Overview of the Scheme for Writing-Down Allowances

To enhance Singapore’s attractiveness as a location for businesses to hold and commercialise IPRs, companies can claim writing-down allowances (WDA) on capital expenditure incurred on or after 1 November 2023 to acquire qualifying intellectual property
rights (IPRs) for use in their trade or business. The WDA scheme is legislated under Section 19B of the Income Tax Act 1947 (S19B), and over the years, the scheme has been extended to the Year of Assessment (YA) 2028.

 

Qualifying IPRs

Under S19B, qualifying IPRs are defined to mean the right to do or authorise the doing of anything which would, but for that right, be an infringement of any:

• Patent;
• Copyright;
• Trademark;
• Registered design;
• Geographical indication;
• Lay-out design of integrated circuit;
• Trade secret or information with commercial value; or
• The grant of protection of a plant variety.

 

That being said, WDA is not available on capital expenditure incurred in acquiring any IPRs in any software which are acquired for the purpose of licensing all or any of those rights to another.

In addition, the expressions ‘trade secret’ and ‘information that has commercial value’, and any work or subject-matter to which the expression ‘copyright’ relates, specifically exclude certain IPRs, such as information of customers and information on work processes such as standard operating procedures.

To be eligible for WDA, the company must acquire the legal and economic ownership of the qualifying IPRs, except where approval for waiver of the requirement for legal ownership has been granted by the Economic Development Board (EDB).

 

Qualifying Capital Expenditure

Capital expenditure that qualifies for WDA excludes legal fees, registration fees, stamp duty and other costs related to the acquisition of the IPRs. Any capital expenditure that is or is to be subsidised by grants or subsidies from the Government or a statutory board also does not qualify for WDA.

 

How to calculate and claim WDA

The amount of WDA is 100% of the capital expenditure incurred on acquiring the qualifying IPRs. However, under the Enterprise Innovation Scheme, which is available for qualifying businesses¹ from YA 2024 to YA 2028, there is an additional amount of WDA available on 300% of the capital expenditure incurred up to S$400,000 on the acquisition of all qualifying IPRs during the basis period.

The WDA is to be claimed on a straight-line basis over a period of 5 years, 10 years or 15 years, based on the company’s election and known as the “writing-down period”, beginning with the YA relating to the basis period in which the capital expenditure is incurred.

The WDA reduces the chargeable income of the claimant company. Any WDA in excess of chargeable income can be transferred out under the group relief scheme, carried back to offset the company’s chargeable income for the preceding YA, or carried forward to offset the company’s future chargeable income, subject to qualifying conditions where applicable (e.g., the substantial shareholding test).

 

Disposal of Qualifying IPRs

Where WDA has been claimed on the acquisition of qualifying IPRs, and the qualifying IPRs is subsequently disposed (upon a sale, transfer or assignment), no further WDA is to be made for the YA relating to the basis period in which the disposal occurred or for any subsequent YA. Further, if the price for the disposal exceeds the amount of WDA yet to be allowed, a charge (i.e., a taxable income) will be imposed on the company, of an amount equal to the excess of the sale price, and the WDA that had been allowed, whichever is the lower.

 

Open Market Price for Qualifying IPRs

Companies that have made, or intend to make, WDA claims on the acquisition of qualifying IPRs should be aware of the tax implications relating to their Open Market Price (OMP).

OMP is defined under S19B as:

• The price which those rights could have been purchased in the open market on the acquisition date of those rights; or
• If, by reason of the special nature of those rights, it is not possible to determine the price mentioned in (a), such other value that the Comptroller of Income Tax (the CIT) considers to be a reasonable value for those rights after considering the valuation of those rights by an appropriate valuer and other relevant circumstances.

 

Where capital expenditure on acquisition of qualifying IPRs exceeds OMP

If the capital expenditure incurred by a company to acquire qualifying IPRs exceeds the OMP for the IPRs, then for the purpose of determining the amount of WDA, the amount of capital expenditure may be treated as the OMP.

In order to make a WDA claim, the CIT requires a valuation of the qualifying IPRs to be made by an appropriate valuer to determine the OMP where the value of the capital expenditure exceeds the
thresholds below.

1. The capital expenditure incurred in acquiring the IPRs is at least S$0.5 million for a related party transaction; or
2. The capital expenditure incurred in acquiring the IPRs is at least S$2 million for an unrelated party transaction.

 

The valuation report is to be submitted with a signed and completed declaration form at the time of the submission of the corporate income tax return for the YA relating the basis period in which the capital expenditure was incurred².

Applicants for WDA should be aware that where the capital expenditure is less than the above thresholds, the provisions relating to OMP remain applicable.

 

OMP considerations when disposing of qualifying IPRs

Under S19B, there are also OMP considerations that arise on a disposal of qualifying IPRs. As explained earlier, a company that disposes of qualifying IPRs and has previously claimed WDA upon its acquisition, will be subject to a charge if the disposal price exceeds the amount of WDA yet to be allowed. For the purpose of determining of the charge, S19B allows the CIT to substitute the OMP for the price for the disposal.

Therefore, there is a risk that where the OMP is found to exceed the disposal price, the CIT may substitute the OMP for the disposal price for the purposes of determining the amount of the charge. As such, a company that disposes of a qualifying IPR may be required to submit a valuation report to the CIT.

 

Valuation of Qualifying IPRs

For the purposes of S19B, the CIT requires IPR valuation reports to be well structured and rigorous in explaining type of IPRs valued, the background of company’s business and value drivers, valuation methods, assumptions and inputs as a basis for the valuation conclusion. The report should also include source information relied on in determining the valuation, material risks, disclaimers and limitations, terms of engagement and credentials of Valuer.

Market approaches to value the IPRs would have been the ideal way to obtain the OMP. However, in reality, intangible assets are unique and rarely traded in any active markets. Hence, appropriate transactions for which information is available will be rare. Furthermore, judgment is required in making any price adjustments given the unique features and terms of sale for each intangible asset.

The following are common income approach methods for valuing IPRs.

• Multi-period Excess Earnings measures the excess earnings attributable to the IPR, after deducting the economic charges on the
  use of contributory assets. The contributory assets include working capital, fixed assets, assembled workforce and other intangible assets. The value of the intangible asset is the present value of the excess earnings after taxes discounted by an appropriate risk adjusted discount rate to the valuation date.
• Relief from Royalty (RFR) represents the royalty savings the subject IPR would generate on a present value basis if otherwise licensed on arm’s-length. Licensing agreements pertaining to comparable intangible assets are used to derive royalty rates for the respective asset. The calculated saved royalty payments after taxes are then discounted by means of a risk adjusted discount rate to the valuation date.
• With or Without estimates an IPR’s value by calculating the difference between two discounted cash-flow models: one that represents the status quo for the business enterprise with the IPR in place, and another without it, given all the rest is the same.
• Real Option Pricing uses option pricing models to estimate the value of underdeveloped IPRs that may not currently generate significant cash flow but have the potential for significant future value. It serves to capture the value of an intangible asset’s ability to create future options and adapt to changing market conditions.

 

Where market and income approaches cannot be applied, the Cost Approach uses the concept of replacement or reproduction cost as an indicator of value. The premise of the cost approach is that a prudent investor would pay no more for an asset than the amount for which the asset could be replaced / reproduced. Consideration is given to planned technical upgrades, which are feasible and prudent from an investment point of view. After determining current replacement/reproduction cost of a new asset, adjustments for losses in value due to physical deterioration for tangible assets, functional and economic obsolescence are made to arrive at the indicative value.

 

Simple Illustration

H-Tech is a medical Research & Development (R&D) company in Singapore that has developed its proprietary range of medical devices for diagnostic testing, monitoring and treatment application of certain infectious diseases. H-Tech has successfully filed for patents in several countries. H-Tech sold its business including the patents to Company A for S$10 million during the financial year 2024 (FY 2024), which is now seeking to apply for writing-down allowances for purchase consideration incurred on the patents acquired.

Key Steps for RFR Method:

1. Develop revenue projection over the estimated life of the intangible asset.
2. Select an appropriate royalty rate based on comparable licensing agreements.
3. Calculate annual royalty savings by multiplying each year’s projected revenue to the selected royalty rate.
4. Apply a statutory tax rate to the annual royalty savings to derive after-tax royalty savings.
5. Compute the present value of royalty savings after applying a risk appropriate discount rate.

 

Key considerations in performing the valuation under the RFR method are determining the length of economic benefit, the appropriateness of observable benchmarks for royalty rate, and the consistency of comparable royalty rates and their bases.

Assuming the patents are valued at approximately S$2.2 million based on the RFR method, the amount of WDA that may be claimed is S$2.2 million + 300% x S$400,000³= S$3.4 million.

Assuming that Company A chooses a writing-down period of 5 years, the amount of WDA that may be claimed per YA, beginning from YA 2025 to YA 2029, is S$680,000.

 

How We Can Help?

Our team of Tax Specialists has vast knowledge and experience in guiding enterprises and business owners through the ever changing financial and tax compliance landscape. We are committed to help our clients to resolve their most pressing tax issues and to achieve various business / personal goals, ranging from (re)structuring, acquisitions, investments, divestments and / or succession planning, to name a few, in the most pragmatic and tax efficient manner.

Our Valuation Specialists possess in-depth experience and an established track record in various intangible asset valuation engagements for international Financial Reporting Standards and Section 19B of SITA compliance. We understand the complexities of intangible assets and the stringent requirements stipulated by regulatory authorities. By employing industry-leading methodologies, data-driven analysis and sound professional judgement, we strive to deliver quality valuation reports that fulfil your reporting obligations at a competitive fee rate.

For all questions or concerns on tax and valuation matters, please speak to our specialists.

 

¹To qualify for Enterprise Innovation Scheme, the business must derive less than S$500 million in revenue for the relevant basis period. However, if the business is part of a group, the threshold of S$500 million is to be applied to the group annual revenue for the basis period.

²If the payment for the IPRs is made by instalments, the YA for purposes of the submission is the YA relating to the first deposit or instalment payment.

³The additional WDA based on 300% of S$400,000 is available on the assumption that Company A qualifies for the Enterprise Innovation Scheme, which is applicable from YA 2024 to YA 2028.

 

View the full article in PDF here.

 

CONTACT US

Contact our Tax Advisory Specialists and Valuation & Transaction Specialists for a Discussion.

Tax Advisory Specialists

Valuation & Transaction Specialists