Withholding tax in Singapore: Royalties

What is Royalty?

Royalty is the consideration for the use of, or the right to use any copyright of literacy (Software), or any artistic or scientific work. It consists of patent, trade mark, design or model, secret formula, information or process which is usually a secret and not commonly available in the public domain. Information (know-how which is not registered) concerning industrial, commercial or scientific experience.

Definition under Section 3 of Economic Expansion Incentives Act (EEIA): “royalties or technical assistance fees” includes:

a.) Any royalties, rental or other amounts paid as consideration for the use of, or the right to use, copyright, scientific works, patents, designs, plans, secret processes, formulae, trademarks, licences or other like property or rights;

b.) Income derived from the alienation of property or information mentioned in paragraph (a).

Royalty payments subject to withholding tax

Section 45A (1): Section 45 shall apply in relation to payment of any income referred to in Section 12(6) or (7) by any person to a non-resident. Section 45 will impose withholding tax payments on Sections 12(6) or 12(7).

Section 12(7) (a): Royalties and other lump sum payments received by non-residents for the use of, or the right to use, movable property deemed to be derived from Singapore.

First part of Section 12(7) (b): Payments received by non-residents for the use of scientific, technical, industrial, or commercial knowledge or information.

Income deemed to be derived from Singapore

Under Section 12(7) (a), royalty paid for the use of or the right to use any movable property shall be deemed to be derived from Singapore if:

  • Borne by a person resident in Singapore or a permanent establishment in Singapore.
  • Deductible against any income accruing in or derived from Singapore.

Under Section 12(7) (b), royalty paid for the use of scientific, technical, industrial or commercial knowledge or information shall be deemed to be derived from Singapore if they are:

  • Borne by a person resident in Singapore or a permanent establishment in Singapore.
  • Deductible against any income accruing in or derived from Singapore.

Withholding tax rate

Tax rates applicable are either:

  • Tax rates under DTA; or
  • The final withholding tax rate of 10% will apply for royalty and deemed payments under Section 12(7)(a) provided such payments:

a) Are not derived by a non-resident from any trade, business, profession or vocation carried out in Singapore; and

b) Are not effectively connected with any permanent establishment of the non-resident in Singapore.

  • Prevailing corporate tax rate if conditions (i) and (ii) are not met, for example payments are made to branch of a foreign company that has not obtained a waiver.
  • The 10% rate does not apply to:

a) Any royalty and other payments made to authors, writers or composers Section 10 (14) or (16) when derived by the person not resident in Singapore; and

b) Any payment to a person not resident in Singapore for the rendering of assistance or service in connection with the application or use of scientific, technical, industrial or commercial knowledge or information.  This applies for the use of trademarks whereby if there is a service portion 10% cannot be used, a different rate must be adopted.

 

Withholding tax under a double tax agreement

The OECD Model Tax Convention 2010 Article 12 states:

  1. Royalties arising in a Contracting State, such as Singapore and beneficially owned by a resident of the other Contracting State or country shall be taxable only in that other State (which is different from a Treaty.)
  2. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literacy, artistic or scientific work including cinematography films, any patent, trade mark, design or model, secret formula, process, or for information concerning industrial, commercial or scientific experience.

Tax incentives

a) Income received by any author, composer or choreographer, or any company which beneficially owns all the issued shares, from any royalties or other payments received from a person continuing the business of publishing in Singapore, of recording music or of producing cinematography films, choreographic works as plays as consideration for the assignment of. Or for the right to use the copyright in any literacy, dramatic, musical or artistic work is to be taxed on the lower, net amount or 10% of the gross amount.

b) Income derived by an individual who is an inventor, author or proprietor of an approved invention or approved innovation, from any royalties or other payments received as consideration for the assignment of or for the rights in the approved invention or approved innovation to be taxed on the lower, net amount or 10% of the gross amount.

c) Approved royalties, technical assistance fees or contributions received by a non-resident; exempted or reduced withholding tax under the Economic Expansion Incentives Act.

d) Royalties and know-how fees paid for the promotion or enhancement of the economic or technological development of Singapore, exempted wholly or in part from withholding tax.

Software & digitised goods

Software

Any payment made for software is usually considered royalty and subject to withholding tax. There are four types of software payments made by end-users where exemption is granted. To qualify for the exemption, the buyer should not have the right to make copies of, or perform any kind of modification on the software.

Digitised goods

Payment for the use or right to use digitised software or information is considered royalty/know-how and subject to withholding tax.

A ten year exemption is granted on payments made by end-users to non-residents for income accruing in or derived from Singapore on or after the 28th of February 2003.

To qualify for this exemption, the end-users must use it for their personal consumption or use within business operations. Also the copyright of information should not be exploited in any way.

Tax with effect from 28th of February 2013

  • E-tax guide issued on 8 February 2013.
  • Similar to the USA & European countries, the rights-based approached is adopted to distinguish the following payment for tax purposes:

a) Payments for software, and

b) Payments for the provision of information and digitised goods.

  • Under this approach, withholding tax treatment depends on whether the payment is for a copyright article or right.

Copyright right

The payer is allowed to “commercially exploit” the software. This involves making any kinds of modification, reproduction or adaptation to the software.  Nor can the payer distribute any of the software, information or digitised goods; nor prepare underlying works based on the copyrighted software program, information and digitised goods for distribution.

Copyrighted article

Rights are limited to enable the payer to operate or use the information or digitised goods, for personal consumption or for use within any personal business operations.

Copyright right: tax treatment with effect from the 28th of February 2013

 

 Copyrighted article: tax treatment with effect from the 28th of February 2013

Payment for a copyrighted article does not constitute a royalty as per Section 45A as it does not fall under Section 12(7). Withholding tax does not take effect unless the payments have come from a business carried out by the non-resident person in Singapore or connected with any PE in Singapore. Payments for other additional services are not within the scope of the rights-based approach. Withholding tax is charged on the service fees attributable to work done in Singapore only. For example a vendor provides training, and the software upgrade falls under the exemption.

Examples of copyright rights and copyrighted articles

  1. Purchase of accounting software by a company for its own use is a Copyrighted article.
  2. Payments made by a cinema (who does not own the movie) operator to screen a film to its customers is a Copyrighted right.
  3. Payment made to acquire a copy of a film for the payer’s private viewing and enjoyment with no right to commercial exploitation is a copyrighted article.
  4. Payment for information (if there is no commercial exploitation) (For example Bloomberg’s stock market analysis) is a copyrighted article.
  5. Payer obtains a right to customise software, make copies and on-license the software is a Copyright right.

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