When Can You Apply the GST Zero-Rating Provisions in Singapore?
Singapore is one of the popular jurisdictions for foreign investors to set up their business and operational headquarters.
As we all know, Singapore does not have any natural resources.
The survival of the Singapore economy depends on both domestic consumption of goods and services and international trades.
The Goods & Services Tax ("GST") was introduced in Singapore on 1 April 1994.
One objective of introducing a GST system in Singapore would be to allow and facilitate a shift of the focus from direct taxation to indirect taxation from a tax revenue collection perspective.
What types of transactions are subject to GST in Singapore? In plain English, the general rule is that GST is imposed on (I) domestic consumption of goods and services and (ii) importation of goods into Singapore.
Currently, the GST rate is 7%.
Of course, there are exceptions to this general rule.
It is beyond the scope of this article to discuss these exceptions.
Our GST legislation contains several zero-rating provisions that effectively allow GST registered entities to charge GST at 0% under certain prescribed conditions.
Although it may sound easy to apply these provisions, it is submitted that in practice there are pitfalls these entities should be aware of.
The reason is that any non-compliance with our GST legislation might result in a hefty penalty to be imposed by the Singapore tax authorities.
In this article, I will discuss two specific situations concerning the application of the zero-rating provisions and explain the common pitfalls.
These are (I) the export of goods out of Singapore and (ii) the provision of international services to overseas persons.
Export of Goods out of Singapore For the zero-rating provisions to be applied to the export of goods out of Singapore, a GST registered entity must ensure that the goods in question will be or have already been exported out of Singapore.
This intention must be ascertained at the time when the sale was made.
In addition, the GST registered entity is expected to maintain sufficient documentation in support of the export of the goods out of Singapore.
Although these requirements seem to be straightforward, in practice there are still companies that have overlooked them.
Perhaps this explains why the Singapore tax authorities had made editorial amendments to their related tax guide titled "GST: A Guide on Exports" 9 times since the original version was issued in August 1994.
Interestingly, out of these 9 amendments, 5 were made during the last 3 years.
What the Singapore tax authorities did was to incorporate new scenarios into this tax guide to explain how the zero-rating provisions for the exports of goods should be applied in those scenarios.
From my experience, one of the pitfalls here is that it is possible for GST to be applied in a business transaction even though it is conducted between two foreign companies.
Suppose ABC has made a sale of goods amounting to S$2,000,000 to DEF and at the time when the sale was made, the goods were in Singapore.
Both ABC and DEF are not incorporated in Singapore.
Unless ABC has obtained proper documentation to show that these goods will be exported within a prescribed time frame, it would be required to register for GST because the value of this sale had exceeded the GST registration threshold of S$1,000,000 and charge a 7% GST to DEF based on the value of this sale.
Interestingly, even if DEF were to assure that these goods would be exported out of Singapore at the time when the sale was made, this representation in itself would not be sufficient for ABC to apply the zero-rating provisions.
Provision of International Services A GST registered entity is allowed to zero-rate the provision of international services to an overseas entity provided that certain conditions are satisfied.
One of the key conditions is that the services must be supplied under a contract with an overseas entity and directly benefits an overseas entity.
From my experience, I have seen many instances whereby a Singapore company zero-rated its supply of services rendered to an overseas entity because its invoice was issued to this overseas entity with an overseas address.
I respectfully submit that this is not the correct application of the law.
In fact, the company should consider the entire circumstances of the case and determine who is the beneficiary of the services rendered.
In some cases, this analysis can be straightforward as there would be only one direct beneficiary, i.
e.
the overseas entity.
In other cases, it is possible for more than one beneficiary to be identified and the next question will be who is the direct beneficiary.
Is it the overseas entity or any other entity based in Singapore? Depending on the answer to this question, the company might have to charge a 7% GST to the overseas entity even though the invoice is issued to this entity with an overseas address.
As you can see from these two examples, the practical application of the zero-rating provisions in our GST legislation can be tricky.
Next time when you encounter any GST issues, the best course of action will be for you to speak to your accredited Singapore GST adviser.
As we all know, Singapore does not have any natural resources.
The survival of the Singapore economy depends on both domestic consumption of goods and services and international trades.
The Goods & Services Tax ("GST") was introduced in Singapore on 1 April 1994.
One objective of introducing a GST system in Singapore would be to allow and facilitate a shift of the focus from direct taxation to indirect taxation from a tax revenue collection perspective.
What types of transactions are subject to GST in Singapore? In plain English, the general rule is that GST is imposed on (I) domestic consumption of goods and services and (ii) importation of goods into Singapore.
Currently, the GST rate is 7%.
Of course, there are exceptions to this general rule.
It is beyond the scope of this article to discuss these exceptions.
Our GST legislation contains several zero-rating provisions that effectively allow GST registered entities to charge GST at 0% under certain prescribed conditions.
Although it may sound easy to apply these provisions, it is submitted that in practice there are pitfalls these entities should be aware of.
The reason is that any non-compliance with our GST legislation might result in a hefty penalty to be imposed by the Singapore tax authorities.
In this article, I will discuss two specific situations concerning the application of the zero-rating provisions and explain the common pitfalls.
These are (I) the export of goods out of Singapore and (ii) the provision of international services to overseas persons.
Export of Goods out of Singapore For the zero-rating provisions to be applied to the export of goods out of Singapore, a GST registered entity must ensure that the goods in question will be or have already been exported out of Singapore.
This intention must be ascertained at the time when the sale was made.
In addition, the GST registered entity is expected to maintain sufficient documentation in support of the export of the goods out of Singapore.
Although these requirements seem to be straightforward, in practice there are still companies that have overlooked them.
Perhaps this explains why the Singapore tax authorities had made editorial amendments to their related tax guide titled "GST: A Guide on Exports" 9 times since the original version was issued in August 1994.
Interestingly, out of these 9 amendments, 5 were made during the last 3 years.
What the Singapore tax authorities did was to incorporate new scenarios into this tax guide to explain how the zero-rating provisions for the exports of goods should be applied in those scenarios.
From my experience, one of the pitfalls here is that it is possible for GST to be applied in a business transaction even though it is conducted between two foreign companies.
Suppose ABC has made a sale of goods amounting to S$2,000,000 to DEF and at the time when the sale was made, the goods were in Singapore.
Both ABC and DEF are not incorporated in Singapore.
Unless ABC has obtained proper documentation to show that these goods will be exported within a prescribed time frame, it would be required to register for GST because the value of this sale had exceeded the GST registration threshold of S$1,000,000 and charge a 7% GST to DEF based on the value of this sale.
Interestingly, even if DEF were to assure that these goods would be exported out of Singapore at the time when the sale was made, this representation in itself would not be sufficient for ABC to apply the zero-rating provisions.
Provision of International Services A GST registered entity is allowed to zero-rate the provision of international services to an overseas entity provided that certain conditions are satisfied.
One of the key conditions is that the services must be supplied under a contract with an overseas entity and directly benefits an overseas entity.
From my experience, I have seen many instances whereby a Singapore company zero-rated its supply of services rendered to an overseas entity because its invoice was issued to this overseas entity with an overseas address.
I respectfully submit that this is not the correct application of the law.
In fact, the company should consider the entire circumstances of the case and determine who is the beneficiary of the services rendered.
In some cases, this analysis can be straightforward as there would be only one direct beneficiary, i.
e.
the overseas entity.
In other cases, it is possible for more than one beneficiary to be identified and the next question will be who is the direct beneficiary.
Is it the overseas entity or any other entity based in Singapore? Depending on the answer to this question, the company might have to charge a 7% GST to the overseas entity even though the invoice is issued to this entity with an overseas address.
As you can see from these two examples, the practical application of the zero-rating provisions in our GST legislation can be tricky.
Next time when you encounter any GST issues, the best course of action will be for you to speak to your accredited Singapore GST adviser.
