Budget 2018: Marketing services from overseas vendors will be taxed

B2B services such as marketing, IT, management and accounting will soon be taxed. Following Budget 2018, Singapore finance minister Heng Swee Keat has revealed that goods and services tax (GST) will be implemented for digital services from overseas suppliers from 1 January 2020.

Currently, services such as consultancy and marketing purchased from overseas suppliers are not subjected to GST. According to Channel NewsAsia, around 1,000 B2B companies will be affected, while 100 businesses will be impacted in the B2C space.

According to the ministry, B2B imported services will be taxed via a reverse charge mechanism, which will see GST reporting obligation falling on the part of the recipient of the services. This only applies to businesses which provide exempt supplies. This includes the provision of financial services, the sale and lease of residential properties and the import and local supply of investment precious metals, according to IRAS' website. It also applies to business which do not make any taxable supplies. As a majority of businesses make taxable supplies, they would not be affected by this reverse charge mechanism.

Meanwhile, B2C services impacted are video and music streaming platforms (such as Spotify or Netflix), mobile apps, listing fees on electronic marketplaces and online subscription fees.Local consumers also do not get charged for GST when they download apps and music from overseas. Heng added this change will ensure that imported and local services are accorded the same treatment.

Clients to pay the price?

Several industry players Marketing spoke to said that the new GST implementation will likely affect brands and agencies. This is particularly to businesses which are currently using services from international providers such as cloud and web services in their everyday operations. For example, Amazon Web Services and various content management systems.

Costs such as GST will also likely be passed onto clients, said several industry players.

According to Preetham Venkky, director at KRDS Asia, although GST cost will likely be passed onto the client, ​there should not be any large impact as long as cost of producing the services remain ​lower than the cost of selling the services. He added that since most agencies do add true value on top of the consumed services, while there may be some impact, it wouldn't be substantial.

He added that GST is a consumption tax. As such, it should indeed apply to all goods and services as long as the consumption is in Singapore. With an increasingly globalised world, agencies have indeed used services such as cloud services, APIs, subscriptions, products and tools which are beyond Singapore borders. As such, it is "only natural" to pay GST on those services. Venkky added:

I think the additions should've been expected sooner and are more than fair.

Jeffrey Lim, general manager of Carbon Interactive, agreed that costs such as GST will likely be passed on to clients. He said that these services, along with cloud, IoT and e-lancing are essential to brands and marketer, and sooner or later, will eventually be taxed.

Lim explained that taxation on digital services is something that many countries are exploring or already have in effect. As such, with an increased in the adoption in over-the-top services such as Spotify, Netflix and other online services in Singapore, this move from the government is "inevitable".

"The questions now is will this affect more of the service providers or the consumers? Or will this deter global service providers from making their stop in Singapore since our population size is not as big as others?" Lim added.

He added that these services will likely continue to thrive in Singapore as it moves into more co-sharing kinds of services online. This will make it fairer for local service providers since all companies will be taxed, whether local or not. Lim said:

Life goes on for us to continue providing cutting edge digital services and focus on innovation in this area.

Planning for the long-haul

That being said, Tribal Worldwide's president Jeff Cheong said this year’s budget provides a long runway for businesses and consumers to prepare and make adjustments for the tax adjustments. He added that in the long run, businesses would have to alter their go-to-market strategy to compensate for the higher tax rate.

"This also means having sharper and smarter communication strategies. Inevitably, this impacts everyone," he said.

For Yeo Ai Ling, managing director at Wild, until more details on the B2B reverse charge mechanism is released by IRAS, she believes that the impact might not be significant on agencies and clients. On digital services provided to clients, it depends on whether the digital providers contracted are GST-registered. If they are, there will likely be little or no impact to clients, she said.

According to CNA, online service providers who meet specific criterias would require registration under the oversea vendor registration model with IRAS in order to continue servicing local customers. The criteria includes an annual global turnover of over SG$1million, with sales of digital services to Singapore amounting to more than SG$100,000. The report added that the second requirement minimises the compliance burden on overseas vendors who are not making significant sales to local customers.

"The cost issue can potentially arise with providers who are not GST registered companies which might in turn translate into increased costs for us and our clients," Yeo explained.

Meanwhile, from a B2C perspective, if digital providers such as Spotify are not able to translate the increase in costs to their consumers, these costs may be extended to an increase in media costs to advertisers, Yeo explained.