Beyond R&D: Capturing and commercialising IP

THE quest for Singapore to be an innovation-driven economy has been relentless since the last decade. This focus was intensified with the announcement of a record S$19 billion five-year Research, Innovation and Enterprise (RIE) 2020 Plan in 2016.

Now, midway into the RIE 2020 Plan, the intention to accelerate the pace of innovation growth is clear: the government has proposed to increase the existing R&D tax deduction from 150 per cent to 250 per cent for staff costs and consumables incurred on qualifying R&D projects performed in Singapore with effect from financial year 2018.

Based on the current corporate tax rate of 17 per cent, the proposed 250 per cent R&D tax deduction equates to an after-tax benefit of 42.5 cents for every qualifying dollar of R&D expenditure. This benefit is globally competitive against more mature jurisdictions such as Australia, the UK and US - and sends a positive signal to large companies on where to place their precious R&D dollars.

While the push for R&D is vital to drive innovation in the economy, equally important is the need to capture the intellectual property (IP) arising from R&D.

According to the US Global Intellectual Property Centre's International IP Index 2018, Singapore ranks ninth globally in terms of the IP environment, which puts it ahead of countries such as Switzerland, Australia, and New Zealand, and second in the Asia-Pacific behind Japan.

The Singapore government's updated IP Hub Master Plan, published in May 2017, outlined various gaps and recommended initiatives to strengthen Singapore as an IP hub, including refinements to the country's tax incentive regime to address the need to anchor post-R&D economic activities in Singapore and improve IP commercialisation.

The introduction of the Intellectual Property Development Incentive (IDI) is one such refinement to encourage the use of IP (namely copyrights and patents) arising from R&D. Taking effect from July 1, 2018, the IDI provides concessionary tax rates of 5 per cent or 10 per cent on qualifying IP income for a predetermined incentive period.

The IDI regulations outlining how the amount of qualifying IP income subject to the concessionary rate would be calculated has not yet been firmed up. However, given how Singapore is aligned with the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting Action 5, it is highly likely that the modified nexus ratio approach will be applied, using R&D expenses as a proxy for substance measurement to determine the amount of income that is qualifying.

A significant proportion of companies conducting R&D in Singapore do not formally recognise the IP resulting from their R&D activities. Often, many fail to fully consider or integrate their IP strategy with their R&D programmes, and that results in wasted opportunity and untapped value. Many companies may only see IP registration as a means of legal protection, and so do not actively consider the best approach to capture the value from such intangible assets and monetise their precious basket of IP.

Furthermore, many companies are not aware that they may be conducting R&D in Singapore, as they do not realise that R&D goes beyond blue-sky basic research to application research that seeks to bring the R&D closer to commercialisation.

Hence companies would benefit from evaluating their Singapore operations for R&D activities and the associated IP generated, given the recently proposed 250 per cent R&D tax deduction and the new IP Development Incentive.

In addition to the potential economic benefits associated with local IP commercialisation, these recent changes to Singapore's tax incentive regime could provide companies with an opportunity to further optimise the tax aspects surrounding the development and commercialisation of their IP in Singapore.

As Indranee Rajah, Minister in Prime Minister's Office, also Second Minister for Finance & Education, said at this year's IP Week @ SG, "In the future economy, IP rights play an important role as an essential and strategic tool for business growth, helping our companies protect their innovations and bring their products and services to the global market. Foreign enterprises can also make use of Singapore as a trusted base for the translation of their ideas and IP into products and services."

As business leaders look to develop IP to grow their business, it is increasingly important for them to ensure that they take a strategic approach towards maximising the value they get from spending precious R&D dollars and the profit-making potential of their IPs.

The views in this article are the writers' and do not necessarily reflect the views of the global EY organisation or its member firms.