Singapore: GST administrative concession removed, recovery of overseas brokerage fees and costs
GST legislation on “blocked medical” expenses has been amended in response to the COVID-19 pandemic.
GST legislation on “blocked medical” expenses has been amended.
The Inland Revenue Authority of Singapore (IRAS) announced removal of the goods and services tax (GST) administrative concession for the recovery of overseas brokerage fees and related costs on shares traded on overseas exchanges under certain circumstances.
The effective date is 1 April 2022.
In addition, the GST legislation on “blocked medical” expenses has been amended in response to the coronavirus (COVID-19) pandemic.
Current GST administrative concession for overseas brokerage fees
Due to the regulatory requirements of stock market trading in other jurisdictions, end-customers in Singapore may be required to contract with domestic brokers that then contract with overseas brokers to place the end-customers’ trades on shares listed on overseas stock exchanges. The domestic brokers pay the overseas brokers’ brokerage fees and related costs (overseas brokerage costs) and then charge the overseas brokerage costs to the end-customers in Singapore. As an administrative concession, domestic brokers are allowed not to charge GST on the recovery of overseas brokerage costs from end-customers in Singapore if the following criteria are satisfied:
- The shares are listed on overseas exchanges.
- The domestic broker did not incur any GST on the overseas brokerage services.
- The domestic broker does not impose a mark-up on the recovery.
If the domestic broker charges a mark-up, it will be liable for GST only on the mark-up if the mark-up is shown separately on the tax invoice. Otherwise, the domestic broker would need to charge GST on both the overseas brokerage costs and the mark-up. The administrative concession is confined to shares and is not extended to other financial instruments such as exchange-traded funds (ETF) or bonds traded on overseas exchanges.
This administrative concession was granted in July 1996 to place GST-registered domestic brokers on equal footing with overseas brokers that do not charge GST on overseas brokerage costs because there is no value-added service provided by the domestic brokers. Also, end-customers may not be able to contract with overseas brokers directly.
GST treatment upon removal of administrative concession
The reverse-charge regime, in which recipients of services account for output GST on the services they import as if they were the supplier, was implemented effective 1 January 2020 for parity in GST treatment on services procured from domestic and overseas service providers. Following this, the IRAS explained that the administrative concession would no longer be required to maintain the competitiveness of the local fund management industry. Instead, the GST treatment was to fall back on the contractual arrangement.
Effective 1 April 2022, the GST treatment of recovery of overseas brokerage costs for shares traded on overseas exchanges will depend on whether the overseas brokerage is engaged by the domestic broker as a principal or an agent.
Domestic broker acting as an agent
In situations when the end-customer enters into a brokerage contract directly with the overseas broker, and the domestic broker merely acts as a paying agent to pay the overseas brokerage costs on the end-customer’s behalf, the domestic broker is not required to charge GST on the recovery of brokerage costs from end-customers. There is no GST implication, as this is a disbursement for GST purposes.
Domestic broker acting as a principal
In situations when the end-customer enters into the brokerage contract with a GST-registered domestic broker, which in turn enters into the contract with the overseas brokers in its own name, the domestic broker would be regarded as the principal of the supply of brokerage services.
When the domestic broker subsequently recovers the overseas brokerage costs from the end-customers in Singapore, such recovery is subject to GST because this is a reimbursement instead of disbursement for GST purposes. GST-registered domestic brokers that claim input tax based on the standard input tax recovery rules are not required to apply the reverse-charge mechanism on the overseas brokerage costs because GST is charged to the end-customers in Singapore on the recovery of brokerage costs and imported services acquired are directly attributable to the making of standard-rated supplies.
On the other hand, GST-registered domestic brokers that claim input tax based on the fixed input tax recovery rate (FITR) or special input tax recovery formula (SITRF) would need to apply the reverse-charge mechanism on imported brokerage services. Domestic brokers can claim a portion of the GST on overseas brokerage costs as its input tax based on the FITR or SITRF. To illustrate, domestic brokers that are banks with full banking licenses are able to claim input tax at 74%—which leads to an additional 26% irrecoverable input tax on overseas brokerage costs.z
Removal of GST administrative concession beginning 1 April 2022 will have significant effects on domestic brokers that claim input tax based on FITR or SITRF, compared to those that claim input tax on standard input tax formula.
Exclusion of blocked expenses
In view of the COVID-19 pandemic, the GST legislation on blocked medical expenses has been amended. Medical treatment expenses incurred on or after 1 October 2021 in connection with any health risk or requirement arising on account of the nature of the work required of staff or staff’s work environment would not be blocked expenses, and GST on such expenses would be claimable.
Read an October 2021 report [PDF 400 KB] prepared by the KPMG member firm in Singapore
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