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Withholding Tax on Payments for IP.

2 February, 2012

 

Legal News & Analysis – Asia Pacific – Singapore – Intellectual Property – Tax

 

Payments for intellectual property (IP) can attract various tax consequences. Both payers and recipients of such payments need to manage their tax affairs. An agreement between a payer who is tax resident in Singapore and a foreign party who is not tax resident in Singapore may include a clause that the payer is to pay the full amount due for the use of or the right to use in Singapore the IP of the foreign party, and also that the payer is to bear any taxes, including withholding taxes, arising from the payment.
 
The withholding tax mechanism in the Income Tax Act puts an obligation on the payer to deduct tax on the income of the non-resident and pay the amount deducted over to the tax authorities. Certain payments relating to IP are deemed to be derived from Singapore, including royalties for the use of or right to use the property, and payments for the use of or right to use scientific, technical, industrial or commercial knowledge or information or for the rendering of assistance or service in connection with the application or use of such knowledge or information. The payment is deemed to be derived from Singapore in either of 2 situations. The first is where the payment is deductible by the payer against any income accruing in or derived from Singapore. The second is where the payment is borne by a person resident in Singapore or by a permanent establishment (local taxable presence of a non-resident person) in Singapore, except in respect of any business carried on outside Singapore through a permanent establishment outside Singapore.
 
Payments that are deductible include royalty or licence fees which are revenue in nature and incurred wholly and exclusively in the production of the income which is chargeable to tax. Just making a provision in the accounts for the payment is not sufficient for the payment to have been “incurred” in the production of income to qualify for deduction.
 
The payments of royalties and licence fees to non-residents attract withholding tax, unless they are exempted. Such an exemption is available for payments for software which are treated as royalty payments for tax purposes which are any of the following: shrink-wrap software, downloadable software for end-users, site licence and software bundled with computer hardware. Additionally, the payer is not to obtain any right to exploit the copyright of the software, not to receive any right to duplicate copies of the software, and not to have any right to modify, reverse engineer or decompile the software.
 
Payments by end-users for information and digitized goods are regarded as also being subject to withholding tax. However, there is a ten year exemption period that commenced on 28 February 2003 for payments made by end-users to non-residents for the use of information and digitized goods. Information is defined as proprietary data or text or other content. Examples of information are end-user subscriptions to Bloomberg and Lexis-Nexis. However, this exemption does not include payments for the use or right to use patents, trademarks, registered design, geographical indications, layout design of integrated circuit, trade secret or software which is not otherwise exempted under the previous paragraph. Digitized goods refer to images, sounds, or text that are transferred through the Internet, telephone, cable network, satellite or any other form of electronic transmission to an end-user and does not include software. Examples of these digitized goods are online or downloadable music videos, films, MP3s, ring tones and logos.
 
The conditions for exemption include that the information and digitized goods are supplied for the end-user’s personal consumption. The end-user must also not have any right to exploit the copyright of the information or to copy, modify, adapt or exploit the copyright in the digitized goods.
 

 

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