Singapore Indonesia tax treaty and IP royalties
IP royalties paid from Indonesia to Singapore are common for many reasons. One is that Singapore is a base for regional investment so holding companies tend to be located in Singapore, covering South Asia. Another is that foreign businesses operating in SE Asian countries face other restrictions (ownership limitations, higher corporate tax etc) that might make IP royalties a useful structural tool. A third is that investment vehicles that own IP assets in a robust jurisdiction are easier to attract VC and other financing options, even an outright sale.
Royalties however attract withholding tax when they are paid offshore. There are different rates for different types of IP. The rules are set out under the Singapore-Indonesia Double Tax Treaty; Indonesia and Singapore signed a new tax treaty on 4 February 2020 to replace the 1990 tax treaty between the two countries. Ratification is under way and it should be in effect by the end of 2020; which means its time for businesses to start planning now.
Under the new treaty withholding tax for royalties will be lowered from 15% to the new rates of either 10% or 8%, depending on the type of royalty:
- 10%, for the copyrights, patent, trade mark, design or models, trade secrets; and
- 8%, for the use of or the right to use, industrial, commercial or scientific equipment, or know how.
So ‘classic’ IP royalties (e.g. licenses of copyright or trade marks) attract 10%. Physical equipment is 8%. Of great interest will be the trade secrets and know how rules, which could create a whole new category of licensable rights, which are currently quite overlooked in transactions.
Both countries apply the credit method for the elimination of double taxation. This means that Singapore should credit the withholding tax paid against the Singapore IP owner’s income tax in Singapore (an already fair 17% corporate tax rate is reduced to an effective 7% then for that IP royalty income).