We still know what you did (in the GST return) last summer...

THE introduction of Goods and Services Tax (GST) on imported digital services from Jan 1, 2020 as announced in the 2017 Budget has certainly raised public interest.

However, what is perhaps a more muted yet significant development that comes into effect on Jan 1, 2019, is the introduction of "customer accounting" rules that impose the obligation to charge and account for the GST on the GST-registered customer, instead of the supplier of prescribed goods (mobile phones without subscription plan, memory cards and off-the-shelf software) that exceed the value of S$10,000 (before GST).

The impact of the "customer accounting" rules is more widespread than what many think. Not only does "customer accounting" affect the manufacturer, the retail intermediary or distributor of the prescribed goods, it is also relevant for businesses that buy such goods in bulk.

And with the new year approaching, affected buyers and sellers should have already acted to make the necessary changes to their processes, systems, contracts, etc, to properly account for the GST, or face the risk of penalties for not doing so.

WHY WERE THE RULES INTRODUCED?

The customer accounting rules were introduced to combat "carousel fraud" or "missing trader fraud" which has resulted in an estimated lost VAT (equivalent to GST) of 600 billion euros (S$938 billion) in the EU.

Under the fraud arrangement which involves the import and sale of the same goods through a contrived supply chain (which may include legitimate businesses which are unknowing parties to the fraud), a domestic seller in the supply chain charges GST on the sale of imported goods.

Instead of paying the GST over to the tax authorities, the seller disappears with the GST and becomes the "missing trader". The goods then change hands a few more times with the last person exporting the goods and not accounting for the zero-rated export sale. The same goods may then be re-imported with the cycle repeated.

The introduction of the customer accounting rules is probably one of, if not the most direct and immediate legislative response by the Singapore government to combat GST fraud. Recently, Iras has made it clear that it is focusing its audit and investigation efforts on businesses suspected to be involved in such fraudulent missing trader arrangements.

This is in addition to Iras reminding businesses that it conducts regular audits on a broad range of industries to check the general level of compliance to encourage voluntary compliance, with targeted programmes for higher-risk industries.

WHAT IS WRONG IN THE GST RETURNS?

The self-assessment nature of the GST means that the onus is on the business to correctly apply the tax rules. The challenge however, is that this is often left to one or two persons in the finance department of the organisation although the GST permeates all aspects of the business, from procurement to sales, from marketing to human resources.

Yet, when the question of who has responsibility for GST arises, most would point at the finance function while finance points at operations. The irony is that both are correct.

Being a transaction-based tax means that the risk of incorrectly applying the GST rules is high. According to Iras, the bulk of the errors arise from limited checks on tax classification of sales and purchases, lack of training for staff on the GST rules and updates, inadequate tax documentation and poor communication between functional units.

It is no wonder that these business process gaps are covered in the Assisted Compliance Assurance Programme (ACAP) for large businesses to enhance tax governance and risk management around GST reporting.

The fact that the ACAP is still a major initiative today shows how important it is for businesses to have the right set of tax governance principles and controls for GST compliance.

This is but one example of tax governance being embedded within the broader corporate governance and operating framework, a trend we see in what tax authorities around the world are expecting boards of directors to consider implementing.

CONCLUSION

Tax authorities find it a challenge to clearly distinguish between genuine mistakes in GST returns and a sign of a wider fraud.

The challenge is to come up with a solution that addresses the errors in a GST return, without placing undue pressure and unnecessary compliance costs on businesses.

While Iras seems to understand this approach, the introduction of customer accounting from Jan 1, 2019 represents a fundamental shift in how GST is normally collected (by the supplier from the customer) with wide repercussions on business systems, processes and contracts. This will invariably lead to higher compliance costs.

However, hard measures such as "customer accounting" need to be taken to help keep fraud in check.

It is therefore important for companies to develop a strong tax risk management and effective governance and controls around people, processes, systems and data. Only then can businesses identify and mitigate the potential mistakes in the GST returns so that they do not contribute to the penalty statistics in the Iras audit programme each year.

Do not wait for Iras to find what you did in the GST return last summer.