in Singapore.
It is fairly common in countries that have a GST to tax services that are acquired by local businesses from service providers based outside the country. The GST on the imported service is accounted for by the local business under what is referred to as a "reverse charge".
This is to avoid a bias for local businesses to use an overseas provider on the basis that they would not charge GST, and follows the general principle that GST should be imposed in the country where consumption occurs.
Singapore's GST is one of the few exceptions to this; currently, IRAS does not tax imported services, though the mechanism exists to do so. Malaysia, on the other hand, will take a very broad approach to taxing imported services with all businesses operating in Malaysia brought into the net, including those that are not registered for GST.
Malaysia is not out of line in taking this approach, as guidelines issued by the OECD have recommended the inclusion of a reverse charge mechanism in a GST system. Japan, similarly, is looking at bringing in changes to tax imported services.
Singapore at this stage has not made any announcement to do so. But given global trends, it is not too difficult to see this measure being brought in at some point in the future.
EXPORTS, FINANCIAL SERVICES
One area that Singapore is unlikely to replicate from Malaysia are the smaller concessions given to exporters - in particular, those in the financial sector. Singapore has a very broad concession for exporters, with goods and services originating from Singapore but consumed outside the country not subjected to tax. Malaysia has taken a different approach, especially for the financial services sector. For example, foreign investors investing in capital market products in Malaysia will have to pay GST on commissions and brokerage. This will have the impact of increasing the cost for foreign investors or reducing the margin for brokers.
In considering Singapore's role as an export and financial services hub, it is unlikely that we would see similar measures here as that would pose a risk to our continued competitiveness with other regional financial services hubs like Hong Kong.
The global trend is for a shift to indirect taxes like GST, and Malaysia's move to introduce a GST system is evidence of that. Although Singapore has had a GST for two decades, there are still areas in which both countries can learn from each other.
* The writers are respectively a tax partner and director working in Deloitte Singapore and Deloitte Malaysia. The views expressed are their own.