Changes affecting certain GST zero-rating conditions
Before 1 January 2020, for zero-rating under certain provisions of sections 21(3) of the GST Act to apply, a supply of services had to directly benefit a person belonging outside Singapore (in other words, an overseas person). A supply of services is standard-rated (currently at 7%) if there are local persons who derive direct benefits from the services supplied.
With the implementation of the reverse charge mechanism on 1 January 2020, where the services directly benefit GST-registered persons belonging in Singapore, the supply may be zero-rated subject to any other conditions that may be imposed under the relevant “international services” provisions under section 21(3) of the GST Act.
Those impacted by the changes
Effective 1 January 2020, a local person who procures services from an overseas vendor must apply a reverse charge on the imported services (subject to certain exceptions) as if the local person were the supplier, if they are not entitled to full input tax recovery. As a result, certain zero-rating provisions under section 21(3) of the GST Act have been amended. Specifically, if the services directly benefit GST-registered persons belonging in Singapore, zero-rating may apply.
Many overseas companies incorporate subsidiaries in Singapore to help provide support services in relation to sales made to customers/related entities in the Asia Pacific region. Such support services are often remunerated under a cost-plus arrangement between the two related entities. The international services provision that is commonly relied upon to determine if the support fee can qualify for zero-rating under such cost-plus arrangements is section 21(3)(j) of the GST Act.
Prior to 1 January 2020 the support fee charged by the Singapore subsidiary attracted 7% GST where it was established that the services rendered directly benefitted the Singapore customers/related entities of the overseas parent company. As a result, the overseas parent company often suffered unrecoverable GST costs charged by the Singapore subsidiary.
With the new changes that have applied for nearly nine months now, companies should revisit their inter-company billing arrangements to examine if the customers/related entities belonging in Singapore who are receiving/benefitting from the support services rendered by the Singapore subsidiary are GST-registered such that the support fees billed by the Singapore subsidiary will no longer be subject to 7% GST (which is set to be increased to 9% sometime between 2022 and 2025). Companies previously concerned with the added GST costs of setting up subsidiaries in Singapore to provide support services may now consider moving ahead with such plans.
How can we help
We can assist you in reviewing inter-company service agreements and can check on whether the local customers of the overseas parent company are registered for GST in Singapore so that zero-rating may apply on the support fees billed by the Singapore subsidiary.
If a local subsidiary is unaware of the recent changes and has continued to apply 7% GST on its support fees to the parent company, we can also assist the Singapore subsidiary by performing a review and making a voluntary disclosure to the Singapore tax authority to explain the situation and to help recover the GST previously over-accounted for in the GST returns.
Chin Sien Eu