Singapore: Revised GST rules for the fund management industry

The Inland Revenue Authority of Singapore (IRAS) recently issued its revised rules on how GST applies to transactions in the industry. This followed feedback from the fund management industry highlighting the need to simplify the rules based on the potential implications for the industry.

In April last year, the IRAS released guidelines on the interpretation of the place of belonging for an offshore fund company (offshore fund) for GST purposes. Specifically, for an offshore fund which relied wholly on a Singapore-based fund manager (SFM) to carry on its business activities, the SFM was treated as a business establishment. This was akin to an extension of the offshore fund and the place of belonging is therefore in Singapore, despite the place of incorporation of the offshore fund being outside Singapore.

This interpretation that the offshore fund belongs in Singapore has significant implications for the fund management industry.

Before this, if an offshore fund was incorporated outside Singapore with no presence in Singapore, it was generally considered as belonging outside Singapore.

Services rendered by a Singapore GST-registered service provider, such as the SFM, could thus qualify as international services and fall within the category of zero-rated supplies. Effectively, the offshore fund suffered no GST.

However, with this interpretation, aside from the fund management services which attracted 7% GST, other services rendered by Singapore GST-registered service providers to the offshore fund, such as professional services, should similarly attract 7% GST.

Since the offshore fund is not registered for GST, this additional GST presents a cost for engaging Singapore service providers.

Such an interpretation and the resultant GST treatment may render Singapore fund managers less competitive than those of our neighbouring countries. One example is Hong Kong, which is traditionally viewed as the closest competitor.

Services provided by Hong Kong service providers would not attract GST, since Hong Kong is one of the few countries in this region that has not introduced GST.

Effective from April 1 2015, to remove any disincentive for engaging an SFM, a remission is granted to ensure that the GST treatment of supply of services to a qualifying fund or overseas fund manager (OFM) is unaffected by the business establishment (BE) arising from them wholly relying on an SFM to carry on their business.

These revised rules are published in the March 18 2015 edition of the IRAS e-Tax Guide for the Fund Management Industry as well as the circular issued by the Monetary Authority of Singapore (MAS) on March 24 2015.

We will cover the rules for determining if an offshore fund or fund manager belongs in Singapore below.

In this e-Tax Guide, the IRAS states that a fund that has a business establishment or fixed establishment in Singapore, and has no such establishment elsewhere would be considered as belonging in Singapore for GST purposes.

The IRAS clarifies that if an overseas incorporated fund wholly relies on an SFM to carry on its business, the offshore fund has a business establishment in Singapore through the SFM.

An SFM is wholly carrying on the fund's business if it has the overall responsibility to oversee or carry on the activities of the fund. This includes day-to-day operations and core business function and is the sole contracting fund manager (FM) with the fund.

On the other hand, the SFM is not treated as the business establishment of the fund if the fund meets any one of the following:

• It has an administration office with its own employees;

• It contracts with the SFM for non-discretionary services. That is, the SFM must have approval from the fund for the execution of trades, cannot act independently to enter into financial contracts on behalf of the fund and has no business or investment authority/responsibility over any assets of the fund;

• It contracts with two or more FMs separately to provide investment management services where each is in-charge of a specific area. For instance, each FM takes charge of each region;

• It contracts directly with other independent service providers to carry out a business function of the fund, such as contracting an administrator, who is not overseen or supervised by the SFM.

This set of rules is more acceptable to the industry than the previous set, as it now takes into account an SFM which provides only non-discretionary services. This SFM would also not be treated as the extension of the offshore fund and thus would not result in the offshore fund being considered as belonging in Singapore.

Typically, an SFM provides non-discretionary services and with this condition in place, a large number of offshore funds would not be treated as belonging in Singapore by virtue of engaging the SFM.

The IRAS also clarified the circumstances that would result in the offshore fund having a fixed establishment in Singapore. An administration office with the fund's employees in Singapore is one such example.

Another example is a fund that conducts regular board meetings (at least four times within a 12-month period) at a fixed place (that is, fixed location such as an office) in Singapore. The offshore fund will have a fixed establishment (FE) in Singapore, through the board of directors. A meeting held through conference calls or video does not qualify in this context unless at least two directors are physically present at the meeting.

In summary, for an offshore fund that –

• does not rely wholly on an SFM to carry on its business;

• has no administration office with its own employees in Singapore;

• whose board of directors does not conduct the board meetings in Singapore on a regular basis;

it is considered as belonging outside Singapore if it is incorporated outside Singapore.

Apart from an offshore fund which could be treated as belonging in Singapore, an OFM wholly relying on an SFM to carry on its business would be treated as belonging in Singapore through the SFM based on the same rules.

The implication of these offshore funds or OFM being treated as belonging in Singapore is that the supply of fund management services by the SFM has to be standard-rated and could no longer be zero-rated.

The IRAS has recently clarified its interpretation of the belonging concept of offshore funds and OFM. These rules supercede the earlier rules and took effect on April 1 2015.

To remove the disincentive to engage a qualifying SFM (one who holds a capital markets licence under the Securities and Futures Act Cap 289, or one who is exempted under the Act to hold this licence) to provide services to offshore funds or fund managers, GST remission is granted to allow services including those from the SFM not to charge GST to a qualifying fund (to be reported as zero-rated supply).

In addition, services of an SFM to an OFM of a qualifying fund that is treated as belonging in Singapore solely on account of its whole reliance on the SFM to carry out its business activities would also be granted GST remission.

A qualifying fund is one that satisfies conditions of the income tax concession under section 13CA or 13X of the Income Tax Act as at the last day of its preceding financial year.

With this GST remission, any impediment for the fund managers arising from GST to compete globally has effectively been removed.

Since the GST remission only targets qualifying funds, offshore funds/OFMs that are treated as belonging in Singapore under the recently published rules but are not qualifying funds need to note:

• 7% GST on fund management services received from GST-registered FMs, and other services received from GST-registered service providers;

• local FMs who have previously obtained approval for exemption from GST registration on account of their services qualifying for zero-rating must now re-assess their liability to register for GST.

Beyond funds, for an overseas investment holding company or a special purpose company (SPC) relying wholly on a Singapore entity to carry out its business, such as decision-making and day-to-day operations, where the same interpretation of the belonging concept applies, there appears to be a GST exposure for them. We believe that there should be no reason not to, as this is a fundamental interpretation.

This exposure is in terms of 7% GST on services provided by Singapore GST-registered service providers to the overseas companies as the Singapore entity could be treated as the overseas company's business establishment and thus belonging in Singapore.

Once these entities are treated as belonging in Singapore, the Singapore GST-registered service providers should no longer treat such services as zero-rated, as one of the conditions for zero-rating to apply is that the contractual party must belong outside Singapore.

Such an interpretation has widespread implications for service providers in their business operations and daily activities. It is not uncommon for the investment holding companies or SPC which are shell companies incorporated outside Singapore to rely wholly on the related company in Singapore in its operations.

If the service providers have been zero-rating their services on account of their place of incorporation being outside Singapore without establishing if the overseas incorporated company has a business establishment in Singapore, they would not have adopted the correct GST treatment.

As GST is a self-assessment tax, the Singapore GST-registered service providers must determine the GST treatment based on the GST legislation and the IRAS guidelines and any non-compliance would be subject to penalty.

An IRAS publication affirming the extension of such interpretation to other companies beyond funds is highly anticipated. The reaction from the business community, given the practical difficulties in determining the belonging status of an overseas company, would likely not fall short of a storm.

Lam Kok Shang and Gan Hwee Leng KPMG