This article outlines a key change due to take effect from 1 January 2023, that was announced by then Finance Minister Heng Swee Keat in Budget 2021 – the taxation of remote services by way of the Overseas Vendor Registration (OVR).
Singapore first implemented its OVR regime on 1 January 2020. The scope of the OVR regime was designed to tax Business-to-Consumer (B2C) supplies of “digital services” (as defined) consumed in Singapore, thereby leveling the playing field in the GST treatment of digital services supplied by local and overseas businesses. At the time of writing, we understand that over 200 overseas businesses are GST-registered under the OVR regime, but the amount of additional GST revenue generated remains largely unpublished.
The upcoming change from 1 January 2023 will be implemented through expanding the scope of the existing OVR regime. Following the expansion, all digital and non-digital B2C supplies of imported services will be subject to GST if the services can be supplied remotely (remote services).
In the GST (Amendment) Bill 2021, it is stated that “This change, together with the introduction of GST on B2C imported digital services that took effect from 1 January 2020, ensure a level playing field for our local businesses to be competitive. This change also keeps our GST system resilient in a growing digital economy”.
To assist taxpayers with the changes, the Inland Revenue Authority of Singapore (IRAS) published an e-Tax guide “GST: Taxing imported remote services by way of the overseas vendor regime (First Edition)” on 30 July 2021 (e-tax guide).
Under the OVR regime, an overseas business is required to register, charge and account for GST if it:
The registration threshold applies on a retrospective and prospective basis.
Remote services are defined as: “any services where, at the time of the performance of the service, there is no necessary connection between the physical location of the recipient and the place of physical performance”.
Conversely, the e-tax guide clarifies that “on-the-spot” services, where there is a direct connection between the location of the supplier and the recipient will remain outside the scope of the OVR regime. Examples of on-the-spot services provided in the e-tax guide include hairdressing services, physiotherapy services, physical entry to entertainment or sporting events, land tours, and passenger transport services.
There are specific exclusions from taxation under the existing OVR regime. These exclusions will equally apply to the wider definition of remote services and include:
Many businesses use intermediaries and electronic marketplaces to expand their potential customer base. For such businesses, to ease compliance and administration, there are specific rules which dictate whether the electronic marketplace (whether established in Singapore or overseas) should be regarded as the supplier of the remote services and liable to charge and account for GST on supplies made through its platform, on behalf of its overseas suppliers, to Singapore-based consumers.
It is key to remember that the OVR regime is limited to B2C transactions (unless specific approval is received from the IRAS to include B2B transactions). Therefore, if the customer provides a Singapore GST registration number, the supply falls outside the scope of the OVR regime and the OVR vendor should not charge GST on the remote services.
Any GST erroneously charged by the OVR vendor cannot be claimed as input tax by the GST-registered customer, who is expected to seek a refund of the GST from the OVR vendor.
To lessen the compliance burden for OVR vendors, they will be registered under the existing simplified pay-only regime. Under the simplified pay-only regime, OVR vendors will be exempt from the normal compliance requirements of local invoicing, price display and record keeping.
A GST-registered Singapore business must provide the OVR vendor with its GST number to justify that it is not a B2C transaction, and thus not subject to GST under the OVR regime. If GST is charged, the Singapore business cannot reclaim it as input tax and is expected to seek a refund of the GST charged from the OVR vendor.
As a GST-registered Singapore business, the imported remote service will instead be subject to GST via the existing reverse charge provisions (if the business is partially exempt).
Non-GST-registered persons should remember that customer misrepresentation (viz providing a false GST registration number) is a serious offence. Such action may lead to a criminal conviction, fines and/or imprisonment.
As detailed in our earlier article, the Organisation for Economic Co-operation and Development (OECD) previously recommended that GST/VAT regimes should be updated to cope with the ever-evolving digital economy to retain their purpose as a consumption tax and many countries (including Australia, New Zealand and the United Kingdom) imposed their respective VAT/GST on B2C digital services.
Nonetheless, the change to include non-digital services within the OVR regime is a development that deserves monitoring as governments look at how they may expand their tax base as a means to address falling revenues and the increased costs of funding the pandemic measures.
For countries that have taken a similar step to tax remote services, there is a question to be asked if the additional VAT/GST revenue outweighs the costs of implementation and administrative efforts.
As Singapore’s tax base is broader than most countries and its residents being highly digital literate, it may expect a greater proportional increase in additional tax revenue by including the likes of online education, professional memberships, and professional brokerage services, which may then reach the tipping point of the cost-benefit scale.
The new rules are likely to impose Singapore GST registration and reporting obligations on overseas businesses that were not previously registered for VAT/GST outside their home country.
Whilst the first registration deadline is not until 1 October 2022, overseas businesses should begin conducting preliminary risk assessments to identify and understand how the rules may impact their existing operating model, customer base, and internal tax reporting controls and processes. Special attention should be paid to the transitional provisions for supplies that stagger the 1 January 2023 implementation date.
OVR vendors will be subject to the same penalty regime and enforcement action as local businesses.
One common area of skepticism is how the IRAS can enforce the rules and penalties on non-resident companies which do not have any physical presence in Singapore. This is not a problem faced just by Singapore, but by any other regime that requires an overseas vendor to register to meet local GST or VAT requirements.
Other jurisdictions have been known to use publicly available lists (list of registered suppliers from overseas tax authorities), technology to track online transactions, information gathered from internet service providers (ISPs), and information gathered from financial institutions and payment channels processing the transactions.
At the end of the day, most businesses will aim to comply with the rules to avoid reputational risk.
From a direct tax perspective, the IRAS has confirmed that having an OVR registration is not on its own, a determining factor to conclude whether a non-resident company has a permanent establishment in Singapore for corporate income tax purposes.
[1] Fourth Schedule to the GST Act
[2] Section 21(3) of the GST Act
[3] GST (Non-Taxable Government Supplies) Order to the GST Act
