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Digital services to be taxed from 2020

SINGAPORE — Businesses providing digital services, such as the streaming of entertainment content, will have to pay the Goods and Services Tax (GST) from Jan 1, 2020.

A consumer making an e-commerce transaction using the NETS QR code. TODAY file photo

A consumer making an e-commerce transaction using the NETS QR code. TODAY file photo

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SINGAPORE — Businesses providing digital services, such as the streaming of entertainment content, will have to pay the Goods and Services Tax (GST) from Jan 1, 2020, Finance Minister Heng Swee Keat announced during the Budget statement on Monday (Feb 19).

Experts contacted by TODAY said that this move is one of the first steps that the Government is taking to look at ways for taxes to be implemented on the digital economy. They also said that firms that are affected would likely pass on the GST hikes to consumers.

With the new GST on imported services, businesses providing services to consumers, including overseas suppliers and electronic marketplace operations such as mobile application stores, will need to be registered with the Inland Revenue Authority of Singapore (Iras). This registration of overseas vendors will apply to those whose annual global turnover exceeds S$1 million and the sale of digital services to consumers in Singapore exceeds S$100,000.

The tax will apply to business-to-business imported services such as marketing, accounting, information technology, and management services.

For consumer-centric services, these will include video and music streaming, apps, listing fees on electronic marketplaces, software, and online subscription fees. Digital services from new technologies, including services derived from cryptocurrency businesses, may also fall under the scope.

GST, otherwise known in some countries as value-added tax (VAT), are indirect taxes. These are consumption taxes levied on any value that is added to a product. 

Commenting on the announcement, Mr Lam Kok Shang, head of indirect tax services at KPMG Singapore, said: “Entertainment on-demand global companies such as Netflix will definitely be caught in this. This ‘Netflix’ tax will apply mostly to digital entertainment firms. Other global firms like Uber may also potentially fall into the category as they are providing private-car ride hailing ‘services’ which are not (yet) susceptible to GST.” 

Mr Lam noted that bookings for taxi rides are susceptible to taxes, but because the guidelines and rules are not yet deterrmined, it is too early to say how things would pan out.

Mr Koh Soo How, the Asia-Pacific indirect taxes leader in business consultancy PricewaterhouseCoopers (PwC), said that because the GST is a tax on final consumption, it is expected that the overseas vendors would pass on the tax increase to Singapore consumers.

Analysts also noted that the contributions generated from this new segment is unlikely to contribute a significant portion to the overall national budget, but the actions are in part an alignment to the changing taxation rules and standards of international practices globally.

The ability to enforce the tax fully, however, is another issue. 

Mr Yeo Kai Eng, indirect tax services leader at accounting and consulting firm Ernst & Young, said: “The big boys will be compliant, as they have a reputation, but for the smaller players, it will be harder to enforce and harder to track.”

The Ministry of Finance (MOF) said in a statement on Monday that this new measure does not affect online sale of goods. 

For imported goods such as when shoppers buy books or clothes online, Mr Heng said that international discussions are ongoing to see how it could be applied, and a review would be done before a decision is made.

GST is not levied on goods are imported through air or post and where the value is below S$400. For goods above this threshold, GST is collected on the entire value.

The MOF said that it would review whether to impose a tax on low-value imported goods.

As to why the “goods” component in GST for lower-value items is not being taxed, one expert said that it is because the concept to tax such categories are still new. 

Mr Simon Poh, associate professor of accounting at the National University of Singapore (NUS) Business School, explained: “Apart from Australia, which will require overseas vendors to register and collect GST on goods sold via e-commerce, other countries like Singapore do not collect GST on imported goods below a certain monetary threshold of S$400, as in the case here.”

The Government needs more time to review international developments before deciding on how to implement this, he added, and it is likely to introduce GST on lower-value goods after it has fine-tuned it.

Mr Yeo from Ernst & Young advised: “Consumers better shop first, as it is a matter of time before they implement GST on goods.” 

Mr Heng said that the GST on imported services is to ensure that Singapore’s tax system remains “fair and resilient in a digital economy”.

Today, services such as consultancy and marketing purchased from overseas suppliers are not subject to GST and consumers here also do not pay GST when they download apps and music from overseas firms. The change made would “ensure that imported and local services are accorded the same treatment”, he added.

Right now, GST is not applicable on imported services provided by an overseas supplier which does not have an establishment in Singapore.

“With the advent of technology and digital economy, it has become increasingly common for services consumed in Singapore to be obtained from overseas suppliers, which are able to deliver such services without a presence in Singapore,” the MOF said.

“Introducing GST on imported services will ensure that, irrespective of whether the service consumed in Singapore is bought from suppliers here or from suppliers abroad, the same GST treatment will apply,” the ministry added.

Outlining how the tax works, the MOF said that business-to-business imported services would be taxed by a reverse charge mechanism.

This means that a Singapore GST-registered business has to account to Iras for the GST on the services it imports. The majority of businesses is not likely to be affected by this reverse charge, but those likely impacted would be banks, financial institutions, and mixed and residential property developers.

A tax on imported services is implemented in many jurisdictions, including Australia, the European Union, Japan and New Zealand.

The MOF and Iras said that they would continue to consult the industry on this tax implementation, to ensure compliance costs for businesses are minimised.

In 2015, consumers in Japan started paying an 8 per cent consumption tax for all overseas online buys. The rate was increased to 10 per cent this year. Australia will roll out such a tax this year while Malaysia is considering such a move.

Before this announcement, experts contacted by TODAY said that the taxation on e-commerce is a “potential minefield,” due to its lack of a physical boundary and presence, and the difficulty in enforcement and collection.

They suggested taxing popular e-commerce operators such as Amazon and Taobao as well as those providing business-to-business services. Some experts even called for the removal or reduction of the $400 GST exemption threshold in light of the e-commerce boom.

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