Proposed e-services tax: How will it affect your wallet?

SINGAPORE — The Government will be imposing a Goods and Services Tax (GST) on certain businesses that provide digital services to Singapore consumers from Jan 1, 2020.

These businesses must be based overseas with no offices in Singapore. Consumers who buy digital services from local suppliers in Singapore already pay GST, which stands at 7 per cent currently.

GST will be increased to 9 per cent some time between 2021 and 2025.

The Inland Revenue Authority of Singapore (Iras) published a consultation paper on Tuesday, explaining how the proposed tax will be administered and what kind of services will be affected, among other things.

Here is what consumers need to know about the new tax regime:
 

1. What are the digital services that will be affected?

The GST on digital services targets two categories:

• Business-to-business (B2B) services such as marketing, accounting, IT and management.
• Business-to-consumers (B2C) services such as video and music streaming, apps, listing fees on electronic marketplaces (for example, Apple’s and Google’s app stores), software and online subscription fees.

Digital services that fall under the proposed tax regime:

• Downloadable digital content (mobile apps, e-books, movies)
• Subscription-based media (TV show and movie streaming, online newspapers and magazines, online gaming)
• Software programmes (downloading of software, drivers, website filters, firewalls)
• Electronic data management (file-sharing and cloud storage services, website hosting)
• Distance lessons via pre-recorded medium or e-learning
• Support services, performed via electronic means, to arrange or facilitate a transaction (service fees to consumers and merchants for product sales through electronic marketplaces)

Digital services that are excluded:

• Telecommunication services
• Professional services (for example, legal services communicated via email)
   

2. How does it work?

B2B imported services will be taxed via a reverse charge mechanism, while B2C imported services will be taxed under an overseas vendor registration model.

Under the reverse charge mechanism, businesses are required to account for the GST on imported digital services to Iras, like suppliers do.

Businesses using imported services to make taxable supplies of goods and services can make claims for full GST refunds on those services. However, businesses using imported services to make non-taxable supplies of goods and services can only make partial GST refund claims for those services.

Under the overseas vendor registration model, overseas businesses with no offices in Singapore whose annual global turnover exceeds S$1 million, and whose sale of digital services to consumers in Singapore exceeds S$100,000, must register with Iras and pay GST.

Under certain conditions, a local or overseas operator of electronic marketplaces may also be regarded as supplying imported services through these marketplaces. In this instance, the operators, not the suppliers of the services, need to register and pay GST.

3. What does it mean for consumers?

Consumers will likely be paying more for digital services from overseas suppliers such as Netflix or Spotify subscriptions come 2020, said Mr Lam Kok Shang, head of indirect tax services at KPMG Singapore.

Currently, it is cheaper for end-consumers to procure digital services from overseas suppliers – a situation that will change when the new tax kicks in, said partner and indirect tax services leader at Ernst & Young Solutions Yeo Kai Eng.

Associate Professor of Accounting Simon Poh, who is from the National University of Singapore (NUS) Business School, added: “So people with iTunes or Netflix subscription will have to foot an extra 7 per cent GST, or 9 per cent GST when the GST hike takes place between the period 2021 to 2025. This is unless the vendors are prepared to absorb the GST in which case the consumer will be spared this extra cost.”

For example, a premium Spotify subscription — which allows members to stream music without advertisements – currently costs S$9.90 a month. This might increase to about S$10.60 a month with 7 per cent GST on top of it. Spotify is headquartered in Sweden.

Ride hailing firms Grab and Uber, which currently do not charge GST, could also potentially be impacted.

Mr Lam and Mr Yeo reiterated that the new tax seeks to level the playing field for overseas and local vendors. “It may encourage more end-consumers to procure locally… if the same GST treatment applies. Of course, besides GST, there may be other considerations such as pricing or availability of content that may also drive the behavior of consumers purchasing online,” Mr Yeo added.

4. What are the possible loopholes?

An Apple customer in Singapore using a United States-based account could escape paying the proposed GST on digital services for example, Mr Lam noted.

Mr Lam also gave the example of a Netflix customer, based in Canada, sharing his account with his family member in Singapore. The family member will not be taxed by Iras under the new regime.

Assoc Prof Poh reiterated that individual consumers can possibly open multiple subscription accounts, one in Singapore and others overseas. “Unless Iras imposes requirements on the overseas suppliers and electronic market operators to monitor and ensure that a local customer can only use a local account before processing their subscriptions, such loopholes to avoid the GST may indeed exist,” he said.

Nevertheless, Mr Lam pointed out that there are similar taxes levied, or that will soon be levied, on digitised services around the world. “You probably can run away for a little while but eventually you start to pay taxes somewhere. (For services based) in Canada, you’ll probably be paying Canadian taxes anyway,” he said.

5. What are some other countries that have implemented or are planning to implement GST on digital services?

At least 50 countries have imposed some form of GST or Value-added Tax (VAT) on imported digital services. These tax rates range between 5 and 27 per cent. These countries include:

• Japan: 8 per cent GST for all overseas online purchases (since Oct 1, 2015); to be increased to 10 per cent from Apr 1, 2019
• Taiwan: 5 per cent VAT on digital services provided to consumers by foreign businesses (since May 1, 2017)
• South Korea: 10 per cent VAT on physical and digital goods and services bought over the Internet (since July 1, 2015)
• Australia: 10 per cent GST on sales of imported services and digital products to Australian consumers (since July 1, 2017)
• New Zealand: 15 per cent GST for most goods and services supplied in New Zealand, including most imported goods and services (since Oct 1, 2016)
• All 28 countries in the European Union: 15 to 27 per cent VAT applied to imported digital products and services, depending on the country (since Jan 1, 2015)
• South Africa: 14 per cent VAT on all foreign suppliers supplying electronic services to South African consumers (since June 1, 2014)