Early this year, the Income Tax (Concessionary Rate of Tax for Intellectual Property Income) Regulations 2021 was published by Singapore’s Ministry of Finance which took effect as of 22nd January 2021. The regulations provide further guidance of the implementation and application of the Intellectual Property Development Incentive (IDI). The initial guidelines on the concessionary tax rate and the incentive period was provided in the main legislation, section 43ZI of the Income Tax Act (ITA) published in 2018.
The IDI was introduced to encourage the use and commercialization of Intellectual Property rights (IPR) arising from research and development (R&D) activities and grants a concessionary tax rate of 5% or 10% on a percentage of qualifying intellectual property (IP) income determined by the modified nexus approach recommended by the Organisation for Economic Co-operation and Development (OECD).
When the IDI was first introduced in 2018, income derived from IPRs were excluded from the scope of two existing incentives, the Pioneer Service Companies Incentive (PC-S) and the Development and Expansion Incentive (DEI) by virtue of certain pre-existing provisions.
The 2021 regulations
Qualifying IP income refers to royalties or other income receivable by the approved IDI company as consideration for the commercial use of an elected qualifying IPR. Such qualifying IPRs are:
- Applications for Patents
- Copyrights subsisting in software
- Family of qualifying IPRs
Family of qualifying IPRs
This refers to a situation where either the expenditure or the income of two or more IPRs cannot be reasonably identified or separated from each other and are therefore grouped into a “family”. This also applies where two IPRs are part of a chain of three or more qualifying IPRs and each of which are interlinked with one another creating a “chain rule”. The grouping of the family of IPRs is important when calculating the nexus ratio.
Elections into the IDI are irrevocable, however, an election for IPRs to be grouped in the same family may be amended to add or remove members as new IPRs join the family or where old IPRs are no longer valid. The final composition of the family as at the end of the basis period will be used to calculate the nexus ratio.
Once elected, the IPRs cannot be removed from the family unless the IDI company ceases to have the IPRs or if the IPRs no longer interlinked with any of the IPRs in the family. Should the family of qualifying IPRs cease entirely prior to the completion of the full basis period, the nexus ratio will be adjusted and based on the final composition prior to cessation.
The percentage of qualifying IP income from an elected qualifying IPR is determined in accordance with the formula:
C x 130 %
C + D
- C are the qualifying expenditures such as R&D carried out directly by the IDI company, qualifying outsourced R&D, and payments under cost-sharing agreements (CSAs).
- D are the non-qualifying expenditures such as acquisition costs, licensing, amalgamation, buy-in payments for CSAs, and non-qualifying outsourced R&D
As IPR protection in a patent or copyright subsisting in software typically has a limited lifespan, issues may arise where there is a cessation of that protection. Particularly, the IDI may no longer cover income for such IPRs where:
- It is no longer part of a family of qualifying IPRs as it can be identified separately
- A patent application was withdrawn or abandoned
- A patent under application was disposed of by the IDI company, ceasing their rights to the pending patent prior to receiving approval
- The application was rejected
Where the income can separately be identified within the family of qualifying IPRs and attributed to a patent application, deemed income may come into force and chargeable to tax at the existing corporate tax rate.
Transitional nexus ratio
As the nexus ratio requires R&D expenditure to be tracked and traced to each IPRs or groups of IPRs, there is a requirement that records from the approval date of the IDI be kept, however, the requirement also includes any earlier periods for which the company has expenditure records tracked to the elected qualifying IPR or family of elected qualifying IPRs.
A transition period may be used for the basis period where an IDI company does not have at least 3 full years of actual tracked data in relation to an IPR or a family of IPRs as at the end of the basis period. For R&D projects that started less than 3 years and the IDI company does not have actual tracked data for the entire period, the transitional nexus ratio will be applied.
Singapore’s IP IDI is administered by the Singapore Economic Development Board (SEDB) and is designed to encourage more R&D activities which in turn will help with the growth of the economy. The incentive is one of many developments reflecting Singapore’s position in the shifting global tax landscape towards greater substance. As IP is an important income generating asset for multinationals, the global tax development on IP regimes is just as important. The 2021 Regulations provide further guidance on the implementation and application of the IDI which became applicable from the 1st of July 2018. IDI companies should ensure that appropriate supporting documents are kept in order to establish and substantiate the qualifying IPR or families of IPRs, relevant income, expenditure incurred, and the R&D activities.