IRAS issues new e-Tax Guide, “Rights-based approach for characterising software payments and payments for the use of or the right to use information and digitised goods”

14 February 2013

With effect from 28 Feb 2013, a rights-based approach will be adopted to characterise payments for software and the use of/right to use information and digitised goods.

Before the introduction of the rights-based approach, such payments were regarded as royalty payments for tax purposes and subject to withholding tax rules when made to non-residents, although, as a concession, some categories of software payments and payments for the right to use information and digitised goods were granted exemption from withholding tax, subject to certain conditions.

The introduction of the rights-based approach for the characterisation of the aforementioned payments is a result of the IRAS’s recognition that delivery models and licensing arrangements for software, information and digitised goods have evolved and that payments by end-users could be for the use of copyrighted articles and not necessarily for the transfer of rights to exploit the copyrights embedded in the software or goods.

The rights-based approach characterises a payment based on the nature of the rights transferred in consideration for the payment and draws a distinction between the transfer of a “copyright right” and the transfer of a “copyrighted article” from the owner to the payer.

By applying the rights-based approach, the tax treatment of a payment for software, or for the use of/ right to use information and digitised goods, would depend on the nature of the payment, ie whether it is for a copyright right or a copyrighted article.

Payment for copyright right

A transaction involves the transfer of a copyright right if the payer is allowed to commercially exploit the copyright (ie reproduce, modify or adapt and distribute the software, information or digitised goods; or prepare derivative works based on the copyrighted software program, information or digitised goods for distribution). Generally, the payer is granted the use of the software, information or digitised good in a manner that will, without such granting of use, constitute an infringement of the copyright.

Where a payment is made to a copyright owner for the transfer of partial rights in the copyright (eg licensing of copyright to be exploited by the payer), the payment is a royalty and, accordingly, withholding tax rules will apply if such payments are made to non-residents. An example of a payment of a copyright right is when a cinema operator acquires a copy of a movie for the purpose of screening to its customers.

If the payment is made to the copyright owner for the complete alienation of his/her copyright in the goods, the transaction is a sale of the copyright and any gain derived by the copyright owner from such a sale constitutes his/her business income or capital gain.

Payment for copyrighted article

A transaction involves the transfer of a copyright article if the rights are limited to those necessary to enable the payer to operate the software or to use the information or digitised goods for personal consumption or within his business operations. Payments for copyrighted articles are characterised as business income of the owner of the rights and not royalties. Accordingly, withholding tax rules do not apply.

Examples of payments for copyrighted articles include:
• the purchase of software by an end user which includes maintenance and support services incidental to the purchase of the software,
• the purchase of a copy of a movie or film for private viewing and enjoyment, through a download or on some magnetic media, where the payer is not given the right to commercially exploit the movie or film,
• subscription payments to information providers, such as Bloomberg or Lexis-Nexis, where usage of information is limited both qualitatively and quantitatively.

No approval is required for the application of the rights-based approach, but proper supporting documents such as licence agreements, intercompany agreements and invoices are to be maintained and provided to the IRAS upon request.

More information on the rights- based approach can be found on the IRAS website and in the new e-Tax Guide published by the IRAS titled “Rights-Based Approach for Characterising Software Payments and Payments for the Use of or the Right to Use Information and Digitised Goods”.

Source: Inland Revenue Authority of Singapore (IRAS)