May 2018 Issue: 2/2018 Business Incentives Advisory Tax Alert IP income definition is out, what should you do? On 20 February 2017, Minister of Finance Mr. Heng Swee Keat announced the introduction of the IP Development Incentive (IDI) and in conjunction, the following (IP income carve-out provisions): Removal of IP income from the scope of the Pioneer Certificate-Services (PC-S) and Development and Expansion Incentive (DEI) for new incentive awards approved on or after 1 July 2017 (subsequently moved to 1 July 2018). Grandfathering of such income until 30 June 2021 for existing incentive recipients. Business Incentives Advisory Tax Alert May 2018 1
After extensive consultations with companies, tax advisors as well as the Organisation for Economic Co-operation and Development (OECD), the final legislation on the IP income carve-out provision is now finalised and gazetted on 4 May 2018. Along with this, the Singapore Economic Development Board (EDB) will be releasing a guide, which provides a list of questions intended for taxpayers to self-assess if they are subject to the IP income carve-out provisions. Based on discussions with our clients so far, one common feedback is that the rules are complex and they have difficulty interpreting how the rules will apply in their circumstances. Whether you are facing the same difficulty or starting to figure out how you may be impacted by the recent legislative changes, we aim to simplify the thought process for you. Please refer to an illustrative decision tree of how you may be impacted by the IP income carve-out provisions as well as our responses to some of the common questions and comments that many of our clients have raised with respect to the IP income carve-out provisions. Decision tree Start Not DEI / PC-S DEI / PC-S* No impact No Yes No Before 1 July 2018 When was your PC-S and DEI (including extension) approved? Yes After 1 July 2018 IP grandfathered until 30 June 2021 or upon incentive expiry (whichever is earlier) From the first day of incentive * This includes the DEI awarded under the International Headquarters Programme. Business Incentives Advisory Tax Alert May 2018 2
Frequently asked questions Q1 Why can t the IP income continue to be covered under the PC-S and DEI incentives? Why is there a need for a change? As a participating associate to the OECD-Base Erosion and Profit Shifting (BEPS) project, there is a need for Singapore to amend its incentive schemes to comply with international standards on countering harmful tax practices. As a result of the amendments, the Forum of Harmful Tax Practices have assessed Singapore s existing incentive regimes (including the Headquarters programme) as not being harmful. Q2 What is IP? IP refers to a right conferred by any patent, copyright, trade mark, registered design, geographical indication, layout design of integrated circuit or the grant of protection of a plant variety. In contrast with the Section19B writing down allowance, note that trade secrets and information that have commercial value are not covered under this definition. Q3 If I do not own IP, will I be impacted? Under the regulations, a company is considered to own IP if it is the owner of the right or a grantee of a license to the right. Hence, even companies that do not own IP but enter into agreements to sub-license the IP, could be impacted and should duly assess the impact of the IP income carve-out provisions. Q4 If I do not derive royalty or licensing income, will I still be affected? IP income is defined as royalties or other income derived from an IP right if it is receivable as consideration for the commercial exploitation of that right. Hence, it is not limited to royalty or licensing income. The challenge lies in determining what constitutes commercial exploitation. Besides the self-assessment guide to be released by the EDB, principles from which we could take reference to assess commercial exploitation include: How commercial exploitation is viewed from transfer pricing perspective Rights-based approach adopted for characterising software payments and payments for the use or the right to use information and digitised goods Business Incentives Advisory Tax Alert May 2018 3
Q5 How do I determine how much of my income is IP income? To assess what may be an appropriate methodology in computing IP income, several data points should be considered, such as underlying agreements that give rise to the particular income stream as well as transfer pricing documentation given that the methodology to compute IP income should be aligned with the transfer pricing methodology adopted. Q6 What are new IP assets? These relate to IP that come into ownership of the company: On or after 1 July 2018; or After 16 October 2017 but before 1 July 2018 as a result of an acquisition by the company, directly or indirectly, from a related party, where the main purpose or one of the main purpose is to avoid income tax in Singapore or elsewhere. Q7 How should I be computing IP income from new IP versus existing IP assets? The transitional rules for determining the IP income from new IP or existing IP assets comprise the following three methodologies (in order of the ability to do so): 1. Direct identification where companies can distinguish the income streams arising from the new IP or existing IP 2. If option 1 is not available, a predominant test will determine if the IP income is predominantly derived from existing or new IP right 3. Where option 2 is not determinable, a proxy test* will be used Determining which methodology is most appropriate for the company will depend on the kind of information or data that is available in relation to its IP. Note that the methodology needs to be applied on an annual basis. *If the percentage of the new IP owned by the company in the basis period is 80% or more, all of such income is treated as derived from new IP (and none of such income is treated as derived from existing IP). If the percentage of the new IP owned by the company in the basis period is less than 20%, none of such income is treated as derived from new IP (and all of such income is treated as derived from existing IP). If the percentage of the new IP owned by the company in the basis period is 20% or more but less than 80%, that same percentage of such income is treated as derived from new IP (and the remainder is treated as derived from existing IP). Q8 I have not seen any legislation on IDI yet, but can I start discussion with the authorities first? We understand the draft legislation will be released for public consultation in the second half of 2018. In any case, the IDI will start from 1 July 2018. Business Incentives Advisory Tax Alert May 2018 4
Conclusion As can be seen from the above, the IP income carve-out provisions are not straightforward. Nonetheless, it clearly demonstrates the efforts that the EDB and the IRAS have expended to achieve the delicate balance between being BEPS-compliant and ensuring the continued attractiveness of Singapore incentive regime. As such, it would be important for companies to consider and start assessing the impact arising from the above IP income carve-out provisions. Tan Bin Eng Partner, EY Asean Business Incentives Advisory - Tax Services, bin-eng.tan@sg.ey.com Luis Coronado EY Asean Leader, International Tax Services and Partner, luis.coronado@sg.ey.com Stephen Lam Partner, Transfer Pricing Services, stephen.lam@sg.ey.com Jonathan Belec Partner, Transfer Pricing Services, jonathan.belec@sg.ey.com Tracy Tham Associate Director, Business Incentives Advisory - Tax Services, tracy.tham@sg.ey.com Johanes Candra Associate Director, Business Incentives Advisory - Tax Services johanes.candra@sg.ey.com Business Incentives Advisory Tax Alert May 2018 5
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