Reimbursement and Disbursement of Expenses 1
Recovery of Expenses You incur expenses and subsequently recover them from another party (e.g. customers, related corporations). GST treatment depends on whether the recovery of expenses is a disbursement or reimbursement Disbursement : No GST is chargeable No legal liability to pay the supplier Payments on behalf of another party Reimbursement : GST may be chargeable Includes pure reimbursement one where the person being reimbursed does nothing else except to enter into contract for services/goods which are used by others However, not all reimbursements are subject to tax. 2
Indicators of Principal/Agent Disbursement You incur the expense as an agent if: i) You are not a party to the contract for the supply i.e. you merely arrange and make payment for the supply on behalf of the other party. Reimbursement You incur expense as a principal if: i) You contract for the supply of goods/services in your own name or capacity Where the contract is not clear (i.e. does not spell out the contractual relationship) or there is no contract ii) You are not legally obliged to make payment for the supply supplier s tax invoice issued in the other party s name you are merely authorized by the other party to make payment to the supplier on his behalf the other party is required by law to make the payment ii) You are legally obliged to make payment for the supply supplier s tax invoice issued in your name supplier holds you accountable for the payment (e.g. take legal actions against you for default in payment) you are required by law to make the payment (e.g. for govt. charges set out in certain Acts) 3
Indicators of Principal/Agent Other secondary indicators Disbursement iii) You cannot alter the nature or value of supply without authorisation from the other party iv) The third party supplier knows the identity of the other party and the other party knows the exact cost incurred by you on the supply procured v) You do not own the goods as they belong to the other party Reimbursement iii) You can alter the nature or value of the supplies and make decision on the value of expense to recover iv) You are the only party known to the third party supplier and the other party does not know the cost incurred by you on the supply procured v) You own the goods 4
Reimbursement vs Disbursement How are the expenses incurred? GST treatment Input tax claim Disbursement Paid as an agent on behalf of another party*, such that the legal liability to pay the supplier is not with you - does not constitute a supply - mere payment arrangement - will not be subject to GST not entitled to any input tax claim since the goods or services are not supplied to you but to another party* Reimbursement Incurred as a principal (you have a legal liability to pay the supplier) - may amount to a supply - if a supply, it may be subject to GST or exempt from GST, as the case may be entitled to claim input tax incurred on goods or services procured if the subsequent recovery constitutes a taxable supply * Another party may be your customers, related companies etc, depending on your case 5
Disbursement You did not incur the expenses as an principal (you are not a party to the contract and do not have the legal obligation to pay the supplier) Is GST incurred claimable by you? Ans: NO Your customer is entitled to claim GST based on supplier s tax invoice addressed to his business 6
Disbursement Example 1 Import duty and GST paid by freight forwarder on behalf of a customer (A) GST is charged on goods imported by A Import Permit shows A as the importer Freight forwarder paid GST to Customs Freight forwarder received payment from A for GST paid Does freight forwarder need to charge GST when he recovers the payment from A? 7
Disbursement Answer As the importer of the goods, A is required by law to pay the import GST A is the party held accountable by Singapore Customs (SC) for the import GST The import permit is issued in A s name The import GST is incurred by A as a principal and the freight forwarder is merely paying the import GST to SC on A s behalf. This is a disbursement. Freight forwarder does not need to charge GST on amount paid to SC that it recovers from A. A can claim GST based on import permit, which shows A as the importer 8
Disbursement Example 2 Dreamworkz Pte Ltd provided graphic design services to Co. Y for $1,000 with GST of $70. The invoice was issued to Co. Y but care of Co. Y s consultant, MC Consulting P/L. MC Consulting paid the bill and invoiced Co. Y to recover the amount. In the same invoice, MC Consulting also included its fee of $2,000 with GST of $140 for its consultancy services provided to Co. Y. 9
Disbursement Example 2 Dreamworkz Payment on behalf of Co. Y ($1,070) Graphics design ($1,000 + GST of $70) MC Consulting Co. Y Consultancy services ($2,000 with GST of $140) + recovery of graphics design cost ($1,070) What is the GST amount that MC Consulting needs to charge Co. Y? 10
Disbursement Answer The graphic design services are contractually supplied by Dreamworkz to Co. Y Dreamworkz invoices Co. Y for the services and hence Co. Y is legally obliged to make the payment to Dreamworkz MC Consulting s recovery of the payment made to Dreamworks on behalf of Co. Y is a disbursement and not subject to GST MC Consulting must charge and account for GST of $140 for its consultancy services rendered to Co. Y 11
Disbursement The tax invoices may be presented in the following manner: Dreamworkz P/L s Tax Invoice to Co. Y c/o MC Consulting P/L Graphics Design services $1,000 GST @7% $ 70 Total $1,070 MC Consulting P/L s Tax Invoice to Co. Y Consultancy services $2,000 GST @7% $ 140 Subtotal $2,140 Recovery of payment made to Dreamworkz Pte Ltd (See attached invoice) $1,070 Total $3,210 12
Reimbursement Incur the expenses as a Principal Contracted with the supplier in your own name You are legally obliged to pay the supplier Is GST claimable by you? Ans: YES, claim GST based on supplier s tax invoice to you subject to normal input tax claiming conditions 13
Reimbursement 1. Recovery of expenses is ancillary to or form inputs to your primary supply to your customer Received goods/services form part and parcel of the overall value of your primary supply GST treatment will generally follow that of the primary supply 14
Reimbursement Example 1 In the course of providing consultancy services to D&G, the supplier, Xcelerate Consulting Pte Ltd engaged Prints Pte Ltd for its printing services. Prints Pte Ltd invoiced Xcelerate Consulting Pte Ltd $100 with GST of $7. Xcelerate Consulting Pte Ltd invoiced its customer, D&G $2,000 with GST of $140 for its consultancy services and recovered the cost incurred on the printing services. Xcelerate Consulting Printing services ($100 + GST of $7) Prints Pte Ltd Consultancy services ($2,000 + GST of $140) + recovery of printing cost? Input for Xcelerate s consultancy svc D&G What is the GST amount that Xcelerate Consulting needs to charge D&G? 15
Reimbursement Answer Xcelerate Consulting Pte Ltd contracted with Prints Pte Ltd to provide printing services as part of its supply of services to D&G. Since Xcelerate Consulting Pte Ltd is the principal in acquiring printing services, it can claim the $7 GST charged by Prints Pte Ltd. When Xcelerate Consulting Pte Ltd recovers the costs from D&G, it has to charge and account GST. 16
Reimbursement The tax invoices may be presented in the following manner: Prints P/L s Tax Invoice to Xcelerate Consulting Pte Ltd Printing services $ 100 GST @7% $ 7 Total $ 107 Xcelerate Consulting P/L s Tax Invoice to D&G Consultancy services $2,000 Printing Services $ 100 Subtotal $2,100 GST @ 7% $ 147 Total $2,247 17
Reimbursement 2. Recovery of expenses is separate and not ancillary to or forming inputs to any primary supply of goods/services (e.g. merely procuring goods or services for another party out of convenience) Recovery at cost (100%) Generally, it follows the nature of the original supply Mark-up Separate supply of service (e.g. arranging fees, administrative fees) 18
Reimbursement Example 2 Overseas Co. K s staff will be in Singapore for a business trip. Out of convenience, K requests its local related Co. L to make the necessary arrangements. Co. L contracted for and paid for various expenses for Co. K s staff (including air tickets, accommodation, local transportation, food and entertainment). Co. L subsequently recovers the individual expenses from Co. K with a 5% mark-up for arranging the expenses. Co. L Various expenses incurred for K s staff Local Suppliers Overseas Co. K Recovers expenses + 5% markup 19
Reimbursement Answer Co. L s subsequent recovery of the various expenses from Co. K is a reimbursement since Co. L contracts for them as a principal. Co. L is merely recovering expenses from Co. K and there is no primary supply. Cost recovery: Air tickets 0% GST under Section 21(3)(a) Accommodation 7% GST Local transportation 7% GST Food and entertainment 7% GST Mark-up for arranging services 0% GST under Section 21(3)(j) 20
Summary The recovery of expenses is GST treatment Input tax claim If you incur the expenses as a principal a reimbursement The recovery of the expenses from another party may amount to a supply and may be subject to GST or exempt from GST, as the case may be. You are entitled to claim input tax incurred on goods or services procured by you if the subsequent recovery of such expenses constitutes a taxable supply. If you pay the expenses as an agent a disbursement The recovery of expenses does not constitute a supply and hence will not be subject to GST. You are not entitled to any input tax claim since the goods or services are not supplied to you but to your principal. 21
Summary GST treatment for Reimbursement Recovery of expenses is ancillary to a primary supply of goods or services Recovery of expenses is separate and not ancillary to any primary supply of goods/services GST treatment will follow the primary supply Recovery at cost (100%) Follow the nature of the original supply Recovery of exempt supplies The recovery must be: a) Sale and lease of residential properties b) Financial services c) Supply of investment precious metals Recovery with a mark-up The GST treatment for the 100% cost recovery is based on the nature of the original supply. The GST treatment for the mark-up is based on the separate supply of service (e.g. arranging fees, administrative fees etc). 22
Application Exercise 23
Application Exercise 1. Reimbursement (7% GST) 2. Reimbursement (7% GST) 3. Disbursement (no GST) 4. Reimbursement (7% GST) 5. Disbursement (no GST) 6. Disbursement (no GST) 7. Reimbursement (7% GST) 8. Reimbursement (7% GST) 24