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Singapore budget to focus on GST and digital sales

14 February 2018

Anjana Haines

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A new e-commerce tax, tax hikes, and changes to the goods and services tax (GST) regime that may affect MNEs are all highly likely in Singapore’s 2018 budget next week.

Tax professionals predict that Finance Minister Heng Swee Keat will announce a number of changes to the country’s tax system to strike a balance between the country’s growing spending needs and maintaining fiscal sustainability. 

Many tax experts and economists are expecting a new e-commerce tax to be unveiled by the finance minister when he makes his speech in Parliament on February 19.

E-commerce expectations

In recent months, Prime Minister Lee Hsien Loong has said that raising taxes will be inevitable to meet spending needs, while Indranee Rajah, senior minister of state for law and finance, has mentioned that the government is examining how to tax online shopping. A Bloomberg survey, in which eight of 12 economists said the budget will contain an e-commerce tax, has strengthened this expectation. Others have suggested that a cross-border digital transactions tax will be included in the GST regime.

"With the increasing prominence of indirect taxes like GST in the digital economy, some countries already have rules that take aim squarely at e-commerce transactions. Considering these trending developments, international consensus is likely to become a key driver that shapes future GST changes in Singapore," Eng Kiat Loh and Yoke Ping Boey, tax partners at Baker Tilly TFW Singapore, told International Tax Review.

"Singapore has generally adopted a pragmatic and pro-business approach in the design of its GST system. This approach helps to reduce the GST compliance costs of taxpayers and is welcomed by taxpayers. However, it has also resulted in tax leakages brought forth by the digital economy," said Yeo Kai Eng, partner and indirect tax services leader at Ernst & Young Solutions.

"[T]he introduction of a GST registration regime for overseas vendors supplying digital services, e.g. downloadable software, e-book, music, to consumers in Singapore that is being contemplated by the government can provide an additional source of revenue to support Singapore’s spending on the economy, infrastructure and social services. At the same time, it will also provide a level playing field for local and overseas businesses supplying digital services to consumers in Singapore."

In his personal opinion, Abhishek Shah, indirect tax head at Caterpillar in Singapore told ITR that he believes "changes on the GST front have been on the radar for quite some time, so it is likely that some action would happen". However, he noted that as there has been a debate around this already, and the government is clear that it needs to tread carefully, weighing risk/reward before introducing this mega change.

While many expect an e-commerce tax to be announced, there is some debate about when it will be implemented. Some say it could come as early as this year, but the majority believe 2019 is more likely.

For online retail giants, such as Amazon and Alibaba, a tax on e-commerce and foreign sellers of goods and services will mean more compliance. This burden won’t be restricted to Singapore, however. Several countries in the region, including Thailand, Indonesia and Malaysia are considering implementing similar tax rules.

Raising the GST rate

The GST changes won’t only focus on online transactions, with a change in the GST rate being another possible proposal.

Singapore’s GST rate has remained at 7% since 2007, and is one of the lowest among the Asia-Pacific countries, where most rates are at least 10%. Only Thailand, Malaysia and Taiwan have rates equal to or less than Singapore.

Shah said he would not rule out a possibility of an upward change in the GST rate being announced.

Tax analysts believe the rate could rise to 9% or 10%, but there is a question mark over whether this will be a staggered increase or an immediate change. Just a 2 percentage point rise could raise an additional S$3.2 billion ($2.4 billion) in revenues to help cover the current operating fiscal deficit gap, estimated at S$5.6 billion in FY2017, according to Maybank economist Chua Hak Bin.

"If there is going to be a GST rate hike, it could be an immediate step-up from the current 7% or it could be staggered in a multi-step approach, as seen in 2003 and 2004," said Chew Boon Choo, partner of GST services at Ernst & Young Solutions.

"We suggest a multi-step approach so as to lessen the immediate burden on individuals and impact on consumer spending, but businesses will need to manage the higher compliance costs incurred from updating and testing the accounting systems, managing transitional issues and determining the appropriate rate to apply for the supplies made."

Balaji Balasubramanian, senior tax manager (fixed income) at Standard Chartered Bank in Singapore told ITR that the key look-out for banks and other companies is to watch if the minister would introduce of GST reverse charge (GST-RC) for imported services. "There may be an 18 to 24-month lag in implementation," he said. "If the GST rate would increase to 9% or 10%, the new GST-RC and existing GST for local supplies would increase costs for Singapore operations," he added.

Reacting to US tax reform

Besides GST changes, the enactment of the US tax reform proposals pose their own challenges to Singapore’s economy. This has raised questions over whether corporate tax rates, or tax incentives could be changed.

"The reduction of the US federal income tax rate for companies from 35% to 21% is certainly a big motivation for US companies to relocate their operations home. However, this will have to be weighed against the need to be physically close to their markets in Asia, both suppliers and customers," said Loh and Boey of Baker Tilly. "Additionally, if these US companies are already enjoying tax incentives in Singapore (whether in the form of reduced income tax rates or a complete tax holiday), coupled with the potentially high cost of relocation, [it] may mean that the reaction (if any) will not be immediate."

Nevertheless, some predict an announcement on corporate tax rates is possible, although an immediate reduction in the 17% rate is unlikely.

"Countries globally are decreasing their headline tax rates for competitiveness. At the same time, many are focusing on measures to address base erosion and profit shifting to protect and consolidate their tax revenue base. In this regard, Singapore’s CIT rate in the mid to longer term should be reviewed, and this warrants further research and analysis," said Chester Wee, partner and international tax services leader at Ernst & Young Solutions.

On other taxes, announcements on future changes to personal tax, wealth tax and property tax measures could also be mentioned by the finance minister.

Regardless of the predictions, one thing that is a sure bet for Monday’s budget is that Heng will continue the trend of "little surprises" in relation to tax changes for many large corporates, according to Loh and Boey.






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