Carousel Tax Scams at Center of Singapore Draft GST Bill

Trust Bloomberg Tax's Premier International Tax offering for the news and guidance to navigate the complex tax treaty networks and business regulations.

By Lien Hoang

Singapore is taking a page out of the European tax rules book, as it rewrites legislation to thwart tax cheats who use so-called carousel fraud and related scams.

Some taxes charged on products like cell phones never make it to the government, which seeks to change that in a new draft bill that would also simplify property taxes, hasten late penalties, and digitize tax notices.

The Draft Goods and Services (Amendment) Bill 2017, which is open for public comment until June 4, will probably force certain taxpayers to rework their accounting systems, says Kor Bing Keong, a partner in EY’s Singapore office.

‘Missing Trader’ Scam

One version of the fraud is called a carousel because a product, like a phone, can change hands through several vendors with a different tax structure at each stage.

In a simple scam, Merchant A would sell a phone to Client B at a price that includes GST, but never deliver that tax money to the government. Client B would claim a tax refund within a month, forcing Singapore to dole out funds it never actually received from Merchant A.

Merchants generally file GST reports quarterly but their varying filing times make it hard to detect foul play in some sectors, according to Stephen Phua, associate law professor at the National University of Singapore.

The new GST bill would cut out this “missing trader” in the middle, having the customer pay the tax directly.

“Under the proposed customer accounting, the customers will step into the shoes of the sellers and pay output GST,” Kor told Bloomberg BNA.

In laying out the proposal, Singapore’s finance ministry said that European countries like Austria and Denmark deployed similar levers to plug tax losses.

“This will deter fraud schemes where the seller absconds with the GST collected, and businesses further along the supply chain continue to claim input tax,” the ministry said. “Customer accounting will be applicable for supplies of mobile phones, memory cards and off-the-shelf software, which are commonly used in fraud schemes.”

Electronic Inventory

Kor said he expects the rules to apply to transactions worth S$5,000 ($3,600) or more.

Bought in bulk, electronics could be easier pawns in a tax scam than, say, cars, which are more heavily regulated, Phua said.

“That risk of people in the cycle collecting GST and not handing over the tax is a big risk to the state,” he told Bloomberg BNA.

The finance ministry is also equipping officials with more enforcement tools, writing into the draft bill that specific businesses “might be required to maintain an electronic inventory system with details of sales,” including invoices with product serial numbers.

Phua interpreted that to mean authorities would choose to scrutinize sectors that have higher odds of tax leakage.

“Millions of goods move in and out every day,” he said. “The only way is to target certain goods.”

The island state is a key trading hub, ranked among the world’s top 10 by number of registered ships, according to the Maritime and Port Authority of Singapore.

Real Estate

Another section of the draft bill would expand customer accounting in the property market. When real estate investment trusts or related special purpose vehicles buy non-residential buildings, they calculate GST with customer accounting on the buildings, but use supplier accounting for the fixtures and furniture inside them. That’s meant to “ease cashflow,” as the ministry put it.

But the draft bill would lump together the furniture and building, based on customer accounting, which should “ease business compliance,” the ministry said.

Regina Lim, head of Southeast Asia capital markets research at property firm JLL, said the change is minor.

“It’s just to make it more convenient for people,” she said by phone.

Going Digital

In other small revisions, the GST proposal would impose a S$200 fee per month as soon as taxpayers are late to file, rather than delaying fees one month, as well as continue the government’s trend of going digital. This means GST notices will be electronic by default, with an opt-out provision for those who prefer to receive paper mail. Singapore already introduced this digital-first format for property taxes, earlier in May.

But the main preparations will fall on businesses that buy and sell big volumes of phones, memory cards, and software. Kor said many corporate accounting programs reflect output GST from the sell side. So if that transaction has to be reported from the buy side, companies need to alter their accounting systems, or record the purchases by hand, he said.

“This would inevitably increase the GST compliance cost,” Kor said.

If finalized, most of the bill would take effect Jan. 1, 2018, except for the chapter on late penalties, which would take effect April 1, 2018.

To contact the reporter on this story: Lien Hoang in Ho Chi Minh City at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The Finance Ministry’s call for comment on amendments to the goods and services tax can be found at http://www.mof.gov.sg/Public-Consultation/Public-Consultation-Open/Public-Consultation-On-Draft-Goods-And-Services-GST-Amendment-Bill-2017

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax