Intellectual property: What is in the value?

Companies need to manage the different tax issues throughout the intellectual property life cycle to maximise its value.

The past three industrial revolutions led to significant human progress, and there are similar expectations of the fourth industrial revolution. A common theme threads through them – intellectual property (IP). Each industrial revolution introduced innovations that resulted in a series of changes and the proliferation of new patents and designs.  

The third industrial revolution began in the 1960s. In less than 50 years, it generated an unprecedented amount of IP. Patent filings during the 1990s rose by more than 40%¹ and there were more than two million² patent filings worldwide in 2011. What the third industrial revolution had achieved on the IP front in four decades, the ongoing fourth industrial revolution achieved in less than a decade. 

IP amplifies enterprise value

Beyond the exploitation of IP, IP is a multiplier that can amplify a company’s value in four areas: 

• It enhances a company's competitive advantage and can create strategic barriers to entry. 
• It can be a valuable bargaining chip in negotiations and collaborations with others, through licensing agreements, joint ventures or strategic partnerships. 
• IP is used in products or services to generate business profits, and revenue streams such as licensing and royalties, which contribute to enterprise value.   
• It incentivises innovation and fosters a culture of innovation, leading to further development of IP. 

The role of IP in creating enterprise value was evident during past industrial revolutions. IP’s role is more important than ever for businesses and society now, especially for sectors such as advanced manufacturing, technology, media, mobility, telecommunications, and consumer products and retail. 

How IPRs are defined

Singapore is recognised for its robust legal framework and enforcement mechanisms for protecting IP rights (IPR). The country has fostered a conducive environment for IP protection, making it an ideal location to acquire and exploit IP. 

For Singapore income tax purposes, IPRs are defined as: 

1. Patents 
2. Copyrights 
3. Trademarks 
4. Registered designs 
5. Geographical indications 
6. Layout designs of integrated circuits  
7. Trade secrets or information with commercial value, excluding: 
   • Information of customers of a trade or business gathered in the course of carrying on that trade or business. 
   • Information on work processes (other than industrial information or technique) that is likely to assist in the manufacture or processing of goods or materials. 
   • Compilation of any information as described above.
     
8. Plant varieties 

Only qualifying costs incurred to acquire the above IPRs qualify for writing down allowances or tax depreciation. 

Income tax considerations

Given the increasing importance of IP, businesses must consider key income tax issues in the different phases of an IP life cycle: acquisition, exploitation and exit.  

Acquisition

Developing IP internally involves R&D, which could result in the creation of the IPRs. Costs incurred for R&D³ activities may qualify for tax deduction if the company: 

• Shows that the benefits of the R&D belong to the business. 
• Bears the financial burden of carrying out the R&D activities.  
• Owns and commercially exploits the results of the R&D activities. 

Companies must substantiate that the R&D activities fulfil the definition of R&D, as prescribed in the Singapore Income Tax Act.  

For IPRs acquired externally, the acquisition costs incurred do not qualify for tax deduction even where the IPR is used in the trade or business.  

However, companies may be able to claim writing down allowances (WDA), provided that: 

• Both legal and economic rights to the IPRs are acquired. If the company obtains only the economic rights of the IPRs, it must obtain a waiver of the legal ownership requirement from the Singapore Economic Development Board (EDB), as part of a larger incentive discussion with the EDB.  
• The acquisition value of the IPRs is substantiated by an independent valuation from qualified valuers. WDA claims are restricted to the lower of the valuation amount or the actual cost incurred in the acquiring of the IPRs. 
• The IPRs are acquired using cash or valuable considerations (e.g., via debt) to meet the incurred condition.  If an IPR is gifted or contributed to a company in exchange for shares, WDA claims may not be available as the company has not incurred the capital outlay.   

Companies may make an irrevocable election to claim WDA over 5, 10 or 15 years, after considering the expected economic lifespan of the IPRs, by submitting a prescribed declaration form to the Inland Revenue Authority of Singapore (IRAS). 

Exploitation

Companies could use their IPRs internally (e.g., to derive income from the sale of products manufactured using the IP rights) or to license the IPRs to derive royalty income.   

How the IPRs are used could have implications from the income, expenses and tax incentivisation perspectives.   

Generally, income from the sale of products would not be subject to foreign withholding tax. However, if the income (or a portion of it) is characterised as an IP income⁴, it would attract foreign withholding tax. Companies should consider these costs and the availability of foreign tax credit in their financial modelling. 

Interest expenses arising from loans taken to finance the acquisition or development of qualifying IPRs through debt may be tax-deductible. If payments were made to non-residents, withholding tax applies. Companies should consider the applicability of reduced withholding tax rate under tax treaties and whether to obtain an approved loan incentive from the EDB. 

Companies may apply for tax incentives based on their investment commitments and activities. Negotiations with the authorities such as the EDB are required to secure and agree on the specifics of these incentives. In this regard, companies should consider the level of investments they are willing to commit to and the type of activities to be incentivised. If there are expected costs (e.g., royalties or interest), the negotiations should include the reduction⁵ of withholding tax rates for such payments made to non-residents.   

That said, with the Base Erosion and Profit Shifting (BEPS) 2.0 project and the impending implementation of the Income Inclusion Rule and Domestic Top-up Tax in 2025, the attractiveness of such incentives to companies impacted by BEPS 2.0 may be reduced. To this end, the Refundable Investment Credit (RIC) was introduced in the Singapore Budget 2024. The RIC covers activities ranging from manufacturing, R&D to sustainability and is targeted at various expenditure categories, ranging from capital expenditure, manpower cost to intangible assets cost. This is meant to be offset against the companies’ corporate tax payable. Any unutilised credits will be refunded to the companies within four years from when the company satisfies the conditions for receiving the credits. More details are expected to be announced in Q3 2024. 

Exit

Companies may rationalise its IP portfolio from time to time and dispose or migrate its IPRs. 

At this stage, companies should: 

• Establish the facts leading to the disposal of the IPRs to determine and substantiate the tax treatment of the gains derived from the disposal. Where WDA claims were made previously, determine whether the disposal would trigger a clawback of WDA. 
• Determine where the IPR is sourced. This is important. With effect from 1 January 2024, gains from the disposal of IPRs not sourced in Singapore are taxable even if the gains are capital in nature, under Section 10L of the Singapore Income Tax Act. 
• Perform valuation of the IPRs at the point of disposal to support the open-market price of the sale. Insufficient documentation could lead to protracted discussions with the IRAS on the open-market price and the amount of WDA to be clawed back. 

To conclude, while the fourth industrial revolution may present challenges and demand adaptability from businesses and the workforce, it will have a profound impact on economies, policies and regulations. In this context, IP is more important than ever. Consequently, it is pertinent that businesses manage the tax issues of IP to flourish in this transformative era. 

The co-authors of this article are Desmond Teo, EY Asia-Pacific Family Enterprise Leader; Asia-Pacific EY Private Deputy Leader; Asean and Asia-Pacific EY Private Tax Leader and Ng Hui Hiong, Director, Tax Services from EY Corporate Advisors Pte. Ltd.