The Inland Revenue Authority of Singapore on 23rd February 2001 published guidelines on how existing Singapore income tax laws and regulations apply to payment of software royalties. Such guidelines are welcomed by the industry as they go some way in making clear a very murky area of tax.
Whenever a person purchases software, whether online, in a box or otherwise, the payment he makes is considered by the IRAS to be royalty payments. Traditionally, royalty payments when made to a non-resident is subject to withholding tax, that is the buyer had to withhold a portion of the payment to pay to IRAS. If the buyer fails to do this, there are penalties imposed.
The “standard tax rate” is 15%. Where the non-resident is from a country that has a tax treaty with Singapore, the rate will that in the tax treaty.
This not only makes it inconvenient for end-user/buyers but there was confusion as to when withholding tax is payable.
Categories of Exemption
On 11 November 2000, the government announced that as from 1 January 2001, shrink-wrap software was exempted from withholding tax. On 23 February 2001, this exemption was extended to other categories. At present, 4 categories of software are exempted:-
- shrink-wrap software
- downloadable software for end-user
- site licences; and
- software bundled with computer hardware.
In the guidelines, a “shrink-wrap software” has the following characteristics:-
- it is distributed in wrapped boxes, usually in the form of CDs or diskette;
- it is accompanied by a shrink-wrap licence;
- the buyer can use the program on his computer but cannot modify it;
- the licence must prohibit reverse engineering, decompilation or disassembly of the program.
Typically shrink-wrap software are standard software such as computer games, operating systems, application software that are available off-the-shelf.
It does not matter if the shrink-wrap software was bought for re-sale. Nor does it matter if the software was shrink-wrapped in Singapore. However, if the CDs or diskettes are pressed/ manufactured in Singapore from a master copy, then the exemption does not apply.
Downloadable software for the end-user
The guidelines defines “downloadable software for end-user” as a software downloaded by an end-user from the Internet or a network for a fee. They are sometimes referred to as “webwrap” or “clickwrap” software.
The end-user is a user who only acquires the right to run the software, not exploit the copyright to the program. Thus is a user downloads a software and then re-distributes the software, he is not considered as an end-user. Withholding tax will be payable in such a situation.
A site licence refers to a licence permitting a user to use a software on several computers or servers within its own business, location or facility. No re-selling or reverse-engineering must be allowed. However the software can be a customizable software.
If additional payments are needed to customize the software that is not part of the software cost, such additional payments are not exempted from withholding tax if they are paid to a non-resident for services rendered in Singapore.
If the software payment includes maintenance and support services incidental to the purchase of the software, there is no need to separate or allocate the cost for such services as they are also exempted. However any subsequent payment for maintenance and support is considered as payment for technical services and are thus subject to withholding tax if the services are performed by a non-resident in Singapore.
This gives rise to an interesting situation where the support or maintenance may be carried out by the non-resident remotely to computers in Singapore. Are such services carried out in Singapore and is withholding tax then payable?
Software bundled with computer hardware
The software is considered by IRAS to be bundled if the software is pre-installed in the computer hardware and are sold together as a single product. There must be no separate pricing. The buyer can use the program on this computer but cannot modify it.
It does not matter if the bundled software/hardware was bought for re-sale. However, if a licence fee is paid to a non-resident for a software and the software is then manufactured/bundled with hardware in Singapore, withholding tax is payable.
In addition to the above, the guidelines also set out an administrative concession from the IRAS.
Normally, withholding tax is applicable to software payments made to a non-resident where the payments are income derived from a trade, business, profession or vocation carried on or exercised by that person in Singapore or which is connected to an permanent establishment of that person in Singapore.
As a concession, IRAS has decided to waive this requirement on payments relating to the 4 categories of software if the non-resident person who receives such payments declares or continues to declare such payments as income in his annual tax returns.
As with all things relating to tax laws, this is a highly technical area. The slightest change to the way a business is proposed to be carried out may result in the payment being subject to withholding tax. Seeking advice from tax lawyers or tax consultants is always prudent.