Singapore—Deloitte’s views on revisions to fixed input tax recovery rate

There have been some recent developments for banks in Singapore regarding the fixed input tax recovery rate (FITR) regime. In this regard, it was understood that the Inland Revenue Authority of Singapore (IRAS) has circulated a survey to the members of The Association of Banks in Singapore outlining changes to the FITR regime. We would like to share some thoughts and observations:

Summary of proposals

• Whilst previously rumoured, the recent communication makes it clear that the FITR will cease from 1 January 2025, though a more limited version of it may exist as an interim solution or under the proposed Method 2.
• The two options presented are best described as a “sectorised method” (Method 1) and a “hybrid method” (Method 2):

— Method 1 would be similar to the various existing established Goods and Services Tax (GST)/Value-Added Tax (VAT) jurisdictions (e.g., Australia, New Zealand, the United Kingdom, and the European Union). It would require the bank to identify and segregate each of the business lines that are undertaking revenue generating activity based on its internal management reports. The bank would then allocate costs to each of these business lines, on a direct allocation basis first, and for any residual costs that cannot be directly allocated, to use an “indirect tax” method to allocate costs to business lines.

— Method 2 differs in that the identification of the business lines would be pre-determined according to the Monetary Authority of Singapore (MAS) classification. As with Method 1, the bank would then allocate costs on a direct and then indirect basis. However, there would be a fixed rate of recovery assigned by business line.

• Method 3 is an interim solution where a FITR would be offered but at a lower rate than the current rate—but ultimately would still lead to adoption of Method 1 and 2.

Areas needing clarification

• Method 1 and 2 will require any residual costs to be allocated using an appropriate cost driver. However, it is unclear whether the IRAS will pre-approve particular cost drivers for specific business lines or will approval be required for all cost drivers used. If approval is necessary, more information regarding the process for seeking and obtaining such approval would be required.
• It is also unclear whether the IRAS will enable the use of multiple cost drivers across and within sectors (e.g., will sectors be able to split into further sub-sectors thereby require multiple indirect tax methods?).

Potential areas for focus

• It may be useful to understand what processes are currently in place to allocate costs amongst the different revenue generating business units within your bank. Are there current methods for cost allocations that the management accountants use? If yes, what are the proxies that are used and how many levels?
• Are these cost allocations manually done or are they system generated? Is it based on historical or current data? In performing those calculations—where does the data/information sit (i.e., in which systems) and how easily is it obtained?
• As Method 2 relies on the MAS classification—it would be beneficial to understand how these figures are determined and reported from within the bank and where the information is sourced from.
• Sector methods have been in use for quite some time in other GST/VAT jurisdictions where methods have been discussed, agreed, and approved by tax authorities. Understanding and obtaining visibility over methods that your bank may have received approval from other jurisdictions may serve as a useful reference point for devising a method for Singapore.

Final thoughts

It is clear that the FITR as it is now, will cease from the end of next year, and as a consequence there will be a lot more complexity in the GST reporting process for banks. From a commercial standpoint, the options presented will result in superior recovery rates for some banks and inferior rates for others. The outcome would be dependent on the nature of the activities and the customer mix of each bank but it can also be influenced by the effectiveness of the method used to allocate costs.

For further information, please contact Senthuran Elalingam.