Taxation of Software Royalities: Singapore’s Consultation Paper

The Inland Revenue Authority of Singapore has released a “Consultation Paper” seeking views on the proposed change to the law on taxing software rights. It is pointed out that currently, all payments for the use of software are classified as royalty for tax purposes. Royalty made to non-resident persons are deemed to be sourced in Singapore and the payer has to withhold tax on such payments made to non-residents.

Under the proposed rights-based approach, the characterisation of a payment is determined based on the nature of the rights transferred in consideration for the payment. In particular, it examines if the payer acquires the use of a “copyright right” or a “copyrighted article”. Payment made for the complete alienation of the transferor’s copyright right in the software would be either business income or capital gains in the hands of the transferor. Payment made for licensing the copyright will be treated as royalty. Payment made for the transfer of a copyrighted article will be treated as business income in the hands of the transferor and will not be taxable in the hands of non-residents unless the income is effectively connected with the non-resident’s permanent establishment in Singapore.

The views expressed in the Consultation paper are very relevant from the perspective of the Indian Income-tax Act.