29 September, 2012
Legal News & Analysis – Asia Pacific – Singapore – Tax
Just when you thought that claiming 400% tax deduction or allowance for your expense on registration or acquisition of IPR was a really good deal, along cometh the taxman with some “buts” that a business may wish it had known all along.
When the Productivity and Innovation Credit (PIC) scheme was introduced in the 2010 Budget and made available for 5 years from Year of Assessment 2011 to all businesses, the 6 categories of qualifying activities included acquisition of IPRs and registration of IPRs. In the 2011 Budget, the PIC scheme was enhanced so that businesses could deduct 400% of the first S$400,000 of expenditure on these qualifying activities. Expenditure on acquisition of IPRs is granted capital allowance (being a capital cost), while expenditure on registration of IPRs enjoys tax deduction (as a revenue expense). So far, so good.
Here come the “buts”. First, to be entitled to the capital allowance, the business must acquire both the legal and economic ownership of the asset when it incurs the expenditure and the asset must have been acquired for use in the business.
Second, some businesses may not be able to afford the entire acquisition cost outright, and it is quite common to see the payment being made under an instalment plan. A claim for the interest cost in addition to the actual acquisition price itself is wrong. Additionally, as the expenditure must be incurred by the business, if it is paid for by a Government grant or subsidy instead, no capital allowance or tax deduction can be claimed for such amount of grant or
subsidy.
Third, a third-party independent valuation report is required where the IPR acquired from a related party costs at least S$500,000. Where the IPR is acquired from an unrelated party and costs at least S$2million, the valuation report is also required.
Intriguingly, there are special tax rules governing when and how the tax allowance stops. A business which permanently ceases to carry on the business for which the IPR was acquired, or that sells, transfers or assigns its IPR, loses its tax claim for that year and may be subject to tax on part of the proceeds as deemed income.
There are more “buts” that the tax authority has in its arsenal, including that the IPRs were acquired as a bundle of rights only some of which fall within the definition of IPRs under the Income Tax Act.
While seeking to balance the boon of enhanced tax benefits against the bane of tax audits and penalties for wrongful claims, a business may wish to review whether its original claims were wellfounded or should be rectified in good time before the taxman knocketh on its door.
