Amendments made to the Income Tax Act in October 201o have provided for, among other things, tax deductions and allowances for expenditure incurred in certain activities along the innovation value chain to enhance innovation and productivity. This article summarises the tax changes for 2 of these activities: the registration of intellectual property (IP) and the acquisition of intellectual property rights (IPRs) under this Productivity and Innovation Credit (PIC) scheme.
Prior to the changes, expenditure incurred on some IP activities was already eligible for tax benefits, e.g. deduction for patenting costs and writing-down allowances for certain IPRs over a period of 5 years. Under the PIC scheme, a tax deduction or writing-down allowance is possible for 150% of the amount of qualifying expenditure up to a limit of S$300,000 for each qualifying activity. The PIC scheme is available for the Years of Assessment (YA) 2011 to 2105.
To attract more taxpayers to the PIC scheme, there is a combined expenditure cap of S$600,000 for the first two years of the incentive for each of the 2 activities. This means, for example, that a taxpayer can obtain from the Comptroller of Income Tax (Comptroller) an allowance for, say S$500,000 of qualifying expenditure on acquisition of IPRs for YA 2011 and a deduction of another S$100,000 for qualifying expenditure on acquisition of IPRs for YA 2012.
Acquisition of IPRs
Writing-down allowances for capital expenditure on IPRs acquired for use in a company's trade or business have been available since 2003. These allowances are made on a fixed line basis over a 5 year period at 20% of the expenditure for each year of assessment. They are for capital expenditure on acquisition of patents, copyrights, trademarks, registered designs, geographical indications, lay-out designs of integrated circuits, trade secrets and information with commercial value. Additionally, a new category has now been added, namely the grant of protection of a plant variety.
A company incurring capital expenditure in acquiring one or more IPRs for use in its trade or business is eligible to claim, in addition to any writing-down allowance previously available, a writing-down allowance equal to 150% of the lower of the capital expenditure incurred during the basis period on the acquisition of the IPRs and S$300,000.
The claim for writing-down allowances is only allowed if the company provides an undertaking that it is an assignee of the IPRs and the claim is made in the manner and subject to the conditions required by the Comptroller.
The capital expenditure eligible for the writing-down allowances excludes legal fees, registration fees, stamp duty and other costs related to the acquisition of the IPRs. However, any capital expenditure incurred on the acquisition of any IPRs by a company before the commencement of its trade or business is treated as if it has been incurred on the first day that trade or business commenced.
The deduction is not available to IPRs already approved for investment allowances or other special tax treatment, e.g. IPRs relating to media and digital entertainment contents approved for an accelerated write-down period of 2 years.
Additionally, the IPRs must be owned for a period of one year and claw-back provisions apply if, within a period of 5 years from the date of acquisition, any of the following events occur:
- The IPRs come to an end without being subsequently revived;
- the company sells, transfers or assigns part or all of the IPRs; or
- the company permanently ceases to carry on its trade or business.
Where any of the above events occurs, no writing-down allowance of the affected IPRs is given for the year of assessment relating to the basis period in which the event occurs and for any subsequent year of assessment. Additionally, if any of the above events occur within the period of one year from the acquisition of the IPRs, any writing-down allowances for the affected IPRs are brought to charge as if the allowances were not given and deemed to be income for the year of assessment relating to the basis period in which the event occurs.
Registration of IP
Prior to the 2010 amendments, a person carrying on a trade or business was allowed a tax deduction for patenting costs incurred between 1 June 2003 and 31 May 2013. With the amendments, the deduction for patenting costs has been enhanced with the deduction for qualifying IP registration costs from YA 2011 to YA 2015. Qualifying IP registration costs have been defined to mean fees paid to 4 registries in Singapore (specifically the Registry of Patents, Registry of Trade Marks, Registry of Designs and Registry of Plant Varieties) or an equivalent registry outside Singapore. The fees paid to a registry must be for one of the following 4 matters:
- filing of an application for a patent, for registration of a trade mark or design, or for the grant of protection of a plant variety;
- search and examination report on the application for a patent;
- examination report on the application for grant of protection of a plant variety; or
- grant of a patent.
Besides fees paid to a registry, whether local or foreign, fees paid to a person acting as an agent for any of the following 3 matters also qualify for deduction:
- applying for any patent, for registration of a trade mark or design, or for the grant of protection of a plant variety, in Singapore or elsewhere;
- preparing specifications or other documents for the purposes of the Patents Act, the Trade Marks Act, the Registered Designs Act, the Plant Varieties Protection Act or the IP law of any other country relating to patents, trade marks, designs or plant varieties; or
- giving advice on the validity or infringement of any patent, registered trade mark, registered design or grant of protection of a plant variety.
A person carrying on a trade or business is allowed, in addition to any deduction previously available, a deduction equal to 150% of the lower of the qualifying IP registration costs incurred for the purpose of his trade or business during the basis period and S$300,000.
The claim for deduction is only allowed if:
- the person provides an undertaking that he would be:
- the proprietor of the patent when the patent is granted
- the proprietor of registered trade mark when the trade mark registere
- the registered owner of the registered design when the design is registered; o
- the grantee of the plant variety when the plant variety is granted protection; and
- the claim is made in the manner and subject to the conditions required by the Comptroller.
Any qualifying IP registration costs incurred by a person prior to the commencement of his trade or business are deemed to have been incurred on the first day that trade or business is carried on.
Where a deduction has been made to a person in respect of any qualifying IP registration costs and the person sells, transfers or assigns all or part of the qualifying IPRs or the application for the registration or grant of the qualifying IPRs for which the costs were incurred, within a period of one year from the date of filing of the application, the deduction allowed is deemed to be income of the person for the year of assessment relating to the basis period in which the sale, transfer or assignment occurs.
Cash Conversion option
A person who is allowed one or more deductions or allowances under the PIC scheme may in lieu of the deductions or allowances, or part of them, above S$1,500, make an irrevocable election in writing for a cash payout. Under this option of cash conversion, up to S$300,000 of the deductions or allowances for each of the first 3 qualifying years of assessment (i.e. YA 2011, 2012 and 2013) can be converted into cash at the rate of 7%.
Taxpayers will have to decide whether they would be better off with the cash payout or by retaining the ability to claim deductions and allowances in future years of assessment.
Election of the option to convert the tax deduction or allowance to cash does not necessarily mean the taxpayer will receive the full amount computed on the option as a cash payout from the Comptroller. The amount of cash payout would be first reduced by any amount due not only for tax, interest or penalty due under the Income Tax Act, but also for any tax, duty, interest or penalty due under the Goods and Services Tax Act, Stamp Duties Act or the Property Tax Act.
Enhancements in 2011 Budget
In the Budget Statement delivered by Singapore's Finance Minister on 18 February 2011, among the tax changes were enhancements to the tax benefits under the PIC scheme, including acquisition and registration of IPRs. Under the enhanced scheme, the tax deduction or writing-down allowance will be increased from 150% to 300% of the amount of qualifying expenditure up to a new limit of S$400,000 from the previous limit of S$300,000 for each qualifying activity. Like the original scheme, the additional deduction or allowance is over and above the general deduction or allowance for such expenditure, i.e. the total deduction or allowance under the Income Tax Act is 400% of the expenditure incurred by the taxpayer. Additionally, the combined expenditure cap of S$600,000 has been raised to S$800,000 for YA 2011 and YA 2012 for each of the 2 activities. A new combined cap on expenditure of S$1,200,000 for YAs 2013, 2014 and 2015 will be introduced as well. Moreover, the cash payout limit under the cash conversion option will be increased to S$30,000 from the present S$21,000.
In view of the various conditions and other details in implementation, any potential tax savings under the PIC scheme need to be studied and evaluated carefully before tangible gains can be realised.