Singapore Reveals New IP Regime in 2017 Budget

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By Ben Stupples

Singapore has announced a new intellectual property regime to encourage companies based in the country to exploit the income derived from their research and development activities.

Corporate income derived from intellectual property will be “incentivized” under the government’s new IP Development Incentive, according to annex documents published as part of Singapore’s 2017 budget.

The regime will replace the country’s existing IP incentives and comply with the Nexus approach for IP regimes enforced by the Organization for Economic Development and Cooperation as part of its 15-action project against multinational companies shifting their profits to low-tax jurisdictions.

The announcement is a “major change” for Singapore’s tax incentives regime, which has been a large part of its corporate income tax system for the past 40 years, Steve Towers, a tax partner and international tax leader for Singapore and Asia at Deloitte, told Bloomberg BNA in a Feb. 21 e-mail.

“It was expected that the government would have to do something to ensure that tax incentives are BEPS-compliant,” he said in reference to the OECD’s Base Erosion and Profit Shifting Project, which identified certain IP regimes as a harmful tax practice. “This particular response was not expected.”

IP Exploitation

Intellectual property—the issue behind Apple Inc.'s six-year smartphone legal battle with Samsung Electronics Co.—is a fundamental part of fostering research and development by allowing businesses to profit from their inventions through patent, trademark and copyright laws.

In Europe, where governments have used them most, IP regimes have various names—patent, knowledge development, innovation boxes—but they all aim to achieve the same result: effectively allowing a low tax rate on income from intellectual property.

Some patents can give businesses exclusive rights to their intellectual property for a limited period of time. In 2010, almost a fifth of U.K. drug-maker GlaxoSmithKline Plc’s global sales came from its patented asthma drugs, according to data compiled by Bloomberg BNA. In 2015, the company also received 285 million pounds ($355 million) in tax relief through the U.K. and Dutch IP regimes.

Singapore encourages foreign investments by offering fiscal and non-fiscal incentives to businesses when significant substantive business is and economic activities are conducted in the local economy.

The country’s IP Development Incentive, or IDI, may help to attract foreign companies to locate their intellectual property in Singapore, and it will replace the IP system currently in place for companies.

Singapore’s existing regime conflicts with the OECD’s Nexus approach, which restricts eligible IP and requires companies to relate their research to the same country in which they apply for tax relief.

Grandfathering Period

Companies who benefit from the existing IP regime can continue to use it until the end of June 2021, according to the 2017 budget documents published Feb. 20 by Singapore’s Ministry of Finance.

The new IP regime will take effect from July 2017 and will be administered by Singapore’s Economic Development Board, the agency tasked with leading the government’s global business strategy.

Yet while it clarified the starting date for the new regime, Singapore’s finance ministry did not clarify the lower rate at which income derived from companies’ IP will be taxed. Instead, it said that the Economic Development Board, or EDB, will publish further details of the new regime in May 2017.

“There is currently no standalone tax incentive targeting solely on intellectual property,” Chester Wee, an international tax services partner at EY Singapore, told Bloomberg BNA in a Feb. 21 e-mail about the country’s existing IP regime.

“Whether the proposed IP Development Incentive will make Singapore a more attractive location for IP-related activities depends on the implementation details and other factors such as the royalty withholding tax rates in our double tax treaties,” he added.

“It should be noted that this is not necessarily the only change which the government will make to tax incentives, to make them BEPS-compliant,” Deloitte’s Towers added. “It is possible that the government will decide that changes are necessary to some other tax incentives.”

Further Changes

As part of Singapore’s 2017 Budget, the Ministry of Finance also announced Feb. 20:

  •  An extension of the government’s existing corporation income tax rebate to 2018;
  •  An extension of the qualifying period for withholding tax exemptions on payments made to non-resident non-individuals “to continue promoting Singapore as a financial hub”;
  •  A simplification of Singapore’s Global Trader Programme—which grants a tax rate of 5 percent of 10 percent on qualifying trading income—to “encourage” more global trading activity.

“The corporate income tax rebate is a broad-based tax measure, in that all companies regardless of size enjoy the rebate,” Daniel Ho, a tax partner and public sector tax leader at Deloitte Singapore, told Bloomberg BNA in a Feb. 21 e-mail. Yet the rebate’s structure, capped at S$25,000 ($17,600) for 2017, means “smaller enterprises would benefit proportionately more than larger businesses.”

“Non-resident non-individuals include foreign companies that are controlled and managed outside Singapore,” EY Singapore’s Wee added on the withholding tax exemptions, “but this definition may be wide enough to cover other non-corporate entities such as partnerships and trusts.”

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

Singapore's 2017 Budget documents are at http://www.singaporebudget.gov.sg/budget_2017/budgetspeech.aspx.

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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