How global tax changes can impact Singapore’s IP ecosystem

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 R&D and IP ownership. Since the inception of the Master Plan, 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 the nation to become the Silicon Valley of Asia. One of the key motivations behind SIPS 2030 is to create awareness and help equip enterprises with the tools and knowledge to manage their IAs 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 commercialize their IA or IP.

Impact of international tax developments

Technology has supported new inventions, revolutionized 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 IAs 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 Organisation for Economic Co-operation and Development 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 life cycle (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 the erosion of margins. 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 stress test level, particularly 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 M&As are undertaken to acquire technology and innovative solutions. As companies acquire targets with existing IAs 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 IAs 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 monetize data have surfaced. However, there is some uncertainty over 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 IAs 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 fully extract the value of their IAs and IP from creation to commercialization.

This article was first published in The Business Times on 26 May 2021.