Singapore retained its pole position in Asia for having the best intellectual property protection, according to the World Economic Forum’s Global Competitiveness Report 2014-2015. This bodes well for Singapore’s ambition to become a global intellectual property hub in Asia.
A series of measures, as part of a 10-year IP Hub Master Plan, has been initiated to build Singapore as a vibrant marketplace for IP transactions — a place where brands can create, protect, manage and exploit their IP.
An attractive tax regime plays a crucial role in encouraging investments in IP. One of the key tax reliefs available for IP ownership and management in Singapore is the writing-down allowances (WDA) available on IP acquisition costs under section 19B of the Singapore Income Tax Act (ITA).
Fine-tuning section 19B
Singapore’s tax regime has constantly evolved to keep pace with local or global developments. There is certainly room for section 19B to be further fine-tuned to make it more relevant and attractive to investors using Singapore as an IP holding location.
1. Introducing an “IP Box” or similar tax regime
One of the recommendations in the IP Hub Master Plan is for Singapore to implement an IP Box or similar tax regime. These broad-based tax incentive schemes offer tax exemption or lower effective tax rates on IP-related income such as licensing fees.
Details of the Singapore IP Box regime have yet to be announced. However, the IP Hub Master Plan clearly states that in order to enjoy the tax benefits of the IP Box, IP owners must have substantive management decision-making functions anchored in Singapore.
2. Greater clarity on qualifying IP for section 19B WDA
The list of qualifying IP for section 19B WDA has been left largely unchanged since 2001. The category “trade secret or information that has commercial value” is open to broad interpretation since it is not defined in the ITA.
In Budget 2014, it was proposed that a negative list be inserted in section 19B to provide further clarity on items that do not meet the description of “information that has commercial value.” This list would include customer-based intangibles and documentation of work processes. This has been legislated in November 2014.
To help taxpayers determine whether their IP expenditure can qualify for the WDA, the government could also provide specific guidance and examples on what constitutes the two excluded items: customer-based intangibles and documentation of work processes.
3. Widening the scope to include in-house development of IP
Section 19B WDA is only granted on the acquisition of qualifying IP and not on internally generated IP. Costs incurred in developing and creating a company’s IP such as consultancy costs relating to logo creation and brand-building costs do not qualify for relief under section 19B WDA.
Some of these internal IP creation costs may not meet the definition of “research and development (R&D)” in the ITA and thus will not qualify for tax deduction claims.
Should there be a distinction between internally generated and acquired IP for tax relief purposes? A company’s investment in generating or developing IP in-house is an equally important process of building brand equity. This “intangible” should not be ignored.
Expanding the section 19B WDA to allow claims on the development costs of in-house IP will encourage more home-grown companies to build their own brands and house their global IP management activities in Singapore.
4. Including incidental costs as qualifying costs
Under the ITA, qualifying section 19B WDA costs specifically exclude legal fees, stamp duty and other costs related to the acquisition of the IP. (Patenting costs and qualifying IP registration costs may be deductible under section 14A of the ITA.) Such costs are often regarded as capital expenditure since they are incurred in bringing into existence an asset of enduring benefit.
As these are incidental costs that have to be incurred prior to the ownership of the IP, we hope that they will be allowed as qualifying expenditure for section 19B WDA.
This move will put Singapore on par with Hong Kong and Ireland, where certain incidental costs such as legal expenses, valuation fees and application fees are accepted as qualifying costs for the WDA.
5. Exempting the clawback of allowance
Currently under section 19B, WDA is granted equally over five years. If a disposal occurs within this period, no further WDA is allowed in the year of disposal or subsequent years.
WDA previously allowed will also be clawed back through a charge to the company in the tax year the disposal took place. This charge is the lesser of the amount of WDA previously claimed or the price which the rights are sold, transferred or assigned.
The government could consider providing an exemption on the clawback of section 19B WDA previously claimed if the IP rights are held for a significant period of time, say 15 years.
This would provide greater certainty and transparency of the tax treatment while ensuring that the IPs would have been sufficiently exploited in Singapore. This will also send a strong signal regarding Singapore’s commitment to being a global IP Hub.
6. Exempting capital gains from disposal of IP
Singapore does not presently have a capital gains tax. In most cases, gains arising from the divestment of the IP held on capital account are not taxable in Singapore. However, the onus is on the company to prove such capital claims as this is subject to the IRAS’ review and agreement.
To minimize compliance costs, greater upfront certainty on the tax treatment for gains arising from the divestment of IP would be welcomed. In particular, a tax exemption on gains arising from the divestment of IP under certain scenarios could be considered.
7. Introducing a cash conversion option
Under the Productivity and Innovation Credit scheme, taxpayers may make an annual election to convert up to S$100,000 of qualifying expenditure to cash in lieu of a WDA claim, subject to conditions.
With some tweaks, a permanent cash conversion option under section 19B may be an attractive option. The cash conversion option will benefit start-up companies which may not have substantial taxable income during their initial operating years to offset against the WDA. The cash grant received may be more useful to these taxpayers as it will provide much welcomed cash flow. After all, cash is king.
Substance is critical
Singapore is well-poised to achieve its vision of being a global IP hub in Asia, supported by an attractive tax environment. However, in today’s age of anti-tax avoidance, IP tax regimes are coming under increasing scrutiny. Therefore, a cautionary note must be struck.
On 16 September 2014, the OECD released a series of deliverables that addressed 7 of the 15-point Base Erosion and Profit Shifting Action Plan. The interim report with respect to Action 5 (Harmful Tax Practices) and the report with agreed draft recommendations under Action 8 (Transfer Pricing for Intangibles) will have an important impact on IP practices. The issue of substance is a consistent message in these reports.
In light of these developments, it is now more crucial than ever to ensure that IP value creation and economic substance are aligned with profitability. The mere relocation of IP without substance could invite challenges from tax authorities.
This article is included in EY´s You and the Taxman, Issue 4, 2014
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