Singapore Budget 2017, how does it impact your related party transactions?
The end goal of the proposed measures is to enhance Singapore’s future position focusing on digitalisation, innovation, and internationalisation. The Singapore Government will assist business and the society in these three key areas to remain competitive internationally.
As a current focus topic of tax authorities, transfer pricing and the implementation of BEPS action plan are still very much in the eyes of the governments and Singapore is not the exception. There are, therefore, a few measures that in our view will impact taxpayers and their related party dealings during 2017.
1. New IP Development Incentive (IDI) Regime that encourages the exploitation of IP from research & development (R&D) activities of Singapore taxpayers
The IDI Regime aims to incentivise income from IP developed from R&D activities of Singapore taxpayers. This income is expected to qualify for a lower tax rate than the normal income tax rate of 17%. For new incentive approvals obtained on or after 1 Jul 2017, the IP income will be removed from current incentives schemes (e.g. Pioneer-Services/Headquarters Incentive and the Development and Expansion Incentive-Services/Headquarters). Existing incentive recipients approved before 1 July 2017, will continue to have the IP income covered under previous incentives until 30 June 2021.
Relevant to transfer pricing, the IDI incorporates the modified nexus approach of BEPS Action Plan. According to the modified nexus approach, for an IP income to qualify for a tax incentive (such as IDI) a significant portion of the R&D activities must be performed by the taxpayer claiming the benefit of the incentive. For a Singapore taxpayer to qualify for the IDI, the R&D activities should be performed locally, and the taxpayer should also incur in R&D expenses in Singapore.
This measure evidence Singapore’s commitment with implementing the principles of BEPS action plan and reinforces the importance of substance over form principle whereby profits should be taxed where substantial activities are present, and value is created. This principle was also included in the 4th Edition of Singapore Transfer Pricing Guidelines released by IRAS earlier in January.
From a tax and transfer pricing planning perspective, the IDI scheme is a good opportunity for Singapore taxpayers to develop IP locally and implement centralised business models. These models are characterised by a main entrepreneur in the supply chain, that ownes valuable IP, and subsidiaries in the region that operate as a lower risk entities, such as contract manufacturers, limited risk distributors or service providers. This type of business model, in principle, remunerates the entrepreneur (e.g. Singapore Company) with a higher profit due to being the owner of the IP and the main risk taker. The key to success for these type of business models are, as stated in the budget speech and in Singapore recent Transfer Pricing Guidelines, the commercial drivers and substance of the arrangement whereby the entrepreneur has the capability (in terms of workforce and financially) to develop the R&D activities in Singapore.
2. Strengthening support for firms to innovate, scale up and internationalise
The budget included the following measures to support businesses with innovation, digital, and internationalisation.
A plan to support companies in various areas of innovation. The first initiative aims to support 400 companies over the following four years with the development of strategic technology plans. The second initiative includes a head start program for SMEs to enter into research collaboration agreement to enjoy royalty free and exclusive IP licenses for 18 months that can be extended to 36 months. Finally, companies will have access to use specialised equipment (from inspection tools to more advanced equipment such as robotised 3D scanners and equipment for manufacturing such as high-pressure cold sprays).
The second measure involves SG$600 million of funds for Singapore-based firms to scale up and internationalise primarily in the Asian markets. The fund will be co-invested with Singapore firms to partner with other Asian companies to extend product lines, brands or value chain or to gain access to markets, channels and technologies. These funds are available for Singapore-based firms with annual revenue not higher than SG$800 million.
These measures to support Singapore businesses with their internationalisation plans will enable them to boost their growth as local businesses are limited to the constraints related to Singapore being a small nation. Significant growth for SMEs will require internationalisation and entering into neighbor countries.
As business internationalise, they have to consider the regulatory framework, including transfer pricing regulations, to ensure compliance with tax and transfer pricing in each country (including Singapore). This is particularly important giving the recent focus of tax authorities in the region on transfer pricing to ensure that companies are paying the fair amount of tax. Internationalisation is welcome, and it should be driven by commercial reasons, but good governance and compliance with local regulations are key to mitigate the risk of future audits and disputes with tax authorities.
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