In the recent court judgement on 6 March 2023, IRAS failed to enforce the application of open market value on the taxable supplies over a five-year period on discounted member price products sold by Herbalife (a GST registered Company) to its members. The revenue leakage or GST output tax leakage including a 5% late tax penalty amounting to $2.2m is based on the shortfall of the retail price (open market value) over the net members’ volume discount tiers from 25% to 50%. IRAS has invoked the general GST tax avoidance s47 arguing that Herbalife’s business structure is an arrangement that results in revenue leakage. However, the Singapore courts ruled that s47 does not apply in this instance as it will introduce “considerable uncertainty” on the taxable value of certain supplies and causes potential negative collateral effects on commercial practices.
There is an equivalent of GST tax avoidance section in Income Tax Act under s33 which we have discussed in our earlier articles: Interesting takeaway from the first case of Tax Payer Challenge to IRAS on s33(1) Tax Avoidance in Dr W Vs Comptroller of Income tax dated 1 December 2020, Corporatisation of medical professional does not in itself constitute tax avoidance under s33 in the latest decision of GCL v Comptroller of Income Tax dated 26 June 2020 and A look into some of the interesting tax avoidance structures caught under s33(1) ITA dated 19 November 2019.
Besides the general avoidance s47, there are specifically 2 other sections that gives IRAS the power to apply the open market value in the GST Act:
s17(5) Value of supply of goods and services with related party which void the default value of any supply of goods and services to be the consideration paid in money unless “the supply would be payable by a person who has no relationshipwith any person which would affect that consideration”.
First schedule s2(d) where there is the avoidance of a liability to be GST registered, open market value will be applied to assess that liability.
Both of these sections would not be applicable in this case as it is neither related to related parties or GST registration (Herbalife is already a GST registered entity).
In addition, s47(4) specifically exempts “any arrangement carried out for the bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax or obtaining of any tax advantage”. Herbalife is a nutrition product company that distributes wellness products using a business model with a distribution channel that sells only to its members. This is a one of the common distribution channels eg distributorship, direct sales etc adopted by businesses. To adopt the open market valuation on Herbalife business model as Justice Choo in his judgement would be beyond the power of the courts, and must be implemented legislatively.