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Better for Singapore to build, not sell, its brands 

First published in The Straits Times on 02 Oct 2013
Singapore is slowly losing the unique brands which form part of the shared cultural identity of its population. This is a problem because besides service industries, which comprise a great proportion of the Singaporean economy, future growth is likely to come from knowledge-based industries.

Last month, the Government announced an intellectual property financing scheme that allows a company to use its intellectual property as collateral on loans.

While the details are still being finalised, this is a step in the right direction in recognising the value of a company's intellectual property. The idea has been discussed for many years, with many businesses welcoming the change.

It is now time for the tax disparity between brand purchasers and brand developers to be addressed.

Singapore’s current tax rules inadvertently encourage local companies to sell their brand rather than to develop it. Instead of holding on to their brands, business owners have an incentive to transfer their brands and other intellectual property to other legal entities, or to sell these valuable assets in order to make money from them.

Markets around the world are increasingly recognising that intangible asset, such as brands and know-how, are fast replacing tangible ones such as land and buildings as key contributors to a company's value. Indeed, half of global market value today can be attributed to intangible assets. And this figure looks set to continue rising as more knowledge-based economies develop.

Businesses and markets have responded by putting intellectual property protection strategies in place, developing valuation methodologies, and reviewing accounting standards to recognise the value of intellectual property.

But almost every tax system in the world, including Singapore’s, has failed to account for this dramatic shift.

Most tax systems regard the purchase of an intangible asset - such as a patent or trademark - as a business expense. Companies are, therefore, permitted to deduct the cost from taxable profits through a so-called "writing-down allowance" over a specified number of years, usually its useful life.

This gives purchasers a considerable tax benefit through a reduction in their tax bills. However, business owners that build up intangible assets such as brand names do not enjoy such tax benefits. This is despite the fact that any company developing a brand often spends much more effort conceiving, promoting and maintaining it than is captured in expenditure such as manpower and advertising costs.

The tax disparity is compounded in Singapore by the Productivity and Innovation Credit (PIC) scheme. For the purchase of a $1 million asset, for example, the scheme potentially allows the buyer to reduce his taxable income by a total of $4 million instead of $1 m illion over a five-year period.

In an ever more complex and competitive world, corporate reputation and trust in a brand will often drive customer choice. Growing niche Singapore brands and capturing new markets have never been more important.

Beyond the obvious advantages, such as additional revenue, job creation and the development of strong international competitiveness, a successful Singapore brand contributes to the image and international standing of the country.

This, in turn, has a positive knock-on effect on goods and services originating from Singapore. This can be seen in the way consumers associate German products with superior engineering, Korean products with innovation, and Japanese products with quality.

The seemingly unequal tax treatment between brand owners and brand buyers can be removed by allowing brand owners to claim writing-down allowances on the value of the brands they own.

Valuing the brand as an intangible asset will be challenging. Understandably, policymakers may be uncomfortable moving away from the traditional method of providing subsidies or tax benefits based simply on what a company spends. Further, valuing the brand as an intangible asset will be challenging.

However, policymakers have many tools at their disposal. For example, the value of a brand can be determined by independent valuers. In addition, Singapore can take small steps by first rolling out the scheme to small and medium-sized enterprises. The amount of writing-down allowance could be capped at $10 million per brand as a start.

As is common with such schemes, if a brand is subsequently sold, any tax benefits derived from the writing-down allowance could be returned to the government (through "clawback" provisions).

Ideas and innovation are more highly valued than ever. New incentive schemes should recognise that successful brands are not built overnight. A successful brand is the result of a culmination of ideas, efforts and resources of the business over a long period of time.

Just as business owners take a leap of faith to pursue originality and invest in value creation, so too must national efforts to help our business owners. Such efforts will invariably give Singapore brands a boost on the world stage.

This article is contributed by Tay Hong Beng, Head of Tax and Harvey Koenig, Tax Partner at KPMG in Singapore.The views expressed are their own.