THE IMPACT OF GST ON LAW PRACTICE1 APPENDIX A APPENDIX B

• Date: 01 December 1994
• Author: CHARLES LIM AENG CHENG
• Published date: 01 December 1994
• Citation: (1994) 6 SAcLJ 1

Law firms with annual billings of $1 million or more are required to register as taxable persons under the Goods and Services Tax Act. This article discusses the legislative provisions with special relevance to the practice of law and the GST treatment of legal services.

I. INTRODUCTION

This paper was conceived during a discussion with some members2 of the Law Society who identified a number of issues with special relevance to solicitors. There are several paradoxical principles in the Goods and Services Tax (“GST”). The most evident is that relating to taxable and exempt persons. A taxable person can claim a refund on input tax but an exempt person cannot. It is sometimes more advantageous to be taxable than to be exempt. As Leung Yew Kwong of the Inland Revenue Authority of Singapore put it, “when you are in, you are out and when you are out, you are in”. Certain provisions in the GST Act read suspiciously like Lewis Carroll. One classic example is section 21(2) on the effects of a zero-rated supply:

“(2) Where a taxable person supplies goods or services and the supply is zero-rated, then, whether or not tax would be chargeable on the supply apart from this section, —

1. (a) no tax shall be charged on the supply; but

2. (b) it shall in all other respects be treated as a taxable supply,”

Although the tax charged is nil or zero, it is nevertheless a taxable supply. The implication of it being a taxable supply is that input tax may be claimed. Hence the paradox that a business which is exempt cannot claim any input tax credit or refund from the Comptroller but a business which is taxable can. This may not be apparent to a person unfamiliar with the mechanics of the tax. Due to space constraints, this paper assumes that the reader is familiar with the basic principles of the GST system.

II. GENERAL PRINCIPLES

The normal GST rules for registration and accounting apply to law firms. All practising solicitors are registered as either sole practitioners or

partnerships until such time if and when law firms are allowed to incorporate as is the case with architects and engineers. Supplies of legal services are generally chargeable to GST at the standard rate of 3% or may be zero-rated. Law firms are likely to be “fully taxable persons” which should result in simpler administrative compliance. Because of the comprehensive nature of the scope of GST in Singapore, it is quite unlikely for any law firm to be making any substantial amount of exempt supplies. The list of exempt supplies is narrow and restricted to financial services and residential property3. Although law firms provide legal services in relation to financial transactions and conveyancing of residential property, such legal services will not be exempt. Paragraph 4(1) of the Fourth Schedule to the Goods and Services Tax Act 19934 (“GST Act”) makes this clear by stating that the exemptions “shall not apply to any services consisting of arranging, broking, underwriting or advising on any of the activities specified therein in return for a brokerage fee, commission or other similar consideration”. However, international services are zero-rated.

III. ZERO-RATING

A. International Services

Extensive amendments were made to clause 21 of the GST Bill by the Parliamentary Select Committee on the GST Bill 19935. The provisions of section 21 which could conceivably apply to legal services are section 21(3)(e), (f), (g), (j) and (k). It would be useful to set out these provisions before examining them:

1. (e) services supplied directly in connection with land or any improvement thereto situated outside Singapore;

2. (f) services supplied directly in connection with goods situated outside Singapore when the services are performed;

3. (g) services supplied directly in connection with goods for export outside Singapore and supplied to a person who belongs in a country other than Singapore, at the time the services are performed;

4. (j) services supplied for and to a person who belongs in a country other than Singapore and who is outside Singapore at the time the services are performed, not being services which are supplied directly in connection with —

   1. (i) land or any improvement thereto situated inside Singapore; or

   2. (ii) goods situated inside Singapore at the time the services are performed, other than goods referred to in paragraph (g);

1. (k) prescribed services supplied for and to a person wholly in his business capacity (and not in his private or personal capacity) who in that capacity belongs in a country other than Singapore;

Paragraph (k) is a significant concession proposed by the Select Committee. Although it appears similar to paragraph (j), it is shorn of the restrictions that the recipient of the services must be outside Singapore at the time the services are performed, that the services must not be supplied directly in connection with land or goods in Singapore and that the recipient must not have a business establishment in Singapore. In lieu of these restrictions a new requirement is added that the service must be “supplied for and to a person wholly in his business capacity (and not in his private or personal capacity)”. The key phrases here are “for and to” and “business capacity”. The significance of the words “for and to” is that the person belonging in a foreign country must be both the recipient and beneficiary of the services. He must not be an agent of another entity which belongs in Singapore. This phrase also appears in paragraph (j) and is borrowed from section 11(2) of the New Zealand GST Act. Hence, if an Indonesian businessman visits a Singapore law firm to procure advice on his joint venture business transaction in Batam Island, that legal service can be zero-rated as an international service. By virtue of the words “business capacity”, legal advice to the Indonesian businessman on personal or family matters cannot be zero-rated. The services of lawyers are prescribed for the purpose of paragraph (k) in paragraph 1 of the Second Schedule to the GST (International Services) Order 19936.

Another restriction, reimposed by the Order though absent in section 21(4)(k), is that legal services supplied directly in connection with land or any improvement to land situated inside Singapore and goods situated inside Singapore at the time the services are performed will be excluded from the ambit of paragraph (k). Thus if the same Indonesian businessman is seeking to buy a condominium or other real property in Singapore, the legal services will not be zero-rated. The question has arisen as to whether the services of a shipping lawyer relating to a ship which sails in and out of Singapore falls within paragraph (k). It is beyond doubt that ships fall within the ordinary meaning of “goods” in the absence of a statutory definition. De Voille (at A5.08) states that “goods” presumably refers to something which is at once tangible, moveable and visible, and of which possession can be taken and does not include heritable property. On a literal interpretation, it appears that the presence of the ship in Singapore will exclude the services of shipping lawyers from zero-rating. However, the Select Committee recognised in its report that “ships are internationally bound and hence the services provided (to ships) are “consumed” overseas”7. It was announced at the Law Society’s GST Seminar held on

16 February 1994 that the Law Society’s GST Committee had made representations on this issue to the Inland Revenue Authority of Singapore (“IRAS”) which will consider it in consultation with the Ministry of Finance. Since then the GST (International Services) Order 1993 has been amended on 23rd March 1994 (S109/94) to exclude ships as defined in section 21(4) of the Act from the restriction in paragraph 1 of the Second Schedule. The definition of “ship” excludes recreation and pleasure craft and passenger harbour craft but includes an oil rig.

Section 21(3)(e) and (f) are fairly clear and will for example zero-rate legal services rendered directly in connection with a housing development project in China or Vietnam. Lawyers who were thinking of taking a day trip to Johore Bahru to draft their client’s agreements in the hope that the service will be zero-rated as a service performed outside Singapore have been foiled by the amendment to section 21(3)(i) made by the Select Committee. Section 21(3(i) is now confined to cultural, artistic, sporting, educational, entertainment, exhibition and convention services performed outside Singapore.

B. Where Do I Belong?

The Select Committee also amended the GST Bill by replacing the concept of “business establishment” with that of “belonging in a country” as part of the test in determining whether a service is international. It is thus instructive to examine the definition of “belonging” as applied to a recipient of services. This concept is defined in section 15 as follows:

(3) If the supply of services is made to an individual and received by him otherwise than for the purposes of any business carried on by him, he shall be treated as belonging in whatever country he has his usual place of residence.

(4) Where subsection (3) does not apply, the person to whom the supply is made shall be treated as belonging in a country if —

1. (a) either of the conditions mentioned in subsection (2) (a) or (b) is satisfied; or

   [(2)(a) he has in that country a business establishment or some other fixed establishment and no such establishment elsewhere;

   (2) (b) he has no such establishment in any country but his usual place of residence is in that country;]

2. (b) he has such establishments as are mentioned in subsection (2) both in that country and elsewhere and the establishment of his at which, or for the purposes of which, the services are most directly used or to be used is in that country.

(5) For the purposes of this section (but not for any other purpose) —

1. (a) a...