IRAS e-Tax GuideGST: Guide on Due Diligence Checksto Avoid Being Involved inMissing Trader Fraud

GST: Guide on Due Diligence Checks to Avoid Being Involved in Missing Trader FraudPublished byInland Revenue Authority of SingaporePublished on 10 Feb 2021Disclaimers: IRAS shall not be responsible or held accountable in any way for any damage, loss or expense whatsoever,arising directly or indirectly from any inaccuracy or incompleteness in the Contents of this e-Tax Guide, or errors or omissionsin the transmission of the Contents. IRAS shall not be responsible or held accountable in any way for any decision made oraction taken by you or any third party in reliance upon the Contents in this e-Tax Guide. This information aims to provide abetter general understanding of taxpayers’ tax obligations and is not intended to comprehensively address all possible taxissues that may arise. While every effort has been made to ensure that this information is consistent with existing law andpractice, should there be any changes, IRAS reserves the right to vary its position accordingly. Inland Revenue Authority of SingaporeAll rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, includingphotocopying and recording without the written permission of the copyright holder, application for which should beaddressed to the publisher. Such written permission must also be obtained before any part of this publication is stored in aretrieval system of any nature.

GST: Guide on Due Diligence Checks to Avoid Being Involved in Missing Trader FraudTable of Contents1Aim . 12At a glance. 13Glossary . 24Background . 25The Knowledge Principle . 56Pillar 1: Identify and Assess Risk Indicators . 67Pillar 2: Perform Due Diligence Checks . 98Pillar 3: Respond to the Risks and Results of the Checks . 159Keeping proper records . 1710Input tax claims subject to IRAS’ audits or investigations. 1711Frequently Asked Questions . 1912Contact Information . 21Appendix A – An Example of Risk Management to Avoid Being Involved inMissing Trader Fraud . 22

GST: Guide on Due Diligence Checks to Avoid Being Involved in Missing Trader Fraud1Aim1.1This guide explains how businesses may recognise and respond to the riskindicators for a Missing Trader Fraud (“MTF”) arrangement, as well as howthe Knowledge Principle 1 may apply to deny a GST-registered business’input tax claims.1.2The examples in this guide are not exhaustive. Depending on the profile ofyour business and your transactions, you should undertake adequate andappropriate due diligence checks in a risk-based and proportionate mannerto avoid being involved in MTF arrangements.1.3You should read this guide if you are or will be a GST-registered business sothat you can implement practical preventive and detection measures to avoidbeing involved in MTF arrangements.2At a glance2.1MTF is a fraud scheme used by crime syndicates to defraud tax authoritiesof GST (or equivalent taxes) in various jurisdictions, including Singapore.Such fraud poses a serious threat to public revenue.2.2Under an MTF arrangement, a supplier fails to account for or pay the GSTcharged on his sales (this supplier is referred to as the “Missing Trader”),while businesses along the supply chain continue to claim credit of input taxor refund of GST on their purchases.2.3MTF relies heavily on the ability of fraudulent businesses to sell goods orservices to other businesses along the chain. The other businesses alongthe chain may not necessarily be aware of the details of the MTFarrangement. Often, they are presented with an opportunity to make a quickfinancial gain and choose to turn a blind eye to the true nature of thetransactions entered into. However, there will always be risk indicators thatwould put reasonable persons on alert that the transactions may not be whatthey appear to be.2.4From 1 Jan 2021, a taxable person will not be allowed to claim input tax onsupplies made to him which he knew or should have known to be part of anyarrangement to cause loss of public revenue. This rule is referred to as the“Knowledge Principle”.2.5The Knowledge Principle aims to counter MTF by ensuring that businessesconduct proper due diligence of business deals and scrutinise the legitimacyof their purchases more carefully. Failure to do so may result in noncompliant businesses not being able to claim input tax on affected purchases.1Please refer to paragraph 5 on the Knowledge Principle.1

GST: Guide on Due Diligence Checks to Avoid Being Involved in Missing Trader Fraud3Glossary3.1Taxable personA GST-registered person or a person who is required to register for GST.3.2Missing TraderA taxable person that is usually at the beginning of the supply chain, whofails to account for or pay the GST charged on its supplies. The MissingTrader is often a shell company or bought off the shelf2 without any tangibleassets, or is a completely fictitious company. The director of the MissingTrader is often a nominee who takes instructions from another person.3.3BufferA taxable person who is placed in the supply chain between the MissingTrader and the Exporter. There can be multiple buffers in a single supplychain.3.4ExporterA taxable person that is usually at the end of the supply chain, who buysgoods from the buffers and exports the goods to overseas customers GSTfree.4BackgroundWhat is Missing Trader Fraud?4.1An MTF arrangement is a scheme that involves goods3 being traded undercontrived supply chains. These supply chains are typically managed by a“controlling mind” who determines the price and date of each transaction. Asmall profit is factored in each time the goods change ownership along thesupply chain, thereby increasing the GST that can be claimed by the exporterat the end of supply chain.4.2Under an MTF arrangement, the seller at the beginning of a supply chain (i.e.the Missing Trader) will fail to account for or pay the GST (i.e. output tax)charged on the goods sold to the intermediary businesses (i.e. the Buffers).The goods will ultimately be exported by the last supplier in the supply chain2An off-the-shelf company is an existing company that is already registered with the Accounting andCorporate Regulatory Authority (ACRA) but has never traded. Such company is ready for sale tosomeone who wants to set up a new company quickly.3 Any goods which attract GST can be used to commit MTF, although goods which are high in value,of low weight and readily available in large quantities (such as computer chips or precision parts) arecommonly used.2

GST: Guide on Due Diligence Checks to Avoid Being Involved in Missing Trader Fraud(i.e. the Exporter) to an overseas customer, with no GST charged as thesupply is zero-rated (0% GST). The Exporter then claims from IRAS the GST(i.e. input tax) which it paid on the purchase of the goods from the Buffers.Due to the failure of the Missing Trader in accounting for or paying the outputtax, IRAS will suffer a tax loss if it pays the Exporter the input tax claimed.This process can be repeated by re-importing and re-exporting the samegoods – such an arrangement is also known as “carousel fraud”.4.3In some arrangements, the transactions only exist on paper and no goodsare actually sold or exported. The appearance of the transactions is solelyfor the purpose of claiming fraudulent GST refunds.4.4Figure 1 below is an illustration of a simple MTF or carousel fraudarrangement.3

GST: Guide on Due Diligence Checks to Avoid Being Involved in Missing Trader Fraud Company A sells goods to Company B at 1 million and charges andcollects GST (output tax) of 70,000 from Company B. Company Adoes not pay the GST of 70,000 to IRAS. Company B sells the goods to Company C at 1.5 million and chargesand collects GST (output tax) of 105,000 from Company C. CompanyB deducts the GST of 70,000 (input tax) paid to Company A from theGST (output tax) of 105,000 collected from Company C and pays thenet GST difference of 35,000 ( 105,000 - 70,000) to IRAS. Company C exports the goods GST-free to overseas customer D andclaims from IRAS the GST (input tax) of 105,000 which it had paid toCompany B earlier. If refunded by IRAS, the tax loss to IRAS will bethe amount of 70,000 ( 105,000 - 35,000) that the Missing Traderfails to account for.[GST amount is computed based on the prevailing GST rate of 7%.]4.5The links between participants in the supply chain are often disguised tomake early detection difficult. For example, numerous buffer companies maybe interposed in the supply chain in order to add distance between themissing trader and the exporter and obscure the entirety of the arrangement.Crime syndicates would also approach legitimate businesses to be part ofthe supply chain, attempting to pass off fraudulent transactions as legitimateoffers with attractive business deals that would sound too good to be true.Employees of businesses may also collude with members of crimesyndicates to approve such transactions for the businesses.4.6Businesses which are at risk of being implicated in MTF arrangements areoften those that have failed to perform adequate and appropriate duediligence checks to ensure the authenticity of the transactions being enteredinto, or that choose to ignore obvious warning signs in order to earn a quickprofit.Example 1: Illustration of an MTF arrangement interposed with numerousbuffer companies and legitimate businessesCompanies A, B, C, D, and E are GST-registered businesses. Company A(“Missing Trader”) supplies goods to Company B and charges GST on theprice of the goods. Company B supplies the same goods to Company C ata higher price, allowing him to earn a profit margin, and charges GST onthis price. The same supply of goods is simply passed on from CompanyC to Company D and then from Company D to Company E, with a higherprice charged each time the goods are sold, with no material value addedto the goods. Companies B, C and D (“Buffers”) are interposed to addlayers between the Missing Trader and the Exporter.4

GST: Guide on Due Diligence Checks to Avoid Being Involved in Missing Trader FraudCompany E (“Exporter”) is asked to first buy goods from Company D andthen sell the same goods to a pre-arranged overseas customer, CompanyF. Company E was promised an attractive deal with no commercial risk(e.g. guaranteed profits with back-to-back orders without the need to holdinventory, or the need to source for suppliers or customers) or no creditrisk (e.g. upfront payment made by overseas customer before delivery ofgoods). All that is required of Company E is to simply pay for the GSTupfront for the purchases made from Company D and thereafter, seek toobtain a refund from IRAS. Company E agrees to participate in this “toogood to be true” deal, exports the goods zero-rated to Company F, andthen submits a refund claim to IRAS.All the above-mentioned supplies are part of an MTF arrangement.5The Knowledge Principle5.1You may incur GST on your purchases (i.e. input tax) when purchasing fromGST-registered businesses or when importing goods into Singapore. Youmay claim the input tax incurred, if you satisfy all the conditions4 for makingsuch a claim, by deducting the total input tax you have paid on your businesspurchases from the total output tax you have collected from your customers.The difference, called the net GST payable or net GST refundable, is whatyou will either pay to or receive (as a refund) from the Comptroller of GST(“Comptroller”).5.2From 1 Jan 2021, you will not be entitled to any input tax on any purchasewhich you knew or should have known to be a part of an arrangement tocause loss of public revenue (i.e. the “Knowledge Principle”)5. The input taxclaim will be denied even though you may have satisfied all the otherconditions for claiming input tax.5.3Under the Knowledge Principle, you should have known that a supply madeto you is part of an arrangement to cause loss of public revenue if:(a)(b)(c)The circumstances connected with the supply made to you or with asupply made by you, or both, carried a reasonable risk of the supplybeing a part of such arrangement; andBefore making a claim for input tax on the supply made to you, youdid not take reasonable steps to ascertain whether the supply was apart of such arrangement; orYou took reasonable steps to ascertain whether the supply was a partof such arrangement andPlease refer to paragraph 6.1.2 of the e-Tax Guide on “GST: General Guide for Businesses” for alist of conditions for claiming input tax.5 Sections 20(2A) and (2B) of the GST Act.45

GST: Guide on Due Diligence Checks to Avoid Being Involved in Missing Trader Fraud(i)(ii)(iii)concluded that the supply was not a part of such arrangementand the conclusion is not one that a reasonable person wouldhave made;was unable to conclude that the supply was not a part of sucharrangement; ordid not make any conclusion as to whether the supply was orwas not a part of such arrangement.5.4The test for whether you “should have known” that a supply was a part of anarrangement to cause loss of publ