TECHNICAL EXCELLENCE

SINGAPORE’S IP TAX REGIME

SINGAPORE’S INTELLECTUAL PROPERTY TAX REGIME

ABHIJIT GHOSH & GARY FOO

AN OVERVIEW OF THE NOW AND BEYOND

In today’s modern economy, intellectual property (IP) is becoming increasingly important as a strategic asset due to its inherent ability to create wealth and thereby enhance shareholders’ value. As more multinationals have started to shift from brick-and-mortar business to online business, there is an increased awareness and usage of different forms of IP rights across the entire business value chain. Such awareness has led multinational businesses to start protecting their intangible assets, spending more on research and development (R&D) capabilities, developing brands, technical abilities and know-how. The idea is to stay ahead of the competition.

This probably explains why global patent filings have increased by 8.3% and global trademark filing activity has increased by 13.5% over the last seven years [based on the “World Intellectual Property Indicators 2017” report published by World Intellectual Property Organisation (WIPO)].

… given that Singapore has one of the lowest corporate tax rates in the region, it still remains as one of the most competitive locations for IP hosting.

BROAD OVERVIEW OF IP MANAGEMENT LIFECYCLE AND APPLICABLE TAX INCENTIVES IN SINGAPORE

A typical IP management lifecycle involves three distinct phases (Figure 1).

Figure 1 Three distinct phases of a typical IP management lifecycle

 

IP creation and acquisition phase

Businesses can deploy resources to carry out R&D on their own to create new IP. Alternatively, they may, for better access to resources and better management of costs, engage third parties or other group entities to carry out the R&D project on their behalf under a “contract R&D arrangement”.

Besides investing in the creation of IP, businesses may also invest in acquiring IP to build up their IP inventory. Broadly, such IP acquisition may involve:

  • Outright purchase of legal ownership of IP rights, or
  • Acquisition of economic ownership of IP rights under a licensing/royalty arrangement.

Below is a range of tax incentives available for IP creation and acquisition in Singapore:

a) Enhanced tax deduction

Companies that perform qualifying R&D projects in Singapore can enjoy a tax deduction of up to 250% for staff costs and consumables. This includes expenditure incurred for contract R&D arrangement performed in Singapore. This additional perk is in line with the R&D practices of regional economies, with Thailand and Hong Kong offering deduction of up to 300% (subject to caps). That said, given that Singapore has one of the lowest corporate tax rates in the region, it still remains as one of the most competitive locations for IP hosting.

b) Research Incentive Scheme for Companies (RISC) grant

Companies investing in approved R&D projects in Singapore can enjoy cash grants of up to 30% of qualifying R&D project costs such as manpower, training, consultancy, equipment, software, IP and material costs, and up to 50% of local manpower costs.

c) Writing-down allowance (WDA)

Companies can claim automatic WDA on capital expenditure incurred to acquire legal and beneficial ownership of specified IP rights1 on a straight-line basis over a choice of five, 10 or 15 years, subject to the conditions under Section 19B of the Singapore Income Tax Act (SITA). Approval from the Singapore Economic Development Board (EDB) is required where only the economic ownership of such IP rights is acquired.

In addition, the Inland Revenue Authority of Singapore (IRAS) requires a valuation report from an independent third-party valuer in respect of:

  • Capital expenditure incurred in acquiring the IP rights from a related party where the value is greater than or equal to S$500,000, and
  • Capital expenditure incurred in acquiring the IP rights from an unrelated party where the value is greater than or equal to S$2 million.

IP protection phase

Following the creation or acquisition of IP rights, businesses should set up the necessary legal platforms to protect themselves from various risks, including the risk of losing out to the competition. The ability to protect the IP inventory and defend the IP rights against infringement is extremely important.

Companies that incur patenting costs for an invention can claim an automatic tax deduction on the patent costs which otherwise would be regarded as non-deductible expenses, provided the legal and economic ownership of the resulting IP lies with the Singapore companies claiming it. The 2018 Budget also provides for 200% tax deduction for the first S$100,000 of qualifying IP registration costs.

IP exploitation phase

Successful exploitation of IP rights helps to generate revenue, raise capital, strengthen competitive positioning or reduce costs.

With effect from 1 July 2018, companies that derive qualifying IP income2 from the commercial exploitation of qualifying IP projects can qualify to apply concessionary corporate tax rates of 5% or 10% on a percentage of the qualifying IP income under the Intellectual Property Development Incentive (IDI). The percentage is determined by the modified nexus approach.3 This benefit is available on application to EDB and subject to meeting qualifying conditions such as making incremental specified fixed asset investments or incurring incremental specified annual business spending and creating specified incremental skilled job opportunities.

In addition, taxpayers using or exploiting their IP inventory to earn other forms of business income (by supplying goods or providing services) may, subject to meeting specified conditions, qualify for concessionary corporate tax rates under the Development and Expansion Incentive (DEI) programme, which is also administered by EDB.

IRAS does not provide any prescribed valuation methodologies to be adopted to value an IP as it acknowledges that the appropriateness of the valuation approach and method generally depends on the nature of the IP rights, the strength and weakness of the possible valuation approaches and methods, and the availability and reliability of information applicable to the method.

VALUATION OF IP FOR SINGAPORE TAX PURPOSES

A valuation report from a third-party independent qualified valuer4 is required if a company intends to claim WDA on capital expenditure incurred in acquiring a qualifying IP.

IRAS does not provide any prescribed valuation methodologies to be adopted to value an IP as it acknowledges that the appropriateness of the valuation approach and method generally depends on the nature of the IP rights, the strength and weakness of the possible valuation approaches and methods, and the availability and reliability of information applicable to the method. As such, one may rely on any or combination of the following most common valuation methods:

1) Market-based approach: Determines the value of the IP based on the estimate of the price at which it can be sold, that is, the present market value of the future economic benefits which could be derived by the owner of the IP.

2) Cost-based approach: Measures the economic benefits of ownership by estimating the amount of money that would be required to replace the future service capability of the subject IP.

3) Income-based approach: Determines the value of the IP based on the income generating capability of the IP.

Interestingly, IRAS reserves the right to seek a second independent valuation report or adjust the amount eligible for WDA, if it has reason to believe that the true value of the IP rights is materially different from that presented in the valuation report.

OUR SWEET SPOT

Given Singapore’s land and labour constraints, it will be more relevant for us to focus on IP assets that zoom in on intangible attributes (example, product design, brand, aftersales services and customer experiences). In the new world, customers will continue to seek products that are not only value for money, but also products with high intrinsic quality that induce the “feel good” factor. Singapore as a country should be geared up to offer not only goods and services but experiences to the global market. Singapore Airlines is a case in point. To achieve this, we need to encourage more investments in R&D, design, branding and after-sales services (Figure 2).

Figure 2 The production cycle of the 21st century

Source: “World Intellectual Property Report 2017: Intangible capital in global value chains”, WIPO 2017, p.10

THE WAY FORWARD

The Singapore government has long recognised that a strong IP environment is absolutely necessary for sustained economic progression in the new world, and IP will continue to be a strong driver for the country’s business growth. In addition to all the IP legal and tax measures unveiled over the years, it may be timely for our policymakers to also consider the following suggestions to retain Singapore’s shine as a favourable IP holding-cum-commercialisation location:

  • Introduce automatic double tax deduction for design and brand development expenses incurred by local companies;
  • Renegotiate old tax treaties for more preferential treaty rates applicable to royalties;
  • Build and nurture a financial ecosystem (could be under a public-private partnership) which will help businesses to access sources of capital using their IP inventories as valuable collateral assets.

Needless to say, in this world of shifting sands, continuous monitoring and actions are required to modernise and enhance Singapore’s attraction as a favourable IP holding-cum-commercialisation location.


Abhijit Ghosh is an Accredited Tax Advisor (Income Tax) of SIATP and International Tax Partner and Tax Market Leader, PwC Singapore, and Gary Foo is Tax Manager, PwC Singapore.


1 Specified IP rights include patents, copyrights, trademarks, registered designs, geographical indications, layout designs of integrated circuits, trade secrets or information with commercial value and plant varieties.

2 “Qualifying IP income” refers to royalties or other income receivable as consideration for the commercial exploitation of qualifying IP rights (that is, patent and copyrights subsisting in software).

3 The modified nexus approach is an international standard set by OECD, which allows jurisdictions to provide benefits to the income arising from exploitation of an IP right, so long as there is a direct nexus between the income receiving benefits and the expenses contributing to that income.

4 “Qualified valuer” refers to Chartered Valuer and Appraiser, Chartered Financial Analyst and Chartered Accountant.