SINGAPORE (Feb 22): While the Goods and Services Tax took a back seat in this year’s Budget, apart from adjustments to the GST import reliefs for travellers, businesses were looking forward to a Budget boost that would make it easier for them to navigate global uncertainty.
Regardless, businesses should continue to manage their GST position to protect cash and cut costs to survive the gloom. The following are some areas for businesses to consider to ensure that the GST does not add to business costs.
Managing cash flow costs
The GST system is based on a system that allows registered businesses to recover the GST on its business purchases, which makes the tax cost-neutral unless you get the GST reporting wrong.
However, there is a cash flow cost from having to pay GST upfront on business inputs, especially on imports of goods before the business can recover the input tax credits when it files the GST return, which is not due until after the quarter end.
To overcome the cash flow costs for importers, there are import relief schemes such as the major exporter scheme (MES) and zero-GST warehouse scheme that allow non-dutiable goods to be imported into Singapore without the need to pay import GST, which would otherwise be payable to Singapore Customs.
Similar relief schemes have also been introduced to address the same cash-flow concerns of certain industries such as aerospace (approved import GST suspension scheme), and the semiconductor, printing and biomedical industries (approved contract manufacturer and trader scheme). It is therefore important for businesses with imports to review their business circumstances and see whether they qualify for the various relief schemes to mitigate cash-flow costs.
While there is generally little cash-flow relief for local purchases with GST, businesses can manage cash-flow costs by considering to file returns on a monthly, instead of quarterly, basis; or making the input GST claims upon receipt of the tax invoice from the supplier, rather than when the invoices are batch-processed, which may not take place until the following month.
There is also GST group registration, which relieves the need to charge GST on intercompany billings. Bad debt relief is also available to enable the business to claim credit for GST that has been accounted for on a debt that has become entirely or partially bad.
In a climate in which cash is king and businesses look at cash preservation and growth, any business registered for GST should examine the GST rules to see whether there are ways to overcome negative cash flows and optimise the recovery of any input GST for the business.
Restructuring and reorganisation
As companies reassess their business models and avenues for growth, they should also be aware that any consolidation or reorganization of businesses can give rise to undesired GST costs that could dent potential savings from the proposed restructuring.
Specifically, the divestment or transfer of any business assets is liable to a 7% GST (which rises to 9% from 2021). However, if the transfer of the business meets the legislative conditions to qualify as a transfer of a business as a going concern, the transfer will not be subject to GST. And if GST is charged on a transfer that qualifies for the relief, it is unclear whether the purchaser is able to claim the GST that is normally claimable.
Essentially, the GST should be taken into account in the deals agreement. Any liability to account for the GST can be agreed upon and addressed in the contract to avoid any deal breakers if the tax is not properly covered in the due-diligence process.
Shared services
As a key regional and global hub, Singapore is a prime location for shared services centres. Despite its higher costs, the city state has a highly skilled workforce, political stability, business-friendly environment and strong infrastructure network.
Nevertheless, if businesses are looking to drive efficiencies and streamline business processes through the outsourcing of back-office activities to reduce costs or meet the lower dependency ratio ceiling announced in Budget 2019, it is important to keep GST in mind so that it does not erode the potential cost savings when using shared services centres.
For instance, the use of internal staff resources does not give rise to any GST costs. When the same work is carried out by a third-party service provider (or a related entity) that is registered for GST, however, the service provider would charge GST for their services.
This not only has a cash-flow impact but is also a cost to the financial services industry, which typically uses shared services, as the industry is unable to fully recover the GST, given the exempt nature of financial transactions.
Further, if the services are provided by an overseas service provider, the financial services business and similar exempt businesses in residential property development, investment holding companies and so on would need to be mindful that the imported services will be subject to GST under a “reverse charge” from Jan 1, 2020.
Registering for GST
For businesses currently not registered for GST to recover the GST on business inputs, there is the option of applying for GST on a voluntary basis if its annual turnover is less than $1 million.
Such a decision should not be taken lightly, however, as approval of the GST registration is subject to conditions imposed by the Inland Revenue Authority of Singapore (IRAS). A proper cost-benefit study should therefore be done to ensure that the business can cope with the minimum two-year registration period as well as the compliance requirements of being a GST-registered person.
Avoiding tax risks (and costs)
The GST system is based on self-assessment and relies on businesses to correctly charge and account for GST on sales or supplies that they make to their customers.
This effectively makes all 98,000-plus GST-registered businesses in Singapore tax collecting agents for the government. This makes it more important for IRAS to ensure that businesses are applying the tax laws correctly.
Unfortunately, a widespread failure to recognise the risks has resulted in IRAS’s collecting close to $200 million in additional tax and penalties from its audit activities in the last financial year. So, regardless of the economic climate, businesses must not expect any slowdown in the IRAS’s audit activities.
To ensure that the business is exposed to no penalty costs that may arise from incorrect GST (or any other tax) reporting, it should look at reviewing its business processes to identify the risks and controls for correct tax reporting for proper tax oversight and governance. Businesses should take advantage of the IRAS Voluntary Disclosure Programme to make timely disclosure of tax errors to enjoy relief of mitigate penalties for past errors.
With a greater emphasis on corporate governance in Singapore and global developments in the area of tax governance and oversight, it will not be long before tax risk management is embedded in the overall corporate governance framework and be an item on the boardroom agenda.
A timely step in the direction of tax process improvements should be part of the company’s overall approach to tax risk management and planning.
Conclusion
With Budget 2019 aimed at economic transformation to help businesses build capabilities as a long-term strategy, immediate steps can be taken to address current business costs. The importance of keeping an eye on the GST cannot be overemphasized to ensure that businesses can enjoy existing reliefs under the law and avoid unexpected costs from not understanding or applying the rules incorrectly. E
Koh Soo How is Asia-Pacific indirect taxes leader at PwC Singapore
