Singapore Budget 2018: Banks & developers eye imported services GST

Singapore

BANKS with operations here are likely to be watching their expenses on imported services a little closer than before, as a small portion of goods and services tax (GST) will be levied on them in two years' time.

This will not just hit the three Singapore banks buying services from abroad, but will also affect Singapore subsidiaries of global banks that use offshore call centres, or incur shared expenses spent on group-wide costs such as IT systems, tax experts told The Business Times. Other financial firms such as insurance companies and credit finance firms will feel some impact as well.

Residential property developers too, will soon be charged for GST for such services sourced from abroad, tax experts said. So home buyers may want to watch the price of name-dropping when it comes to residential properties. "They (developers) do hire brilliant architects," quipped Lam Kok Shang, head of global indirect tax services, Singapore, at KPMG.

The government has set a 2020 deadline in charging the goods and services tax (GST) on imported services, according to the Budget announcement made this week by Finance Minister Heng Swee Keat.

The Inland Revenue Authority of Singapore (IRAS) is still seeking feedback until March 20, 2018.

But what is clear is that in the business arena, the actual pinch should mainly be felt on financial services firms and property developers. Charities, as well as restructured hospitals, will also be affected, tax experts said.

This GST move only hits specific sectors because most other businesses buying imported services are eligible for a GST refund as long as the imported service is regarded as an input that is used to make taxable supplies of goods and services. So the government levies GST on the final product or service sold here.

But banks, insurers, and residential property developers are part of the minority that sell goods and services that are exempted from GST. The taxman does not collect GST on bank loans sold to customers, on life insurance, or on homes sold.

That means these businesses cannot claim a GST refund for imported services. And only businesses that get no GST refund or a partial refund, will have to apply a reverse charge to account for this new tax on imported services. A reverse charge means a business would pay to the tax collector the GST on imported services, and then claim back the amount paid.

Singapore's GST is now at 7 per cent, but this will rise to 9 per cent in the earlier part of 2021 to 2025.

To be clear, banks should not be charged the headline GST figure, because they can claim a significant amount back from the taxman under a rule specific to finance firms, tax experts said. The current recovery rate for banks, which is set annually, is 72 per cent, tax experts said. Based on today's rate, banks could effectively be charged about 2 per cent for qualifying services bought from aboard.

The applied rate differs across the industry, and reflects how much of financing has gone to consumers versus corporates, tax experts said.

Banks that outsource to overseas vendors the processing of documents and customer service calls, or buy IT services from abroad, should see a higher tax bill.

The consultation draft from IRAS this week added that fees of directors who do not reside in Singapore can be taxed. So will legal and professional services related to overseas collaterals, among other things.

BT understands that there was lobbying from banks on excluding salaries as an expense that would incur GST, with salaries typically being the largest expense for most organisations. In the current IRAS consultation draft, IRAS said the wage component of inter-branch transactions is excluded from GST accounting.

The move will inevitably erode some cost competitiveness, said Koh Soo How, Asia-Pacific indirect tax leader, PwC Singapore. He pointed out that Hong Kong is unlikely to take the same path. Hong Kong does not charge GST.

The affected industries are taking a wait-and-see approach, noting that the changes only take effect in 2020.

OCBC's head of group tax Jane Lim said the new tax measure is not likely to result in a major shift in the bank's procurement decisions.

"We are unable to ascertain the new measure's full impact on our bank at this point as the implementation details have yet to be finalised. But based on our preliminary assessment, we do not expect the expenses arising from this change to be significant," she told The Business Times.

"Also, cost is just one criteria in our assessment of services overseas. We take into consideration a number of other factors including the nature and availability of the service."

A DBS spokesman said: "We are reviewing the guidance and will provide feedback to the relevant authorities to ensure that the new rules can be implemented effectively and efficiently. DBS reviews our operations and procurement policies regularly and will take into account the new GST requirements once IRAS has issued their confirmed guidance."

UOB, CapitaLand and City Developments declined comment, saying it is premature to comment at this point.

There are meanwhile signs that Singapore's financial services firms have been taking some operations onshore. Anecdotally, banks here have offices at Changi Business Park.

A survey by recruitment firm Robert Half in October 2017 showed that 44 per cent of Singapore's chief financial officers (CFOs) within financial services have increased their level of onshoring in the last two years.

About 60 per cent of CFOs within financial services refer to the rising costs and skills shortage in offshore regions as reasons for returning onshore. Just under half also said they were motivated to move back given the complaints about service, and poor efficiency. Almost half of those who have returned business activities to Singapore say it has resulted in increased productivity, higher service quality, and better cost efficiency.

Still, banks - like many organisations - are constrained in hiring more foreign labour due to ongoing curbs. This is why they have also been using technology to boost productivity.

The Robert Half survey further showed that if there are specialised skills available here, 43 per cent of the CFOs polled would consider shutting down offshore activities.

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