Singapore motor firms may have to pay millions in back taxes

This story was first published in The Straits Times on Sept 18, 2014

AN IMMINENT decision by a world Customs body could result in the Singapore Government being able to recover hundreds of millions of dollars in back taxes from motor companies here.

The World Customs Organisation has, since 2011, been examining a relatively new practice among some car companies in Singapore.

It boils down to the car companies tweaking the way a vehicle is priced. They lower its cost price and pay the difference to their manufacturers through a so-called franchise or distribution fee. This, industry watchers said, may have resulted in the open market values (OMV) of some cars being substantially lower.

A lower OMV attracts lower taxes and allows companies to price their vehicles more competitively. But if the practice is deemed improper, the Government may recover thousands of extra dollars by way of taxes from each car sold.

This is how it works: Say, the cost price of a car is $18,000. With taxes, it would cost around $41,100 before certificate of entitlement (COE) and profit.

Instead, a manufacturer may sell the car to the importer or distributor for $15,000, but is paid the difference of $3,000 as a franchise or distribution fee.

This would result in the car costing $34,260 before COE and profit. The Singapore Government potentially loses out on tax revenue of $6,840 per car.

If that kind of loss is applied to, say, 3,000 vehicles a year, over three years, the potential back taxes would work out to almost $62 million.

A Singapore Customs spokesman would say only that it "has sought guidance from the World Customs Organisation on the treatment of distribution fees as an adjustment to the price for vehicles".

When contacted, the organisation said the issue is before its technical committee, which has yet to reach a conclusion.

But The Straits Times understands that it has instructed its members to come to a decision by the next meeting, scheduled for next month in Brussels.

Member states China and India had apparently raised questions on the franchise or distribution fee. A transcript of a meeting in May had China saying that "paying distribution fee makes no sense between related companies".

Observers said China and India's positions reflect actions they took recently at home. Both slapped hefty fines on automakers for anti-competitive practices like price-fixing.

In Singapore, several car brands, notably German ones, have seen a dip in their OMVs following their manufacturers assuming the role of distributor, importer or retailer.

This has raised protests among other brands, but Singapore Customs has hitherto not found anything inappropriate about the OMV adjustments.

Still, protests persisted.

So, about three years ago, the authority decided to take the matter to the world body.

Mr Cecil Leong, chief executive of tax experts Mayer Brown Consulting, said "a major concern of countries would be the immediate loss in Customs revenue".

But, he added: "The impact on overall state revenue will also spread... and may also affect other indirect tax collections, such as GST (goods and services tax), VAT (value-added tax), etc."

As for the long time the authorities are taking to arrive at a decision, Mr Leong said: "This is a very complex issue."

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