The dawn of taxation in the digital economy
By Richard Mackender (Tax Partner and Indirect Tax Leader) and Danny Koh (Tax Partner), Deloitte Singapore
As published in The Business Times on 20 December 2016
The retail sector is a major contributor to the growth of Singapore’s economy but the rise of e-commerce, dominated mainly by overseas retailers, has resulted in more money flowing out of the country. As many of the largest online retailers are located outside of Singapore, the products and services escape Singapore domestic GST and often the goods they sell are brought into the country without any import GST being due.
Based on IRAS’s (Inland Revenue Authority of Singapore) financial reports for the financial year ended 31 March 2016, the collection of Goods and Services Tax (GST) in Singapore was S$10.3 billion. This represents a modest increase of S$0.1 billion from the financial year ended 31 March 2015. This could be explained in part by the weaker than hoped for domestic and tourist spending due to the anaemic economy, but it is also likely that the modest increase could also be down to the growth in cross-border online transactions.
Singapore has not increased the standard rate of GST since 2007 and given the many uncertainties and challenges facing our current economy, it is unlikely that the Government will increase our GST rate in the near term. Therefore, if the government needs to increase GST to increase revenues, the immediate solution more likely lies in expanding the scope of the tax.
One area to be considered is the taxation of digital services purchased from a provider located outside the country. GST under its current scope is only imposed on domestic taxable supplies of goods and services made by someone who is registered for the tax. If a local business or consumer purchases digital services (e.g. downloadable software) from a provider located overseas, unless that provider is registered for GST, no GST will be charged.
Singapore also offers import GST relief for the import of the vast majority of goods, subject to a cap on the value at importation of S$400. This means that if you purchase low-value goods (i.e. less than S$400) via the internet and arrange for the goods to be shipped to you via courier, no import GST will be payable. The above stands in contrast to a situation where you purchase digital services or low-value goods from a provider in Singapore, where GST would be charged if the provider was registered for the tax.
In recent years, the rapid development of the digital economy has resulted in the Organisation for Economic Co-operation and Development (OECD) calling upon countries to standardise how they tax cross-border supplies.
Indeed, this is a growing concern for Singapore as not only is there a leakage in GST revenue, it has also created an uneven level playing field between domestic GST-registered suppliers and overseas suppliers who are not registered for GST. At the same time, it has presented incentives to taxpayers to structure their business arrangements by shifting offshore to take advantage of this uneven level playing field. By doing so, it could also mean more job losses in the domestic retail industry.
Countries such as Japan, Korea and New Zealand have already implemented taxation for the digital economy and Australia, Taiwan and India (which is the latest country to announce) are likely to do so in 2017. In an advanced economy like Singapore, the amount of tax to be collected from the digital economy could be significant. Imagine if the entire 5.6 million Singapore population spent S$100 annually on imported digital services and low-value goods: this would result in an additional annual GST revenue of approximately S$39 million (i.e. 5.6 million X S$100 X 7%). This increase in tax revenue could also provide a potential boost for local retailers, as buyers move their spending back to the domestic economy because there is no longer as great a financial incentive to buy from overseas.
During the build-up to the 2016 annual budget, there was speculation that Singapore might announce the imposition of GST on cross-border digital transactions and low-value imports. However, it did not happen; the Government has so far adopted a “wait and see” approach as there are many factors to be considered, especially in these times of economic uncertainty.
Factors to be considered may include deciding on the most efficient tax collection method – for example, whether to subject only Business-to-Consumer (B2C) digital services to GST and exclude Business-to-Business (B2B) digital services, since businesses which are registered for GST should usually be able to recover the GST incurred as an input tax credit. In addition, the Government will need to consider whether to include all B2C digital services or only certain defined services and, if it is the latter, which services should be covered. Finally, we would expect IRAS will want to estimate the costs involved in the administration of the requirements vis-à-vis the tax revenue to be collected to determine whether the financial benefit outweighs the additional efforts it has to expend in administration.
If it is concluded that the most efficient collection method is to require the overseas suppliers to register for GST in Singapore and for them to charge, collect and account for the tax via the filing of a local GST return to IRAS, IRAS would also need to determine the GST registration threshold and registration process and more importantly how to effectively communicate the new requirements to the overseas suppliers and “encourage” the affected overseas suppliers to voluntarily comply with the new requirements.
It remains to be see whether the Government will expand the scope of GST during the announcement in the upcoming 2017 budget and introduce the taxation on the import of digital services and low-value goods. If this indeed happens, it would be the online shoppers in Singapore who ultimately will bear the cost as their favourite retail channels get a little bit more expensive.