When a deal is too good, it is always true that it may be a scam. The recent IRAS GST Act has been amended to counteract the scam relating to Missing Trader Fraud (MTF) with effect from 1 January 2021. MTF is not an arrangement unique to Singapore tax authority but it is a common worldwide problem. Frauds from MTF is reported to be around EUR 60 billion annually. In Singapore, more than 300 GST-registered businesses are suspected to be part of the MTF fraud, causing leakage in GST collection usually with the fraudsters long absconded by the time the fraud is discovered. What is interesting in this amendment in GST Act is that it now places the responsibilities of counteracting MTF into the shoulders of suppliers, innocent or otherwise, along the supply chain.
This has implications on all GST registered businesses in Singapore. The financial implication is that you are exposed to MTF for the crawl-back of the 110% input tax claims (including 10% surcharge on input tax claims) by IRAS. The compliance implication is the increased burden of due diligence that you would need to perform to avoid unknowingly involved in MTF. The business implication is how much due diligence would you perform without antagonising suppliers and customers and losing business opportunities in addition to the increased cost of resources needed for compliance.
In a typical MTF arrangement, a person (the “missing trader”) would collect output tax from its customers and abscond without handing over such tax to the tax authorities, while the other parties in the supply chain continue to make input tax claims on purchases they had made, resulting in a loss of revenue to the State. Alternatively, the missing trader may also obtain from the tax authorities an input tax credit claim on purported supplies which it never received before absconding.
If you happened to be one of the unfortunate suppliers in the MTF supply chain and have claimed GST input tax relating to goods purchased (or sold), you would have to perform mandated due diligence to satisfy the Knowledge principle, otherwise IRAS has the power to deny the full input tax claim and further impose a 10% surcharge.
The knowledge principle requires that you to proof otherwise that you knew or should have known to be a part of an arrangement to cause loss of public revenue. To decide whether the taxpayer “should have known”, the first question is whether the circumstances of the supply are such that there was a reasonable risk of the supply being part of an MTF arrangement. And if so, conclude reasonably that the supply was not part of such a fraudulent arrangement. It is important to note that, if you have “unreasonably” concluded that it is not part of the MTF or unable to conclude (due to whatever reasons), you would have failed the knowledge principle and you will be at the mercy of IRAS.
Depending on the risk profile, customers that you deal with, the industry and business model, you may have to re-calibrate your business processes to put in place reasonable protection for your businesses. Some of the reasonable steps are:
- Evaluate the commercial viability of the transaction. Follow the maxim “is the deal too good to be true”. An easy deal of buying from Company A and selling to Company B at a substantially attractive margins with back-to-back receipts from Co B before payment to Co A and with zero business risks, seems too good to be true.
- Check the legitimacy of suppliers and customers, credit ratings and third party references, are these persons potentially missing persons (or phantom).
- Ascertain the risks of money laundering (eg cash-only transactions, payments to foreign bank accounts, or to an account which is likely to be terminated or withdrawn immediately).
- Assess the reasonableness of the quantity, order frequency and pricing.
It is therefore important that the front office from sales to person handling customers and orders to finance specifically, accounts payable and receivable understands what is MTF and put in place processes to accord the level of protection for the business.