What is a Missing Trader Fraud (MTF) Arrangement?

As indicated by its name, the objective of such an arrangement is to defraud the tax authority (Inland Revenue Authority of Singapore, or “IRAS”) and cause loss of public (tax) revenue.

In a typical Missing Trader Fraud (MTF) arrangement illustrated by IRAS, a trader (the Missing Trader) sells goods locally and charges Goods and Services Tax (GST) on the sale. This missing trader may be GST-registered. The GST is collected from the buyer but is not reported to nor paid to IRAS by the missing trader. The buyer will in turn sell the goods to another buyer and claim from IRAS the input tax which he has paid to the missing trader. Eventually, the goods will be exported out of Singapore and no GST is charged (zero-rated). This arrangement results in IRAS losing tax revenue through refunding input tax paid without collecting the GST output tax from the missing trader.

MTF arrangements may take many forms – The Goods and Services Tax Act (GST Act) contains 5 illustrations under which such fraud may be perpetuated.

How Missing Trader Fraud will Affect You

The main risk to legitimate GST-registered businesses is not being able to claim a refund of input tax paid to a missing trader.

A GST-registered business will usually be able to claim input tax paid to suppliers which are directly attributable to taxable supplies. These GST input tax claims are subject to certain conditions like having supporting invoices addressed by the supplier to the GST-registered business.

However, with effect from 1 January 2021, a GST-registered business will not be entitled to claim a refund the input tax that paid on any purchase which it knew or should have known to be a part of a Missing Trader Fraud arrangement. This will apply even if the other conditions for claiming GST input tax have been met.

The Knowledge Principle – If you should have known

A person should have known that a transaction was a part of a MTF arrangement if —

  • the circumstances connected with the entity’s transactions carried a reasonable risk of being a part of such arrangement; and
  • before claiming a refund of the input tax, the GST-registered business —

(i)      did not take reasonable steps to ascertain whether the transaction was a part of such arrangement; or

(ii)     took reasonable steps to ascertain whether the transaction was a part of such arrangement and —

(A)    concluded that the transaction was not a part of such arrangement and the conclusion is not one that a reasonable person would have made;

(B)    was unable to conclude that the transaction was not a part of such arrangement; or

(C)    did not make any conclusion as to whether the transaction was or was not a part of such arrangement.

Implications on GST-registered businesses

The law now imposes additional responsibility on GST-registered businesses to assess the risk of whether its transactions are part of a MTF arrangement. GST-registered businesses are required to ascertain and must be able to reasonably conclude that it is not part of such a MTF arrangement.

It does not matter if the GST-registered business does not have actual knowledge that the transactions are part of such an arrangement. If it can be shown that the GST-registered business ought to have known that it has been part of a MTF arrangement, its input tax claim will be disallowed. It is an objective test – i.e. whether a reasonable person would have made the same conclusion.

It should be noted that an affirmative conclusion that a transaction is not part of a MTF arrangement is required. If the GST-registered business did not make any conclusion or could not conclude that the transaction is not part of a MTF arrangement, it will fail the test.

What you need to do

GST-registered businesses are required to take reasonable steps to ensure that they are not dealing with traders that are part of an MTF arrangement.

IRAS has issued guidance for GST-registered businesses on due diligence checks that can be undertaken to avoid being part of a MTF arrangement. The three-pillar approach by IRAS to apply the Knowledge Principle includes performing risk assessments, due diligence checks and responding to the risks and results of the checks. Clients should familiarise themselves on the risk factors and procedures to be undertaken in the IRAS e-Tax guide and apply them in the conduct of their business.

We can help you

The change in legislation imposes new responsibilities on GST-registered businesses when making their input tax claims. Non-compliance with the requirements may result in financial losses. IRAS conducts audit on GST returns and may disallow input tax claims on transactions that are part of a MTF arrangement.

We provide training and consultancy on implementation of the due diligence procedures in applying the Knowledge Principle. We can also review your business procedures and determine if any changes required to reduce the risks of non-compliance with the new legislation.

Contact

Wee Kong Eng
[MTax, CA (Singapore), CIA, Dip. in Law, ATP (Income tax & GST)]
K E Wee & Associates PAC, Public Accountants and Chartered Accountants
Email:         kongeng@kewee.com.sg
Mobile:       +65 97552868
Office:        +65 67200950 ext 115
Internet:      www.kewee.com.sg

Date of Publication

This Client Update was originally published on 3 February 2021.

Disclaimer

Information is subject to change. This is not a comprehensive guide and information may have been summarized, simplified or paraphrased to suit scenarios more commonly applicable to our clients and for easy understanding.  Any opinion or interpretations are solely those of K E Wee & Associates PAC and may be subject to agreement with the relevant authorities. We disclaim all liabilities arising from any inaccuracy that may be contained in the above information.