Key takeaways

• The value of a supply should be its open market value where part or all of the consideration for the supply includes non-monetary consideration.
• GEV v Comptroller of Goods and Services Tax [2022] SGGST 1 ("GEV") clarifies that a supply is regarded to include non-monetary consideration where obligations undertaken by the recipient have independent economic value and practical benefit to the supplier.
• The decision may have broad implications on businesses, beyond those making supplies that are expressly offered at a discount or rebate. Arrangements involving extensive contractual obligations by a recipient to a supplier may be scrutinised more closely, as these may constitute non-monetary consideration.
• There may also be material implications from a compliance perspective. For instance, evidence of the open market value of goods and services may not always be readily available or defensible in the event of an audit.
• Businesses should review their GST positions and ensure that their positions remain defensible in light of the principles set out in GEV. On a forward-looking basis, businesses should exercise more thought when incorporating contractual undertakings that may go beyond the actual commercial transaction.

In more detail

Singapore GST regime: determining the value of a supply

Section 17 of the Goods and Services Tax Act 1993 ("GST Act") sets out the relevant rules for determining the value of a supply for GST purposes, in particular:

• Where goods or services are supplied for consideration that is in money, the value of the supply is generally equal to that consideration amount.
• Where a supply is for consideration that does not wholly consist of money (i.e., part or all of the consideration includes non-monetary consideration), the value of the supply is taken to be its open market value.

The term "consideration" is not defined in the GST Act. However, the Singapore case authorities on contract law have interpreted the term very broadly to mean "some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other ".

Details of the decision in GEV

Key facts

In GEV, the Board examined the meaning of "consideration" in the context of supplies of nutritional products by the taxpayer, a GST-registered company. The taxpayer operates a direct selling business exclusively for its members, with the following arrangements:

• The members entered into membership agreements with the taxpayer for an annual fee, with various contractual undertakings to the taxpayer.
• Members were entitled to purchase products from the taxpayer at discounted prices and recruit other members as "downlines". The products were sold by the taxpayer to a member at a standard discount of 25%, with higher tiered discounts available to the member based on the volume of products purchased by the member directly or by its downlines.

The taxpayer took the position that the consideration for the supply of the nutritional products was purely in money, and GST was chargeable on the actual product price after applying the standard discount of 25% and applicable tiered discounts. The Comptroller argued that the consideration for the supply included non-monetary consideration, being the various contractual undertakings by members under the membership agreement. It therefore sought to impose GST on the open market value of the supply, as represented by the product price less the standard discount of 25% only.

The Board's decision and reasoning

The Board found that the supply of nutritional products by the taxpayer to its members was partially made for non-monetary consideration. As such, the Board upheld the Comptroller's assessment to impose GST on the open market value of the products (i.e., the product price less the standard discount of 25%).

The Board's reasoning for its decision centered on the meaning of "consideration" for GST purposes. It observed that there may be unintended and draconian consequences in adopting an overly broad interpretation of "consideration", as any obligation incurred by the purchaser of the discounted products (e.g., restrictions on the use and sale of products) would effectively be caught as non-monetary consideration.

The Board opined that there are two touchstones of what would constitute non-monetary consideration:

• First, the consideration must be independent of (and not ancillary to) the purchase, disposition or use of the product.
• Second, the contractual undertaking incurred by the recipient provides a practical benefit to the supplier that goes beyond the monetary transaction. Examples of such an undertaking may include: (a) promoting the sale of goods or services, or protecting the infrastructure of the network or terms of agreement of sale with other purchasers; (b) behavioural or commercial obligations or constraints on the recipient; (c) granting exclusivity rights to the supplier; and (d) ascribing to the supplier rights or privileges that are unrelated to the supply.

The Board distinguished cases with such features from commercial practices involving reasonable restrictions imposed by a supplier on the manner of sale, disposition or use of the discounted product (e.g., control of retail prices to the end-consumer), which would not be regarded as non-monetary consideration. Not every middleman purchasing at bulk discounts would be caught by the non-monetary consideration rule.

In the taxpayer's case, the Board considered these touchstones to be present in the form of the obligations undertaken by the members pursuant to their membership agreement (e.g., not to sell on other retail platforms or in other jurisdictions; to act as brand ambassadors, not to utilise social media for marketing and not to provide media interviews; not to promote another multi-level marketing or direct-selling company; and granting the taxpayer a licence to use the member's image in publicity materials). These obligations were independent of the underlying transaction (i.e., purchase of nutritional products) and presented a clear and practical benefit to the taxpayer in a manner separate from the benefit of the actual commercial transaction itself. The combined effect of the obligations was integral to the taxpayer's business model.

Commentary

The GEV decision is the first local case examining the meaning of "consideration" and providing guidance on what might constitute non-monetary consideration in the context of the GST Act.

At first blush, based on the factual matrix of the case, one may infer that the impact of the decision is largely confined to businesses that offer conditional discounts and rebates at varying rates to different customers, which may be common in direct selling business models.

However, the principles formulated by the Board may lend itself to more general application, and not only to supplies that are expressly offered at a discount or rebate. The Comptroller may scrutinise commercial arrangements more closely to ascertain whether the various contractual undertakings by the recipient represent reasonable restrictions on the sale, disposition or use of the subject of the arrangement. If such obligations are regarded as independent of the transaction and provide clear and practical benefits to the supplier, GST may be imposed on the open market value of the supply instead of the amount of monetary consideration.

From a compliance perspective, these could present material implications for businesses:

• Determining the presence of non-monetary consideration requires one to distinguish the contractual obligations that are common or reasonable from those that may be seen as extraneous and independent to the sale of goods or services itself. This can be complex and involves a degree of judgment.
• If a supply is made (partly or wholly) for non-monetary consideration, the open market value of goods and services may not be readily available or defensible in the event of an audit, especially if the commercial arrangement between parties is unique. This may be less challenging in cases where products are sold at baseline price with varying discounts depending on specific contractual obligations undertaken by the recipient.
• From a commercial perspective, parties may disagree as to the open market value of a supply on which GST is to be charged, especially where the recipient is not able to claim full input tax for the GST incurred and will have to bear the incremental GST charged. It is uncertain whether and how the Comptroller may intervene to provide certainty on disagreements between businesses relating to such issues of valuation.

Businesses should review their GST positions and ensure that these positions remain defensible in light of the principles set out in GEV. On a forward-looking basis, it would be prudent for businesses to exercise more thought in the drafting of contracts and deciding whether to incorporate contractual undertakings that may go beyond the actual commercial transaction (e.g., exclusivity terms, behavioural or commercial obligations). One should also consider appropriate tax clauses to mitigate the impact of any unintended GST consequences.

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