Finance Minister and Deputy Prime Minister Heng Swee Keat announced the GST plan in the 2021 budget on February 16. He acknowledged the importance of the OECD’s digital tax proposals and the adverse impact the plans could have on Singapore’s corporate tax system, but the budget was more focused on indirect tax policy.
Heng said that, with effect from January 1 2023, GST will apply to goods imported via air or post that are valued up to S$400 ($301), effectively removing the GST import relief threshold for businesses who meet the GST registration threshold. Business-to-consumer (B2C) imported non-digital services will also be subject to the GST.
These measures will be implemented by extending the overseas vendor registration (OVR) and reverse charge regimes. The Inland Revenue Authority of Singapore will soon begin consulting with businesses before it finalises the implementation details.
There is a growing trend of low-value imports being taxed in countries around the world as governments try to cash-in on the growth of e-commerce. Australia, New Zealand, Norway, Switzerland, and the UK have introduced similar measures on low-value goods, and other countries are considering the same change.
Allen Tan, principal and head of the tax, trade and wealth management at Baker McKenzie Wong & Leow, said the change “will be bemoaned by the legions of online shopping fans” who will likely pay more for the goods they purchase online.
However, Tan said the measure “will provide a much-needed boost to government revenues without detracting from Singapore’s attractiveness to inbound investment”.
“It is also a principled proposal consistent with the policy of tax neutrality, and ensures that local retailers are not unfairly penalised by the GST regime,” Tan added.
Yeo Kai Eng, EY ASEAN indirect tax leader, said foreign vendors supplying low-value goods to non-GST registered customers in Singapore “might have to register for GST in Singapore in 2023 if they meet the threshold for GST registration and impose GST on their supplies of low-value goods to non-GST registered customers in Singapore”.
GST registered customers in Singapore receiving low-value goods from foreign vendors would have to self-account for GST. Tan told ITR that he expects the required changes to be an expansion of their existing systems based on their prior experience from Australia and other jurisdictions that have implemented similar regimes.
“However, for smaller players that transact directly with customers in Singapore, this may impose additional compliance burdens that could raise the costs of transacting with Singapore customers,” added Tan.
Nevertheless, Richard Mackender, tax partner and indirect tax leader at Deloitte Singapore, Southeast Asia and Asia Pacific, said that as the measure will not apply until 2023, foreign vendors have enough time to get ready.
Mackender expects compliance for businesses to be straightforward, and similar to when the government introduced GST on foreign digital services providers under the OVR regime, which had a similar timeline.
“The experience with OVR is that the GST registration and compliance process is quite straight forward, but there are some changes required to the systems and platforms, e.g. around pricing, collection of the tax, etc. that would take some time to get right,” Mackender told ITR. “As the government has said it will use the OVR regime for low-value goods too, we would expect a similar, straightforward process of registering, charging and remitting the tax.”
GST rates to rise sooner rather than later
Although businesses were relieved to learn that the Singapore government will not increase the 7% GST rate this year because of the economic conditions, Heng stressed that the rate will rise by 2025.
“We will not be able to put off the increase for too long,” said Heng. “We will have to make the move sometime during 2022 to 2025, and sooner rather than later, subject to the economic outlook.”
Mackender said it is clear that Heng would prefer to introduce a rate rise closer to 2022. As such, the indirect tax leader suggested an increase could happen in 2023. “Of course, if the Singapore economy really bounces back over the rest of this year, we could see 2022 as the date,” he added.
Tan said the expected future GST rate rise is a “necessary evil” because of the increasing recurring healthcare costs. Like Mackender, Tan predicts a 2% rise in 2022 or 2023, depending on the economic recovery from the pandemic.
In the meantime, the zero-rating of supplies of media sales and online advertising will be amended as of January 1 2022. Online advertising intended for circulation outside of Singapore is zero-rated, but the government has decided to change this. So, the tax liability will depend on where the contractual customer and direct beneficiary of the service resides.
Online advertising has grown and is expected to account for an increasing share of advertising spending in future. From 2022, sales of online advertising will be zero-rated under two conditions: if the customer of the service resides outside of Singapore and the direct beneficiary is either abroad or GST-registered in Singapore. However, if the customer belongs in Singapore, the sales will be charged at the standard rate.
COVID support for businesses extended
In an effort to continue supporting businesses and managing the economy during COVID, the government has extended a number of tax incentives for another year, with the financial services sector benefiting the most.
For example, the withholding tax (WHT) exemptions on specific payments will be extended for another five years until December 31 2026. This covers payments for over-the-counter financial derivatives and payments made for structured products. In addition, a number of WHT exemptions under section 12(6) of the Income Tax Act will be enhanced, while several double deduction schemes will be boosted.
“The extensions to the withholding tax exemptions provide Singapore financial institutions with certainty on the tax treatment of payments to overseas counterparties, and demonstrates the government’s continued commitment to keep the Singapore financial services sector competitive on the international stage,” said Dawn Quek, principal at Baker McKenzie Wong & Leow.
Although, Quek said he is looking forward to further substantive enhancements to the withholding tax exemptions which will further strengthen the financial services sector. These are likely to occur after the government has reviewed exemptions that are coming to the end of their sunset clauses in the next few years.
Matthew Lovatt, Deloitte Singapore’s financial services tax director, said the measures do help “reinforce the existing framework rather than target incremental sector development”. However, more could still have been done.
“One measure hoped for had been the enhancement of the fund management tax exemptions (sections 13CA/13R/13X of the Income Tax Act) to income and gains derived from a greater range of digital assets,” said Lovatt.
“Investors’ interest in digital assets is materially increasing. It is currently very difficult to establish digital asset funds in a cost-effective manner and enhancing the fund tax exemptions could enable Singapore to realise a first-mover advantage in the digital asset management sector,” Lovatt said.
The government has also extended the carry-back relief scheme for all businesses. This will allow companies to continue to use the incentives for qualifying deductions for year of assessment (YA) 2021. In addition, the option to accelerate the write-off of the cost of acquiring plant and machinery has been extended up until YA 2022.
Environmental tax is still crucial
Singapore’s Parliament has called on the government to take stronger actions to tackle climate change. As such, the finance minister said the government would “review the trajectory and level of the carbon tax, post-2023, in consultation with industry and expert groups”.
In next year’s budget statement, Heng will announce the outcome of the review so businesses can prepare for any changes.
“Given the global consensus that the climate change must be dealt with urgently and decisively, an increase in the carbon tax up to S$15 per tonne by 2025 to 2026 will not be surprising,” according to Jaclyn Ho, local principal at Baker McKenzie Wong & Leow.
“The government’s commendable carrot and stick approach will therefore balance the increase in carbon tax with incentives for industries to adopt greener technologies such as the launch of the enterprise sustainability programme,” added Ho.
Until 2023, “the carbon tax level will be maintained at S$5 per tonne of greenhouse gas emissions as previously announced. This will provide businesses with certainty in the current challenging economic climate,” Heng confirmed.
At the same time, the finance minister announced extra measures to boost the use of electric cars. This included:
Narrowing the cost differential between electric cars and internal combustion engine (ICE) cars;
Zero-rating the additional registration fee for electric cars, from January 2022 to December 2023;
Revising the road tax treatment for electric cars by adjusting the road tax bands so that a mass-market electric car will have road tax comparable to an ICE equivalent; and
Raising petrol duty rates by S$0.15 per litre for premium petrol and S$0.10 per litre for intermediate petrol.
Certain rebates will, however, be available for taxi and private hire car drivers using petrol and petrol-hybrid vehicles, as well as for goods vehicles and buses using petrol.
Overall, the budget did well to avoid measures that would harm businesses and the economy. It was focused on a road to recovery, aiming to deal with the hurdles some companies may face along the way. However, the budget did not avoid the need to raise revenues and deal with climate change, keeping it aligned with the trends seen in the budget announcements of other countries.
