APAC Tax Matters: 13th edition
At a glance
- Singapore budget update – key tax initiatives affecting multinational companies
- Rights-based approach for characterising software payments and payments for the use of or the right to use information and digitised goods
Key tax initiatives
A number of tax changes were announced in the 2013 Budget Statement to make the fiscal system more progressive, help families and businesses cope with rising costs, and to support businesses as the Singapore Government intensifies its efforts toward economic restructuring and the upgrading of skills.
Some of the key tax initiatives that affect multinational companies doing business in Singapore are as follows:
- Corporate income tax (CIT) rebate
- Wage credit scheme (WCS)
- Enhancing the productivity and innovation credit (PIC) scheme
- Liberalizing the scope of PIC automation equipment
- PIC bonus
- Extending and enhancing the financial sector incentive (FSI) scheme
- Extending and refining the qualifying debt securities (QDS) and QDS plus (QDS+) incentive schemes
- Extending the tax incentive scheme for approved special purpose vehicle (ASPV) engaged in securitization transactions (ASPV scheme)
- Enhancing the tax exemption scheme for the underwriting of offshore specialised insurance risks
- Extending and enhancing the tax incentive scheme for offshore insurance broking business
- Extending the maximum tenure of the maritime sector incentive–approved international shipping enterprise (MSI-AIS) award
Rights-based approach for characterising software payments and payments for the use of or the right to use information and digitised goods
With effect from 28 February 2013, the Inland Revenue Authority of Singapore (IRAS) will adopt the rights-based approach to characterise the following payments for tax purposes:
- Payments for software
- Payments for the use of or the right to use information and digitised goods
In this connection, the IRAS issued an e-Tax guide explaining the rights-based approach for characterising payments for software and payments for the use of or the right to use information and digitised goods.
Principles of the rights-based approach
The rights-based approach characterises a payment based on the nature of the rights transferred in consideration for the payment. Hence, a distinction is made between the transfer of a “copyright right” and the transfer of a “copyrighted article” from the owner to the payer.
A transaction involves a copyright right if the payer is allowed to commercially exploit the copyright.
This means that the payer will be able to:
- Reproduce, modify or adapt and distribute the software, information or digitised goods
- Prepare derivative works based on the copyrighted software program, information or digitised goods for distribution
A copyrighted article is transferred if the rights are limited to those necessary to enable the payer to operate the software or to use the information or digitised goods, for personal consumption or for use within his business operations.
In cases where a payer may obtain multiple rights in one payment, then in order to determine whether a payment is for the right to use a copyrighted article or a copyright right, the primary purpose of the payment will need to be examined.
Tax treatment of copyright right and copyrighted article
A payment will be treated as a royalty if it is made for the transfer of partial rights in the copyright, such as in the case of licensing the copyright to be exploited by the payer. Hence, the payment will be subject to withholding tax if it is made to a non-resident person. In contrast, a payment made for a complete alienation of the copyright in the software, information or digitised goods or transfer of copyrighted articles, will not fall within the withholding tax provisions. Such transaction will not be taxable in the hands of the non-resident unless the payment constitutes income derived from a trade, business, profession or vocation carried on by the permanent establishment of the non-resident person in Singapore.
Taxpayers using the rights-based approach will not be required to seek prior approval from the IRAS. They only need to determine the correct tax treatment by ascertaining the nature of the payments using the rights-based approach and maintain documents to support their position. Examples of supporting documents include licence agreements, intercompany agreements, and invoices. Taxpayers who wish to obtain upfront certainty on the character of a payment may apply for an advance ruling in the usual manner.