BSL Bulletin

On 31 May 2013, IRAS issued the e-tax guide to provide guidance on the GST treatment on this complex area of “Recovery of Expenses” under the various business scenarios.

The starting point in analysing the GST treatment of the recovery of expenses is to apply the principal and agent relationship principle to the expenses incurred. In order to determine this you will need to examine the contractual relationship between the service provider, the beneficiary, the principal and the payment arrangements.

This article sets out briefly the various underlying GST principles to be applied in this GST analysis. Please note that illustrative examples used in this article are obtained from the IRAS e-tax guide.

Recovery of Expenses

As a GST Registered business you may arrange for the supply of goods or services on behalf of another party (e.g. customers, suppliers, related companies or employees) and seeks recovery of the cost or expense of the supply incurred by you from the other party.

Are You Acting as a Principal or an Agent in Incurring the Expenses?

The question of whether the recovery of the expenses is subject to GST is whether you have acted as a principal or an agent in arranging the supply of goods and services.

If you acted as a principal (i.e. act in your own name or capacity) in arranging for the supply of goods or services on behalf of another party and you seek recovery of the expenses incurred from the other party, it is called a reimbursement.

A reimbursement may be subject to GST depending on whether the reimbursement amounts to a taxable supply of goods and services. This requires further analysis as explained in the following paragraphs.

Disbursement

On the other hand, if you merely acted as an agent to make payment on behalf of another party and seek recovery of the payment from the other party, it is called a disbursement. If you pay the expenses as an agent, it does not constitute a supply and will not be subject to GST. You are also not entitled to any input tax claim since the goods or services are not supplied to you but to the principal.

As an example, the recovery of the costs of door gifts by the event company (B) is a disbursement, whereby Co A ordered the gifts from Co C, and B makes the payment for the gifts and recovers the cost from Co A.

Indicators for Acting as Principal

Generally, you are acting as a principal in procuring the goods or services when you contract with the supplier in your own name or capacity. If the contractual relationship is unclear, you should use the five indicators as suggested by IRAS to determine if you are acting as a principal or agent in procuring the goods or services as set out below.

GST Treatment for Reimbursement

Once you have determined that the recovery of the expenses is a reimbursement, the next step will be to determine whether the recovery of expenses is a separate supply or ancillary or form inputs to a primary supply.

Reimbursement of Expenses Ancillary to or Form Inputs of Your Primary Supply of Goods or Services

In the situation, where you are making a primary supply to your customer and incurred cost or expenses for the purchase of goods or services for use or as an input in providing your primary supply to your customer then the recovery of the expenses forms part of the overall price or consideration that you are charging your customer.

Accordingly, the GST treatment for the reimbursement will follow that of the primary supply. If your primary supply is a taxable supply and is subject to GST, then the recovery of the expenses is subject to GST.

One of the examples refers to the recovery of transport expenses in the course of performing audit as part of the billings made by the audit company to their clients.

Reimbursement of Expenses not Ancillary to or Form Input of Your Primary Supply of Goods or Services

In a situation, where you are not making a primary supply to your customer or related companies but merely arranging the supply of the goods or services out of convenience, cost savings, etc. and seek recovery of the expenses, the various expenses you are recovering are treated as separate and distinct from one another.

You will then have to determine whether the recovery of the expenses is:

1. Recovery at cost;
2. Recovery with mark up; or
3. Recovery of exempt supplies.

Separate Recovery of Expenses at Cost

In determining the GST treatment, you are treated as though you are a “buyer and re-seller” of the goods and services and the nature of the supply will follow that of the goods or services you originally procured.

One example is whereby one of the group companies, GG procures international courier services for the entire group. GG makes no other supplies to the group. GG will recover the courier charges at cost based on their usage from the group. In this instance, GG can zero rate the recovery of the courier charges from the group, based on the original supply of international courier services procured.

Recovery of expenses related to staff secondment

As a further guideline on recovery of expenses related to secondment of staff, such recovery can be treated as outside the scope of GST if you meet all the following conditions. If otherwise, you are required to charge GST.

The conditions are:

1. No secondment fees or mark-up charges are levied by the seconding company;
2. Both seconding company and recipient company are related within the meaning of section 6 of the Companies Act;
3. Staff is seconded to one company at any one time;
4. Recipient company exercises full control over the staff; and
5. Seconding company is not allowed to claim any input tax directly relating to the seconded staff.

Separate Recovery of Expenses at Cost Plus a Mark Up

In a situation, where you seek recovery of the expenses at cost plus a 5% mark-up, the 5% mark-up is treated as a separate supply of administrative fee, arranging fee, facilitating fee in the billing from the cost recovery of the expenses. The GST treatment of the 5% mark-up will follow that of the normal supply of services and will be subject to GST unless it can be treated as a supply of international services under section 21(3) of the GST Act.

For example, Co OO used Co PP’s account with its freight forwarder to import some goods. The freight forwarder bills PP for the international freight service, which PP in turn recovers from OO with an additional $50 arranging fee. Hence, the recovery of the freight cost should be zero rated and the arranging fee should also be zero rated as this was incurred to arrange for international transport services.

Separate Recovery of Expenses which are Originally Exempt Supplies

To qualify as an exempt supply, the recovery must fall within the description of goods or services in the Fourth Schedule to the GST Act:

1. Sale and lease of residential properties
2. Financial services
3. Supply of investment precious metals

The supply of accommodation to staff of related company is treated as an exempt supply.

On the other hand the supply of financial services cannot be treated as an exempt supply, unless the business itself is providing the financial services.

To illustrate, the fee charged by the bank to WW for issuance of the Letter of Credit (“LC”) is exempt under the Fourth Schedule of the GST Act. However, when WW recovers the LC fee at cost from its related company, on the basis that WW is not the one issuing the LC, the recovery is subject to 7% GST.

The above is a brief overview of the key essentials from the IRAS e-guide. There are many more illustrative examples which are provided in the e-guide. It can be a complex analysis. Please note that any incorrect treatment of recovery of expenses may lead to under-reporting of output tax and may attract penalties and fines from IRAS.

It is important that you get the GST treatment right on a rather hazy subject of what constitutes a disbursement or reimbursement.

Limit on Share buyback for Singapore Companies not listed on the SGX-ST increased from 10% to 20%

With effect from 1 October 2013, all companies incorporated under the Companies Act, Chapter. 50, (the “Singapore companies”) are allowed to purchase or acquire up to 20%, instead of the previous 10%, of their total number of ordinary shares and stocks in any class over the period between consecutive annual general meetings.

However, the new share buyback limit will not affect Singapore companies that are listed on the Singapore Exchange Securities Trading Limited (“SGX-ST”). These companies will continue to be subject to the 10% limit in the SGX-ST Listing Manual.

The rationale for increasing the limit from 10 to 20% is to allow Singapore Companies to have greater flexibility in buying back their shares.

Singapore Companies must, however, conduct their share buyback in accordance with the requirements of the Companies Act, Chapter 50, amongst other conditions, designed to safeguard the interests of shareholders and creditors.

The prescribed requirements under the Companies Act, Chapter 50 are as follows:

1. Articles of Association of the Company must allow share buyback. The Articles of Association of a Singapore company (the “Articles”) must permit the company to buy back its
   own ordinary shares and stocks.
2. Shareholders’ approval. All share buybacks must be approved by shareholders at a shareholders’ meeting.
3. Methods of share buybacks. A share buyback may be conducted pursuant to one of the four methods prescribed in Section 76C, 76D, 76DA or 76E of the Companies Act, Chapter 50.

Please note that any company which currently has in force an existing share buyback mandate which allows it to buy back its shares up to a maximum of 10% of its issued shares (in compliance with the previous 10% statutory limit) and wishes to take advantage of the enhanced 20% share buyback limit, it must ensure that a fresh shareholders’ resolution must now be passed to approve share buyback up to the enhanced 20% share buyback limit.

DID YOU KNOW?

Update on the revised XBRL filing requirements

On 27 June 2013, the Accounting and Corporate Regulatory Authority (“ACRA”) announced the revised filing requirements for companies required to file their financial statements with ACRA.

On 30 September 2013, ACRA announced that the effective date for companies to start filing financials in full XBRL format has been changed from 22 October 2013 to 2 December 2013.

Under this new regime, the option for partial XBRL will be removed.

With the changes to the filing requirements, ACRA has developed a new software tool known as Bizfin preparation tool (which is available free) to help companies prepare their financial statements.

Which are the companies that need to file and which are exempted

Under the revised XBRL filing requirements, ALL Singapore-incorporated companies which are either unlimited or limited by shares, and which are not exempt from filing under the law, will be required to file a full set of financial statements in the revised XBRL format according to a minimum requirement list within the new ACRA Taxonomy 2013.

The following types of companies are exempted from filing their full set of financial statements in XBRL and will file their financial statements in PDF with Financial Statements Highlights in XBRL format instead:

1. Companies which are regulated by the Monetary Authority of Singapore such as Commercial Banks, Merchant Banks, Registered Insurers and Finance Companies; and
2. Companies allowed by law to prepare financial statements in accordance with accounting standards other than SFRS, SFRS for small entities and IFRS (International Financial Reporting Standards).

Insolvent exempt private companies will have the following options to file their financial statements with ACRA:

• A full set of financial statements in XBRL format; or
• A full set of financial statements in PDF with Financial Statements Highlights in XBRL format.

Solvent exempt private companies which choose to file their financial statements voluntarily with ACRA will have the following options:

• A full set of financial statements in XBRL format; or
• A full set of financial statements in PDF with Financial Statements Highlights in XBRL format.

Companies limited by guarantee will continue to file a PDF copy of their AGM financial statements to ACRA.

Applicable Financial Periods

The revised XBRL filing requirements will be applicable for companies if they are filing financial statements with periods ending on or after 30 April 2007. Companies filing financial statements relating to financial periods ending before 30 April 2007 will continue to file their financial statements in PDF format and their financial highlights in respect of the financial statements in their Annual Return form.

More time given to convene Annual General Meeting (“AGMs”)

Non-listed Singapore-incorporated companies will have more time to file their financial statements in full XBRL. Eligible companies which apply for a 30-day extension of time to hold their annual general meetings can obtain an application fee waiver during the first year of implementation of the revised XBRL filing requirements.

The fee waiver is available for companies applying for an extension of time from 19 August 2013 onwards.

Subsidised Training Sessions

To ease the transition to full XBRL filing, ACRA will make available the following range of resources and support for companies (where applicable):

• $1.8M training fund
• Companies can sign up for training sessions on the revised filing requirements and usage of the preparation tool, and can also tap on a S$1.8 million training fund to subsidise these training sessions. This will be available throughout the first year following the implementation of the revised filing requirements. You may wish to visit Http://www.acra.gov.sg/XBRL+Help+Resources.htm for more details on the training sessions.
• XBRL Support Hotline
• Companies and preparers of financial statements can contact ACRA for technical support relating to issues and queries on XBRL filing in any one of the following ways: Helpdesk contact no: 6248 6028 / Email : ACRA_XBRL_General@acra.gov.sg
• Free Data Analysis
• Companies which file their financial statements in XBRL also qualify for a free one time usage of a data analysis tool via the BizFinx portal from October 2013 onwards. For more information on the revised XBRL filing requirements, please visit www.acra.gov.sg/xbrl.