How global tax changes can impact Singapore's intellectual property ecosystem

INTELLECTUAL property (IP) and other intangible assets (IA) now drive the value of the world's most promising enterprises. While innovation is sector-agnostic and has become a core part of businesses, there may be limited understanding of what exactly IP or IA is and what IP laws, which may differ from country to country, seek to protect.

Every product or service originates from an idea - a creation of the human mind. Creative works - not ideas - may automatically be protected by copyrights while other types of IP may be protected by registering them in the form of a patent, trademark, design, plant variety or geographical indication. Beyond registrable IPs, IAs such as trade secrets, systems and processes are often overlooked assets that drive enterprise value and profits.

Knowing what can be and is protected by law is important. For example, in the new world of Big Data, the database structure and artificial intelligence engine may be copyright-protected while the content within the database may not be, if it comprises merely information rather than literacy works or trade secrets. While this distinction is particularly important in the enforcement of legal rights, it is equally relevant for tax purposes in areas such as the coverage of tax incentives, availability of tax deductions and applicability of withholding tax.

DEVELOPING SINGAPORE AS AN IP HUB

To increase awareness of the role of IP rights in encouraging innovation and creativity, the World Intellectual Property Organisation (WIPO) designated April 26 as World IP Day. This year, on this day, the Singapore IP Strategy (SIPS) 2030 was officially launched. SIPS aims to strengthen Singapore's position as a global hub for IA and IP transactions through three key thrusts - supporting international activities, attracting and growing innovative enterprises, and building a high-calibre workforce.

Singapore has long recognised that innovation - and the development of new products, processes and services for commercialisation - generates value for the economy. The 10-year IP Hub Masterplan, which was introduced in 2013 to drive the development of the country's IP ecosystem, bears testimony to this.

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Various tax measures have been introduced over the years, and there is now a comprehensive host of measures catering to different stages in the IP lifecycle, from creation to protection to exploitation.

These tax measures, together with cash grants and other attributes such as Singapore's business-friendly IP regime and proximity to key growth markets, make the country a choice location for research and development (R&D) and IP ownership.

Since the inception of the masterplan, Singapore has achieved various milestones and accolades that affirm its efforts. These include being ranked second globally and top in Asia for having the best IP protection, according to the World Economic Forum's Global Competitiveness Report 2019.

With the past decade dedicated to establishing the foundation for encouraging R&D and innovation activities in Singapore, SIPS 2030 is expected to chart the next wave of growth and pave the way for Singapore to become the Silicon Valley of Asia.

One of the key motivations behind SIPS 2030 is to create awareness and ensure that enterprises are equipped with the tools and knowledge to manage their IA and IP effectively for growth. Undoubtedly, the true value of an asset cannot be harnessed if it is not effectively managed, exploited or protected.

SIPS 2030 aims to bridge this gap for enterprises, regardless where they may be in the value chain to commercialise their IA or IP.

IMPACT OF INTERNATIONAL TAX DEVELOPMENTS

Technology has supported new inventions, revolutionised business models and allowed companies to extend their market reach and access to customers globally without a physical presence in each location. The highly mobile nature of intangible assets also makes it easy for such assets to be moved from one jurisdiction to another.

However, current international tax frameworks were designed with brick-and-mortar businesses in mind. New business arrangements, particularly of the digital economy, had prompted the international tax community to relook at the relevance of existing tax frameworks.

This culminated in the 15 action items under the Base Erosion and Profit Shifting (BEPS) project led by the Organization for Economic Co-operation and Development (OECD) and more recently, BEPS 2.0. Notably, the changes proposed under BEPS aim to align the value derived from IP to where the key functions in the IP lifecycle (that is, development, enhancement, maintenance, protection and exploitation) are undertaken.

Companies will need to be agile in adapting to these imminent changes in global tax rules - or risk margins being eroded. Some immediate areas of focus include intercompany licensing arrangements, where the pricing of intercompany transactions and robustness of transfer pricing documentation will be subject to a higher level of stress test, in particular the degree of alignment to the location where key activities are being performed. Where legacy structures exist, it is time to review their appropriateness for congruence with current business realities.

Another area to note is when mergers and acquisitions (M&As) are undertaken to acquire technology and innovative solutions. As companies acquire targets with existing IA and IP to complement or expand their existing portfolio, they must carefully plan and consider whether the IP to be acquired should be integrated into existing operations and how it should be carried out, bearing in mind the tax measures available. This includes managing exit taxes if IP ownership is to be migrated to another jurisdiction.

Lastly, companies should also consider new forms of IA and IP and their interaction with prevailing tax rules. Data has emerged as a critical element of the current technology-driven world and options to monetise data have surfaced.

However, there is some uncertainty on how payments made for data are viewed from a tax perspective. There is also no consistency and consensus on how such payments may be treated. Hence, companies should not assume that a particular tax treatment adopted in one country may be accepted in another.

The future economy will only become more knowledge- and innovation-driven. Clearly, this also means that the significance of IA and IP as value-drivers will continue to grow.

Staying ahead of the evolving tax developments internationally and planning upfront will be important for companies to ensure that they fully extract the value of their IA and IP from creation to commercialisation.

• Chester Wee is EY Asean International corporate tax advisory leader, and Yeo Ying is associate director, international tax and transaction services at EY Corporate Advisors Pte Ltd. The views here are the writers' and do not necessarily reflect the views of the global EY organisation or its member firms.