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Singapore introduces IP Development Incentive to encourage innovation

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The measures announced are focused on upskilling Singaporeans and enabling companies to compete and globalise.


IN THE wake of the recent Committee on the Future Economy (CFE) report, the Budget had been highly anticipated.

The measures announced are focused on upskilling Singaporeans and enabling companies to compete and globalise.

Innovation is one of the key pillars and intellectual property (IP) a key component. Against that backdrop, the introduction of the IP Development Incentive (IDI), which focuses on IP commercialisation, is aligned with Singapore's strategy for the next phase in encouraging innovation.

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Under the IDI, qualifying income will be taxed at a rate lower than the normal income tax rate of 17 per cent. It is not clear yet at which rate(s) exactly, but it may be a rate a taxpayer can achieve under an existing incentive (0, 5 or 10 per cent).

While super deductions for R&D expenditure focus on the "front-end" of IP creation, the new IP regime will centre on the "back-end" of the IP life cycle.

With the introduction of the IDI, IP income will be removed from those incentives for approvals obtained on or after July 1, 2017, and existing incentive recipients will be covered by grandfathering rules until June 30, 2021.

Compliance with international (OECD) rules

The IDI is targeted at encouraging R&D investment and innovation as well as retaining or attracting high-tech industries to anchor their businesses in Singapore.

Although more details on the IDI will be available only in May, it has already been made clear that the IDI will incorporate the "BEPS-compliant modified nexus approach".

In layman's terms, the OECD has undertaken an anti-Base Erosion and Profit Shifting (BEPS) initiative in which profits should be taxed where substantial activities are present and value is created. This initiative sets out the features needed in a preferential tax regime without harming tax practices.

For an IP regime, it clarifies that preferential treatment should be granted only to income arising from IP where the actual R&D activities are undertaken by the taxpayer in-country. This is referred to as the "modified nexus approach".

Tailor IP regime to Singapore's needs

Like a designer dress that is worth its price only when it fits perfectly, Singapore's IP regime should be adjusted to its specific economic environment, which is vastly different from larger countries like Britain and France.

Below are some key considerations in applying the modified nexus approach in Singapore.

Which IP rights should the regime cover?

Most OECD countries take the view that IP rights, such as patents, software and plant breeders' rights, should be covered.

To create those IP rights, Singapore should attract high-tech industries covering anything from advanced manufacturing to urban solutions to digital economy.

It is apparent from the recent report issued by the CFE that Singapore wishes to do so. But with limited supply of land, should Singapore just focus on those R&D-intensive industries?

Perhaps retail industries with strong brands should also be considered. If such taxpayers carry out value-creating substantive activities in Singapore, there should be included in this preferential treatment.

Who should perform the R&D?

Under the OECD's rules, "contract R&D" outsourced to a related party (whether in the same country or abroad) is not considered as being carried out by the taxpayer.

As a result, such R&D does not count under the "modified nexus approach" and the corresponding income does not qualify for preferential treatment.

Similarly, an entity performing "contract R&D" is not considered to be bearing sufficient risk to benefit from an IP regime.

In Singapore's context, applying the "modified nexus approach" wholesale may not be entirely suitable.

For example, multinationals in the pharmaceutical industry may not necessarily want to bear the full economic risks in Singapore even when they carry out R&D activities in the country.

The saving grace is that the stricter nexus approach applies only to European Union member states. Other countries can outsource to related parties in the same country and still benefit from the preferential regime.

A development that we may see more of is the sub-contracting of R&D to neighbouring Asean countries. Fortunately, the modified nexus approach allows the outsourcing of R&D abroad to unrelated parties.

Final comments

We welcome the introduction of the IDI, which encourages the commercialisation of IP and stimulates the performance of valuable R&D activities in Singapore.

Moving IP income from the existing incentives to a separate regime illustrates Singapore's commitment to the OECD's BEPS rules.

What is important is the implementation of the scheme. We expect the IDI to be administered much like any other incentives - it will be based on negotiations.

Compare this with the regimes in some other countries, where taxpayers who meet the prescribed conditions automatically benefit from the preferential tax treatment.

The administration of the IDI could add greater complexity to what is already a complicated incentive regime.

  • The writers are from PwC Singapore. Florence Loh is a Tax Partner, Leng Harn Szuan is a Tax Director, and Dr Frederik Boulogne is a Senior Tax Manager.