BDO Indirect Tax News

Singapore - High Court issues seminal decision on the GST treatment of a “direct selling” business model

Singapore’s High Court issued a landmark decision on 6 March 2023 in a case involving the value of products supplied by the taxpayer to its distributors on which goods and services tax (GST) is levied. The court concluded that GST must be charged based on the actual price of the goods sold after taking into account “tiered discounts,” rather than based on the open market value of the goods. The court held in favour of the taxpayer, a nutrition product company (Herbalife International Singapore Pte Ltd).

The decision may have a significant impact on a broad range of businesses that operate a “direct selling” business model. Direct selling involves products being sold to end consumers only through distributors, usually through a network of members that are registered with the respected brand or company.
Overview of the case
The taxpayer is incorporated in Singapore and is engaged in the business of marketing, selling and distributing nutritional supplements, weight-management products and other personal care products.

The company’s direct selling business model works as follows: the company does not sell directly to end consumers; instead, it sells its products to members who are registered with the company and the members sell the products to end consumers. The public may only buy products from the members. The members purchase Herbalife products at various discounted prices (a standard 25% discount and tiered discounts of 25%, 42% and 50%, depending on the volume of products purchased either for resale to end users or for the members personal consumption). They retain as profits the difference between the price they pay to the company and the price at which they are contractually bound to sell the products.

The members generally are not GST-registered so their sales to end consumers are not subject to GST, with the result that the difference between the discounted price charged by the company to the members and the retail price paid by the end consumers is not taxed. The appeal concerns the GST liability of the transactions between the company and its members, specifically whether the value of the supply (i.e., the taxable amount) should be: 
  • The discounted price (i.e., the contractually stated retail price less the standard discount or the tiered discounts); or
  • The open market value of the products (i.e., the contractually stated retail price).
The High Court also examined whether any non-monetary consideration (i.e., marketing services) was provided by the members to the company when selling the products to end consumers or if the “benefits” incurred (specifically the undertakings in the terms and conditions in the Member Pack, such as being “kind and courteous” when selling the company’s products) were merely member compliance with the contractual terms. 

The governing section of the Singapore GST Act is section 17, which provides that the value of a supply of goods or services is determined as follows:
  1. If the supply is for monetary consideration, the value will be such amount that, with the addition of the tax chargeable, is equal to the consideration.
  2. If the supply is not for consideration or is for consideration not consisting of money in whole or in part (e.g., a trade-in of an item or the provision of a service), the value of the supply will be its open market value.
The Comptroller of Goods and Services Tax (Comptroller) took the position that the members provided non-monetary consideration in the form of marketing services to the taxpayer in exchange for the products. Accordingly, the Comptroller argued that the value of the supply should be the open market value, i.e., GST should have been levied on the contractually stated retail price of the products and not on the discounted rate. The taxpayer, on the other hand, argued that the discounted price of the products should be the value of the supply as the consideration for the products consists entirely of money and does not include any form of non-monetary consideration.
High Court decision
The Singapore High Court found that for something to be considered non-monetary consideration furnished by a customer, it must be sufficiently valuable, and it must be clear that it was given by the customer in exchange for the supply of goods. The court stated: “an overly broad conception of consideration threatens to introduce considerable uncertainty as to the taxable value of these supplies.”

Based on the facts of the case, the court concluded that the “benefits” that arise from regular terms of trade (i.e., undertakings of obligations in the Terms and Conditions of the Membership Agreement by the members to the company) would not qualify as non-monetary consideration in exchange for the supply of the discounted products. Thus, the discounted rate paid by the members should be considered the value of supply (i.e., the taxable amount) and not the open market value of the products.

Eu Chin Sien
Jackson Cai
BDO in Singapore