In this connection, the Inland Revenue Authority of Singapore (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.
With effect from 28 February 2013, the 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 issue, we explore the rights-based approach via the following topics:
Prior to 28 February 2013, withholding tax exemption1 was granted on the following:
1. Software payments2 by end-users of:
(i) Shrink-wrap software
(iii) Downloadable software
(iv) Software bundled with computer hardware
2. Payments by end-users for information and digitised goods3
The above exemption had been in place for the past decade and in view of rapidly changing technology and business practices, the IRAS decided to review its prescriptive characterisation of the above payments.
A public consultation was conducted in April/May 2012 to seek feedback on whether the adoption of a rights-based approach to characterise the above payments (in lieu of the withholding tax exemptions) would provide greater clarity and certainty to businesses. After considering the feedback received and in line with international practices, the IRAS decided to adopt the rights-based approach with effect from 28 February 2013 to replace the withholding tax exemption regime on the above payments.
1 The law provides that specified payments such as royalty and any payments for the use of or the right to use scientific, technical, industrial or commercial knowledge or information are deemed to be derived from Singapore under certain specified circumstances, and are subject to withholding tax if they are paid to a non-resident person. The IRAS treats software payments as royalty for tax purposes, and payments for the use of or right to use information and digitised goods as payments for the use of or the right to use scientific, technical, industrial or commercial knowledge or information. Accordingly, such payments are subject to withholding tax if they are made to a non-resident person.
2 To qualify for the withholding tax exemption, the payer must not be granted any right to exploit the copyright of the software or receive any right to duplicate copies of the software or have any right to modify, reverse engineer, decompile or disassemble the software.
3 To qualify for the exemption prior to 28 February 2013, the end-user must not acquire the right to exploit the copyright of the information or digitised goods but only has the right to use the information or digitised goods for personal consumption.
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:
(i) Reproduce, modify or adapt and distribute the software, information or digitised goods
(ii) 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 of 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.
For example, if a payment is made by a payer to acquire a copy of a movie or film for his private viewing and he is not given the right to screen the movie publicly, or to re-distribute the movie, then it will be treated as a payment for a copyrighted article. If, on the other hand, the payer is a cinema operator that acquires the movie for the purpose of screening to its customers, then the payment will be a royalty for the use of the copyright right in the movie, and is subject to withholding tax if paid to a non-resident.
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 the payments may apply for an advance ruling in the usual manner.
A copy of the e-Tax guide may be obtained from the IRAS website.
The rights-based approach aligns our tax treatment with international practices and in keeping pace with the rapid development of technology and business practices. Although the approach is intended to provide more certainty for taxpayers and hence ease the compliance burden, it remains to be seen if it is easy to adopt in practice.