Recent case law developments on indirect tax

Background facts

The recent decision of Herbalife International Singapore Pte Ltd v CGST [2023] SGHC 54 involved Herbalife, a Singapore incorporated company, engaging in the “direct selling” of health products. In other words, Herbalife did not sell its products directly to consumers, but instead sold its products to members at a discount. The members would in turn sell the products to the end consumers at the undiscounted rate.

Issues

The Inland Revenue Authority of Singapore (IRAS) argued that Herbalife’s business model sought to interpose a non-taxable intermediary (i.e., the members) between Herbalife and the final consumers. By doing so, Goods and Services Tax (GST) is only accounted for on the sale of products by Herbalife to the members based on their discounted rate, and not the final retail price paid by the end consumer.

The difference between the price at which products are sold to the members and the final retail price consumers pay is not subject to GST, hence leading to revenue leakage. Such revenue leakage should be addressed by recognising the consideration provided by the members to Herbalife did not consist wholly of money, but also other forms of non-monetary consideration. As such, the value of the supply is equivalent to the retail price of the products when sold to the consumer.

Decision

The case centers on the interpretation of Section 17 of the GST Act, and in particular whether the supply of products to members is for a consideration in money or for a consideration not wholly consisting of money. IRAS sought to argue the latter, so that it can impose GST on the retail price of the products, as opposed to the discounted price.

In reaching his decision, the judge, Justice Choo (Choo J) was persuaded that Section 17(3) of the GST Act was based on the United Kingdom Value-Added Tax (VAT) Act, and the United Kingdom VAT Act had to enact special legislation to deal with businesses that operated a direct selling model. In the absence of similar special legislation in the GST Act, this supports the reading that direct selling cases ordinarily do not involve supplies made for non-monetary consideration and should fall under the usual rules. If so, the value of the supply from Herbalife to its members would be equal to its discounted price.

More importantly, Choo J also held that the word “consideration” in the GST Act has a different meaning from how consideration is ordinarily understood for the purposes of contract law, which tends to be very broad and can encompass any “right, interest, profit, or benefit accruing to one party or some forbearance, detriment, loss or responsibility” (Gay Choon Ing v Loh Tze Ti Terence Peter [2009] 2 SLR(R) 332).

Such a definition would be too broad for Singapore GST purposes because it could result in a large swathe of non-monetary promises (usually of de minimis value) being captured and subject to tax based on their open market value, leading to draconian taxing outcomes. Choo J also refined the test by the Board of Review and set out two requirements which would indicate when the undertaking of obligations would constitute non-monetary consideration.

• Requirement 1: Whether the undertakings required the provision of something in exchange for the supply (as opposed to merely regulating what the recipient can or cannot do with the supply).
• Requirement 2: Whether the undertakings provided a benefit which goes beyond the monetary transaction in question.

A comparative view

From an Australian perspective, consideration is specifically defined by the relevant legislation to include any payment, or any act or forbearance. A “payment” is similarly defined broadly to include a payment in a non-monetary or in an 'in kind' form, such as: the provision of goods, the grant of a right or performance of a service, and entering into an obligation (see also, the decision in White v. Elmdene Estates [1959] 2 All ER 605). It can also include payments made by other persons other than the recipient of the supply.

The only limiting factor is that a payment must have economic value, that is, it must be capable of being valued and be a thing that an acquirer would usually or commercially pay money to acquire.

Because the definition of “consideration” in Australia is similar to contract law, it has to be limited by another concept, which is that of “nexus”. Put simply, consideration will have sufficient nexus to the supply if it is made in connection with, in response to or for the inducement of a supply.

Where a transaction involves the exchange of various rights and obligations between the parties, it is important to differentiate between conditions that regulate the supply (e.g., conditions that seek to define or describe the supply, specify rights that are to be retained by the entity making the supply, etc.) and those are made in connection with, in response to or for the inducement of the supply.

For completeness, we observe that this is the same approach taken in many other jurisdictions, such as New Zealand, Canada, the United Kingdom, and the broader European Community as well.

Seen in this light, the comments made by Choo J could be seen as a step towards incorporating the concepts which have been explored by the courts in other various jurisdictions. For example, Requirement 1 harkens to the “nexus” requirement, and Requirement 2 is similar to the requirement that a payment must have economic value.

Key takeaways

At first blush, it may appear that the decision is only restricted to businesses which operate a direct selling model. However, there are far-reaching implications that extend to all.

From a technical perspective, it provides judicial endorsement of a long-held view that the definition of “consideration” in the GST Act has to be differentiated, and more limited, than how it is commonly understood under contract law. It also provides guidance on what might constitute non-monetary consideration for the purposes of the GST Act. It would be interesting to monitor the developments in this area, and whether there would be convergence of principles in indirect tax (i.e., GST/VAT).

From a business perspective, this case highlights the need for a robust and technical approach to the drafting and reviewing of contracts, especially where the contract in question contemplates the inclusion of additional undertakings that may cross the line and be regarded as non-monetary consideration. As there is no bright line test provided by Choo J, this can unfortunately be a technically complex exercise which requires a practitioner to make a judgement call based on their interpretation of the terms and conditions of the contract.

Businesses should also seek to ensure that appropriate and robust tax clauses are inserted into the contracts to ensure that the risks of unintended GST consequences are appropriately allocated between the parties.

For further information, please contact Michael Velten, Senthuran Elalingam and Kevin Ng.