SINGAPORE – Direct sales company Herbalife has won its appeal to the High Court against the taxman over the value of the products it supplies to its members on which goods and services tax is levied.
Herbalife sells nutritional supplements, weight-management products and other personal care products to its members at varying discount tiers, from the standard 25 per cent and up to 50 per cent.
It is not disputed that the products supplied by Herbalife to its members are liable to GST, but the issue is how such supplies should be valued.
The issue in contention in the case is whether the discounted rate is taken as the value of the supply, as contended by Herbalife, or the open market value of the nutritional products, as argued by the Inland Revenue Authority of Singapore (Iras).
In a judgment on Monday, Justice Choo Han Teck ruled in Herbalife’s favour.
Justice Choo accepted that Herbalife’s business model results in revenue leakage, but said the question is how it ought to be plugged.
The judge said the solution to the revenue leakage lies not in expanding the scope of non-monetary consideration, but in the adoption of a special valuation provision such the one adopted in the United Kingdom’s Value Added Tax (VAT) Act.
The UK law specifically addresses business models akin to Herbalife without the potential negative collateral effects on commercial practices.
But this is beyond the power of the courts in Singapore, and must be implemented legislatively, said Justice Choo.
Iras had issued notices of assessment to Herbalife for the accounting periods of Jan 1, 2012, to March 31, 2017, on the basis that the supplies were valued at open market value.
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The disputed amount of GST involved in the appeal is slightly under $2.2 million, inclusive of the 5 per cent late payment penalty.
Under Herbalife’s direct selling business model, it sells products only to members, who in turn sell them to consumers.
Members who sell the products to consumers earn as profit the difference between the price they paid to Herbalife and the price they are contractually bound to sell the products.
Members move up the discount tiers as they accumulate volume points, which are credited for their own purchases as well as the purchases of the new members they refer to Herbalife, known as downlines.
Iras argued that if the members were GST-registered, the final sale to end-consumers would be taxable supplies and GST would be levied on the full price, which is the contractually stated retail price of the products without the tiered discount.
Because the members are not GST-registered, the only taxable supply is the supply between Herbalife and the members.
The tax man said that by inserting a non-taxable intermediary between Herbalife and the final consumer, the difference between the price at which the product is sold to the intermediaries and the final retail price consumers pay is not taxed.
This results in the revenue leakage, said Iras, which added that this loss of revenue is addressed by Section 17(3) of the Goods and Services Tax Act.
The provision states that if goods are supplied in exchange for a consideration, or payment, not wholly consisting of money, the value of the supply shall be taken to be its open market value.
Iras contended that the open market value is the retail price of the products less the standard discount of 25 per cent.
But Herbalife, represented by Mr Vikna Rajah, argued that this provision does not apply.
He said a similar provision in the UK VAT Act was unable to bring to tax goods sold via a direct selling business model, thereby requiring the enactment of a special valuation provision.
Since this special valuation provision is absent in Singapore’s GST Act, he argued that there is a lacuna, or a gap, that has to be filled by Parliament.
This article was first published in The Straits Times. Permission required for reproduction.