2014 B d t S i

www.pwc.com/sg

2014 Budget SeminarTax Implications for Intellectual Property PlanningIntellectual Property Planning

Abhijit GhoshTan Ching NePwC SingaporePwC Singapore

AgendaAgenda

1. Importance of intellectual property

2 Singapore’s vision and initiatives2. Singapore s vision and initiatives

3. IP box regime

4. Substance and planning4 p g

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Importance of intellectual propertyImportance of intellectual property

3

Towards an innovation-driven economyTowards an innovation driven economy

Traditional economy Knowledge-based economyy o edge based eco o y

Focus on IP development through

S l /

IP

Sales/

IP IP

Sales/

p gresearch and development (R&D)

Outsource routine and limited

Manufacturing

Sales/Distribution

Manufacturing

Sales/Distribution

/Distribution

Manufacturing

Outsource routine and limited value-added manufacturing

ManufacturingManufacturing Manufacturing

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Importance of IP – headlinesImportance of IP headlines

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Choosing an IP strategyChoosing an IP strategy

PROACTIVEStrategy II

Mitigate Competition

Strategy IVLeverage Full

Potentialp

Strategy IProtect

Intangibles

Strategy IIIEstablish Income

StreamREACTIVE

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Importance of IP for business restructuringImportance of IP for business restructuring

Intellectual property High

(trademarks, patents, etc)

rofi

t

Commercial risks (market, foreign exchange, etc)

F ti ( l k ti t )

Pr

HighPortability

Functions (sales, marketing, etc)

Low

Wh t i th li IP hi ?• What is the policy on IP ownership?

• How is this reconciled with the underlying R&D spend?

• Is it consistent with maximising the relief and incentives involved?

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• How well has a sensible transfer pricing policy been implemented?

Types of IPTypes of IP

Registered d i

Trademark

design

Patent

Lay-out design of

integrated circuit

Trade secret or

information

Customer listsBrandsDatabasesRecipesSoftware circuitthat has

commercial value

Geographical

SoftwareManualsTV programmes

CopyrightGeographical

indication

Plant variety

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IP lifecycleIP lifecycle

Creation Acquisition & ownership Commercialisation

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Singapore’s vision and initiativesSingapore s vision and initiatives

10

Singapore’s vision as a global IP hubSingapore s vision as a global IP hubIP Hub Master Plan unveiled in April 2013

Outcomes

1. A hub for IP transactions and management

2. A hub for quality IP filings

3. A hub for IP dispute resolution

EnablersEnablers

1. Skilled manpower resources networked to the region and beyond

2. Conducive and progressive environment for IP activitiesp g

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Singapore’s initiatives in promoting R&D and IP Singapore s initiatives in promoting R&D and IP managementNon-fiscal

T t d l l i f t t f IP t ti IP t ith • Trusted legal infrastructure for IP protection – IP court with identified IP judges

• Organisations to promote R&D and IP management – Intellectual Property Office of Singapore (IPOS)– National Research Foundation– Agency for Science, Technology and Research (A*STAR)Agency for Science, Technology and Research (A STAR)

• Focus on IP-driven industries, eg, biomedical sciences, interactive and digital media and clean energy

• Attract and nurture top quality research scientists and engineers • Attract and nurture top quality research scientists and engineers from around the globe

FiscalC d i t i t f R&D d IP t

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• Conducive tax environment for R&D and IP management• Grants to support R&D projects

12

IP lifecycle – current Singapore IP tax landscape IP lifecycle current Singapore IP tax landscape

Creation Acquisition & ownership Commercialisation

R&D b h d - Enhanced deductions

for registration

- Broad-based incentives (e.g. Development and - R&D base, enhanced

and further deductions (Sections 14D, 14DA, 14E)

- R&D grants

o eg st at o (Section 14A) and in-licensing costs (Section 14W)

- Writing-down allowance (Section

B)

Development and Expansion Incentive)

- Foreign tax credit pooling

- Tax treaty network –reduced withholding 19B) reduced withholding tax

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IP creation IP creation

Issues to consider• What does R&D mean?What does R&D mean?

• What qualifies as R&D expenditure?

• R&D expenses

- Tax deductible?

- If capitalised as an asset, can it be amortised?

- Eligible for incentives or government grants? Eligible for incentives or government grants?

• Types of R&D arrangement

- Contract R&D

- R&D cost-sharing

R&D claim – (i) R&D claim form & (ii) R&D project documentation

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( ) ( ) p j

IP creation – Deductions and grants IP creation Deductions and grants

R&D base, enhanced and further deductions (Sections 14D, 14DA, 14E)

• First $400k (PIC)/$600k (PIC+) of qualifying R&D expenditure 400% deductionNew!• First $400k (PIC)/$600k (PIC+) of qualifying R&D expenditure – 400% deduction

• Qualifying R&D expenditure in excess of $400k/$600k spent in Singapore – 150 % deduction

• Qualifying R&D expenditure in excess of $400k /$600k spent outside Singapore – 100% deduction

• Approved R&D project up to 200% deduction for expenditure in excess of $400k /$600k spent in

New!

• Approved R&D project – up to 200% deduction for expenditure in excess of $400k /$600k spent in Singapore (Extended to 31 March 2020)

R&D grants

• Research Incentive Scheme for Companies (RISC) - Supports the development of R&D

New!

p ( ) pp pcapabilities, grant provided (on reimbursement basis) to cover part of qualifying cost of project (staff-related costs 50%, equipment and materials 30%, professional services 30%, IP rights 30%)

• Initiatives in New Technology (INTECH) - Encourages manpower development in industrial R&D and application of new technologies, grant provided for allowable costs relating to overseas pp g , g p gand local training

• The Commercialisation Programme (TCP) - Reimburses a percentage of the qualifying costs of the project, repayment is required upon commercialisation

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IP acquisition and ownership IP acquisition and ownership Enhanced deductions for

IP registration (Section 14A)

IP in-licensing (Section 14W)• 400% deduction on the first $400k (PIC) or $600k (PIC+) of qualifying expenditure

incurred per qualifying YA

• 100% deduction on qualifying expenditure incurred in excess of $400k/$600k

• IP registration scheme – extended for five years till YA 2020

Writing-down allowance (Section 19B)

New!

g ( 9 )• Extended for five years till YA 2020

• 400% WDA over 5 years on the first $400k (PIC) or $600k (PIC+) of qualifying expenditure incurred per qualifying YA

New!

p p q y g

• 100% WDA over 5 years on qualifying expenditure incurred in excess of $400k /$600k

• “Information that has commercial value” excludes (i) customer-based intangible and

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(ii) documentation of work processes New!

IP commercialisationIP commercialisationIssues to consider• License IP to others

- Source of incomeSo o o- Lump sum vs periodic income- Income subject to withholding tax? Any treaty relief?- Foreign tax credit or deduction for withholding tax available at recipient's location?- Related party transaction – at arms length?Related party transaction at arms length?- Customs duty implications

• Outright sale – is the gain capital or revenue in nature?

f b i f hi• Use IP for own business or as a franchisor- Pricing arrangement with related parties should factor in the value of IP- Potential permanent establishment as a result of provision of services

P f ti l t t f i f IP i li ti d i ti h• Preferential tax rate of income from IP commercialisation under incentive schemes

• Sourcing of income and availability of foreign tax credits- Foreign tax credit in tax treaty cases

Unilateral tax credit in non treaty cases

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- Unilateral tax credit in non-treaty cases- Foreign tax credit pooling

Treaty withholding rates for royaltiesTreaty withholding rates for royalties

Incoming royalties

Country Withholding tax

Outgoing royalties

Country Withholding tax y grate (%)

Australia 10

Canada 15

hi /

y grate (%)

Australia 10

Canada 10

/China 6/10

Germany 8

Hong Kong 4.95

India 10

France 0/10

Germany 8

Ireland 5

Luxembourg 10India 10

Japan 10

Malaysia 8

Netherlands 0

Luxembourg 10

Mauritius 0

Netherlands 0/10

Norway 7

Thailand 15

United Kingdom 8

United States* 30

y 7

Switzerland 5

United Kingdom 8

United States* 10

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*No comprehensive tax treaty between Singapore and the US

IP box regime – should Singapore IP box regime should Singapore have one?

19

Should Singapore introduce an IP box regime?Should Singapore introduce an IP box regime?

What is an IP box?

• A tax scheme that lowers the effective tax rate on income derived from prescribed IP, usually achieved through a notional deduction calculation

Why implement the IP box regime?

• Encourages the retention of locally-created IP• Encourages the retention of locally-created IP

• Attracts foreign enterprises to locate IP and IP management functions

• Additional incentive for companies to commercialise existing IP and to d l i ti d tdevelop new innovative products

• Enhances pool of highly-skilled persons

• Strong link to high-tech R&D and manufacturing activity – relocation of real activities

• Changing landscape of transfer pricing principles

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An illustration – UK Patent Box regime An illustration UK Patent Box regime

Tax Factors UKEffective tax rate 10%Qualifying IP Patents, supplementary protection certificates,

regulatory data protection, and plant variety rightsQualifying income Net income from qualifying IPQualifying income Net income from qualifying IPAcquired IP? Yes, if further developed and/or actively managedCap on benefit? NoIncludes embedded royalties? YesI l d i l f lifi d IP? YIncludes gain on sale of qualified IP? YesCan R&D be performed abroad? YesCredit for tax withheld on qualified royalty? YesYear enacted 2013Applicable to existing IP? Yes

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Singapore’s “IP box regime” for individualsSingapore s IP box regime for individuals

Existing regime for individuals – sections 10(14)&(16)i f• Earnings from:

- assignment of or right to use any patent, copyright, trademark, industrial design, lay-out design of integrated circuit, or know-how of an approved IP or approved innovation (new method or substantial improvement in method that involves innovation (new method or substantial improvement in method that involves novelty or originality) – approval required for the five-year incentive

- assignment of or right to use copyright in any literary, dramatic, musical or artistic work.

• Individual (or company beneficially owned by that individual) will be taxed on the lower of:

- amount of royalties or other payments after allowable deductions; and

- 10% of the gross royalties or other payments.

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Substance and planningSubstance and planning

23

IP acquisition and ownership IP acquisition and ownership

Issues to consider• Which entity in the group should own the IP?

• Why bifurcate legal and economic ownership?

- Possible to achieve tax savings on income from exploitation

• Where to locate the IP?

- Favourable tax regimeg

- Tax treaty network

• Acquiring IP

i i ibl ?- Tax amortisation possible?

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IP migrationIP migrationMechanics• Existing intangible v future intangible

O t i ht t f f IP• Outright transfer of IP

• Buy-in payment for existing IP followed by future R&D cost-sharing

Issues for consideration• Valuation

• Transfer pricing

• Exit chargesg

• Treaty considerations

• Indirect tax issues including customs duty

• The need for substance which is not defined

Design, implement, operate, and defend IP migration.

• The need for substance- which is not defined

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The need for substanceThe need for substance

Minimum requirementPotential shift in profit

• Financing, development and ownership of IP

• Management competent in IP l t d tt

profit

related matters, e.g. investment in IP, exploitation of IP

• Capable team of IP lawyers and patent agentsp g

• Ability to audit licensee’s use of IP

• Responsible for enforcement, take care of potential infringement

IP HoldCo IP HoldCo St t

IP HoldCo IP HoldCo IP HoldCoinfringement

• Address compliance issues+ Strategy + Strategy

+ R&D+ Strategy + R&D+ IP management

+ Strategy + R&D+ IP management+ Goods

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Level of substance

Foreign tax credit poolingForeign tax credit pooling

Previous treatment

• Country-by-country, b b i

New alternative treatment

source-by-source basis

• Excess foreign tax paid over the Singapore tax payable for a specific • Option to claim foreign payable for a specific income stream cannot be set off against the Singapore tax payable on another income

p gtax credit on a pooled basis (from YA 2012)

stream

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Foreign tax credit pooling – an illustrationForeign tax credit pooling an illustration

Illustration

Gross Thai dividend $400 Thai withholding tax $60 and direct expenses of $200 (for Gross Thai dividend $400, Thai withholding tax $60, and direct expenses of $200 (for Singapore purposes)

Gross Malaysian royalty $800, Malaysian withholding tax $64, and direct expenses of $300 (for Singapore purposes)

With FTC claim and FSIE

$

Dividend Exempt

Election of FTC pooling$

Net taxable dividend 200Net taxable royalty 500Dividend Exempt

Net taxable royalty (800 - 300) 500500

Tax @ 17% 85Less FTC -64

b oy y 500700

Tax @ 17% 119

Less FTC pooled -119 (restricted)Net Singapore tax payable 21

Total tax cost 145 * 145* (21 + 60 + 64)

Net Singapore tax payable 0

Total tax cost 124 ** 124** (0 + 60 + 64)

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Optional nature of foreign-sourced income exemption (FSIE) coupled with foreign tax credit (FTC) pooling election gives taxpayer the flexibility to optimise its overall tax position

Profit extraction Profit extraction

Profit extraction

As is

ParentCo

Issues• WHT at local subsidiary level on royalty

and possibly on management fee.• IRAS might not allow foreign tax credit

t f d bl t ti

SingCo

on management fee – double taxation.• Non-deductibility of management fee at

local subsidiary level in certain countries (eg China).

SubCo(Foreign

Management fee & royalty

(Foreign jurisdictions)

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Profit extractionProfit extraction

Profit extraction

C id tiTo be

ParentCo

Considerations• Combine multiple related-party transactions into

industrial franchise fees – remuneration should be value-based rather than cost-plus.

• Characterisation of payment – depending on local

eg Industrial SingCo

p y p gsubsidiary’s tax environment.

• Consider impact if SingCo enjoys tax incentive or has losses – foreign tax credit claims.

• Seek ruling or clarification from the IRAS that fees constitute royalties

SubCo(Foreign

eg Industrial franchise fee (management fee & royalty)

constitute royalties.

Benefits• Withholding tax on royalties creditable in Singapore

(provided treaty countries).(Foreign jurisdictions) • Better chance of securing deduction at local subsidiary

if payment is characterised as royalty.

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Industrial franchising – simplified illustrationIndustrial franchising simplified illustrationContract R&D

FranchisorIP ownercontract R&D

services

Profile of franchisor: Under arm’s length

Franchise fee may include: • Patented and unpatented technology• Trade secrets and know-how• Brand, trademarks, trade names• High-value services, e.g. industry-leading engineering

t h l t t i t

• Performs and controls main functions• Bears and controls market risk• Leading global marketing and sales • Decision maker on global strategy• Production planning, strategic IT

functions

conditions, the franchisor would be entitled to an intangible-related return (in this case the franchise fee) on the

FranchiseeF ll fledged

Third party Customers

technology, strategic procurement• Routine head office services

functions• Procurement and supply chain

management

)value provided to its franchisees

Fully-fledged manufacturer

suppliers Customerssupply of raw

materials and semi-finished goods

sale of product

sale of product sale of productProfile of franchisee: • Fully fledged manufacturer and local entrepreneur with right to

3rd party routine sales company

• Fully-fledged manufacturer and local entrepreneur with right to sell its products in its territory

• Franchisee may plant process technology but costs incurred related to, for e.g. R&D and patents are reimbursed by franchisor

• Bears market risk, e.g. risk of fallen demand and of increased t i l i

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buy-sell distribution of products in local market

raw material prices• Earns residual income after payment of the franchise royalty to

franchisor

Royalty-free licence Royalty free licence

Singapore principal with royalty-free licence

ParentCo

Features• Suitable for a Singapore company in the start-up

phase.• Initial arrangement – royalty-free licence from

M i i

Singapore MauritiusCo

Mauritius.

Benefits• Profits retained in Singapore – taxed at lower tax

rate (especially if there is a tax incentive).Singapore PrincipalCo IP owner

( p y )• Consider moving IP from Mauritius to SingCo

when SingCo becomes more profitable and IP value increases – maximise s19B claim.

ConsiderationRoyalty-free licence

Consideration• Will there be any exit tax in the future? • Will BEPS change anything?

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Management of IP – Take-away pointsManagement of IP Take away points

Creation phase Acquisition & ownership phase

Commercialisation phaseownership phase phase

Id tif d d

- Ascertain how to exploit IP – defensive

ff i ?- Identify and record R&D costs for each project

- Explore opportunities to qualify for grants

- Get valuation for acquired IP

- Seek legal help for registration of IP

- Seek tax advice on

or offensive?- Negotiate for “net-of-

tax” arrangement- Explore the possibility

of re-characterisingthe income to a oid qualify for grants

and maximise tax deduction claims

- Outsource R&D work or cost share to reduce costs and

where to locate IP e.g. favourable tax regime

- Pay attention to protecting and enforcing IP in other t it i

the income to avoid withholding exposure

- Check for tax treaty planning and incentive opportunities

achieve efficiency territories opportunities- Exit charge

Pay attention to transfer pricing and indirect tax

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Pay attention to transfer pricing and indirect tax

Thank youThank you.

Abhijit GhoshPartner, PwC Singapore+65 6236 3888

Abhijit GhoshPartner, PwC Singapore+65 6236 3888+65 6236 3888abhijit.ghosh@sg.pwc.com.+65 6236 3888abhijit.ghosh@sg.pwc.com.

Tan Ching NePartner PwC SingaporeTan Ching NePartner PwC SingaporeTan Ching NePartner PwC SingaporePartner, PwC Singapore+65 6236 3608ching.ne.tan@sg.pwc.com

Partner, PwC Singapore+65 6236 3608ching.ne.tan@sg.pwc.com

Partner, PwC Singapore+65 6236 3608ching.ne.tan@sg.pwc.com

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