June 2019
There has been an increasing number of corporations setting up subsidiaries in Singapore to provide support services to overseas parent companies or related entities. Such support functions are typically arranged under a cost-plus model. Under this model, the local subsidiary is remunerated for the support services rendered based on the costs (both direct and indirect) incurred in the business operations at a mark-up.
Under the Singapore Goods and Services Tax (GST) Act, a supply of services can be zero-rated (that is, GST is chargeable at 0%) if the services qualify as “international services” as defined under section 21(3) of the GST Act. For the service fee to be zero-rated, all the conditions set out under the relevant zero-rating provision the supplier is relying on must be satisfied.
It’s a common misconception that all services rendered to person(s) outside of Singapore are “international services” that qualify the service fee to be zero-rated. Many fail to realise that there are two categories of supplies of services for which the zero-rating relief may not apply:
According to the guidelines issued by the Inland Revenue Authority of Singapore (IRAS), the phrase “directly in connection with” is used for services that have direct effect on goods or land. “Directly benefit” is used in the context of person(s) who derive direct benefits from the services. Therefore, to correctly determine whether the services are directly in connection with any goods or land and/or to identify the person(s) who directly benefit from the services, it’s important to consider the business arrangement and nature of the services.
Where a supply of services is directly in connection with goods or land located in both Singapore and overseas, or where it directly benefits both local and overseas persons, the value of the supply must be apportioned. The portion of the value attributable to services directly in connection with goods or land in Singapore or enjoyed by local persons needs to be standard-rated. The remaining portion that’s attributable to services directly in connection with goods or land outside Singapore or directly benefitting overseas persons is zero-rated.
In apportioning the value of services, the Comptroller of GST accepts the following proxy values: the market prices chargeable, costs incurred, amount of time spent, sales revenue supported, and the number of customers serviced. Any other proxies require pre-approval from the Comptroller.
Failure to apportion the services can lead to understating of output GST and will attract penalties from the IRAS. We've been assisting clients by reviewing their service-level agreements to examine the nature of the services and to assess whether the conditions for zero-rating are satisfied. Where a portion of the services has to be standard-rated, we suggest appropriate methods to apportion the value of services and we assist clients who may wish to seek written approval from the Comptroller.
Chin Sien Eu
chinsien@bdo.com.sg