3 common GST risk areas you should focus on

How well am I managing my GST risk exposure?

June 2017

By Jonathan Doraisamy

Since the commencement of the Customs Blue Ocean Strategy operations (Ops CBOS) in September 2016, Goods and Services Tax (“GST”) audits have been carried out in phases by the Royal Malaysian Customs Department (“Customs”). At our Budget 2017 seminar held in November, the Deputy Director General of Customs (as he was then), Dato Subromaniam highlighted that at least 25% of businesses audited were non-compliant. Of these, some are expected to be charged in court.

Due to the significant errors identified by Customs last year and with Phase 2 having commenced in March, the question you should be asking yourself is “How well am I managing my GST risk exposure?”

Based on our consultative experience and GST Healthchecks carried out in 2016, here’s a rundown of the three common GST risk areas that you should focus on.

Deemed supplies

This is the most notable GST risk area. If you thought that output tax only relates to standard-rated supplies, you thought wrong. A deemed supply is a transaction or event for which you are required to account for output tax, notwithstanding the lack of any sale of goods or services. GST is charged on the open market value of the transaction. Some examples of these deemed supplies are set out below.

Free goods – Gift rule

GST-registered businesses are required to account and pay output tax on goods provided for no consideration where the aggregate cost (incurred by the donor) exceeds RM500 per person per year. Items commonly overlooked are door gifts, hampers and merchandises provided free to customers at fundraising events or to employees during a company’s annual dinner.

However, you are not required to account for GST on goods given for free to employees irrespective of the value if the goods are stated in the employment contract or company handbook. If you have yet to update these documents, now is the time. Following this, you should ensure that the correct value of the benefits given are recorded in the employee’s remuneration statement (e.g. EA form).

Asset put to private use

When a business asset (i.e. goods) is disposed, given away for free or is used for non-business purposes, the GST-registered business may be making a deemed supply. This may not apply if you were not entitled to claim input tax credit on the goods at the first instance (blocked or purchased from non-GST registered suppliers).

However, there is a distinction between not choosing to claim and not being entitled to claim input tax. You are still required to account for deemed supplies even if no input tax claims were made in the first instance (if you were entitled to do so). This is a common misconception we found during our GST Healthchecks.

On the other hand, any supply of accommodation for free by a GST-registered business could trigger a deemed supply when the accommodation includes furniture or appliances for use in those premises. Notwithstanding that the supply of accommodation is an exempt supply, where the furniture forms part of the business assets of the company, this will trigger a deemed supply.

This is an area which attracts significant mistakes especially if the nature of the business or employee benefits includes hosting its employees during work (e.g. in manufacturing, hospitality and construction industries).

Recovery of cost and expenses

The GST treatment for the recovery of an expense from another party depends on whether a registered person is acting in his own capacity (i.e. as principal) or on behalf of another party (i.e. as agent) when acquiring the expense.

Customs has expressed its view in the Guide on Supply as at 24 May 2016 that recovery of an expense that a registered person incurs as a "principal" from another party is a "reimbursement". On the other hand, the recovery of an expense by a registered person as a "paying agent" on behalf of another party is treated as a "disbursement".

A reimbursement is regarded as consideration for a separate supply and is subject to GST at the standard rate (6%), unless otherwise specified (i.e. zero rated, exempt or given relief). However, a disbursement is not regarded as consideration for a supply and is therefore not subject to GST.

Pursuant to the criteria shared in the Director’s General (“DG”) Decision 5/2015 as to what constitutes a “disbursement”, we understand that Customs has taken the position that any recovery of expenses that does not qualify as a disbursement, shall be regarded as a reimbursement.

However, we find that most companies still struggle to apply the appropriate GST treatment especially when the recovery includes a mark-up or the recovery involves an overseas entity. A quick guide would be to first establish the nature of the recovery and then subsequently perform a test to determine whether such recovery meets the conditions of a disbursement.

Imported services

Further to our article on Think you know all about reverse charge? one of the positive changes introduced in the Budget 2017 was the amendment to the time of supply rules for imported services.

The amendment addresses the administrative burden of tracking imported services and amending the GST return(s) to ensure compliance. Effective 1 January 2017, GST-registered businesses are able to account for reverse charge and claim input tax credit in the same taxable period.

While this is good news, we note that there is still unfamiliarity with the concept of reverse charge.

There appears to be a tendency for businesses to disregard the GST treatment pertaining to services procured from overseas. Although a reverse charge, properly accounted for, would not impact the cash flow of a wholly taxable person, not accounting for reverse charge would lead to an underpayment of output tax, which is an offence.

Therefore, if your company regularly procures services from overseas, it is advisable for you to review these transactions and determine the appropriate GST treatment. We wish to stress that most services procured by businesses from an overseas supplier is subject to reverse charge.

Conclusion

In view of the increased penalty provisions effective 1 January 2017, it is imperative for you to manage your GST obligations according to your business risk appetite. Apart from the risk areas highlighted above, you should be aware of all the changes introduced (e.g. Orders, Regulations, RMCD Guides) and its effect on your business.

If you want to know more about how our GST Healthcheckcan assist you with your GST requirements and its implications, do feel free to contact us.

Jonathan Doraisamy is a Senior Associate Consultant of the Indirect Tax Advisory Group at PwC Malaysia.