GST and intellectual property

29 February 2016

by Nicolaos Giannopoulos

Since the introduction of GST, we have received a number of questions on issues faced by clients supplying rights to use intellectual property (IP).

Issues with GST classification

Effective 1 April 2015, any supply of rights to use IP made in Malaysia by a GST registered person will be subject to GST of 6%. There are exceptions; a zero rate of GST may apply, for instance, in cases where the recipient (contracting party) of the services is a non-resident and is outside Malaysia at the time the services are performed and where the services do not benefit anyone in Malaysia.

It is critical (and has been a challenge) for some clients to identify whether the above criteria could be met to enjoy zero rating status.

Disagreements between contracting parties

One of the key impacts of GST is that the supplier is required to remit GST amounting to 6/106 of any consideration received; suppliers usually pass on the burden of GST to the recipient by way of increasing the consideration payable. However this has not always proved possible.

The GST law presumes that consideration is GST-inclusive unless otherwise agreed between the contracting parties. Not catering for such may have an impact on royalties that are calculated in reference to sales or turnover. For example, take a royalty calculated contract based on the selling price; if the contract is silent as to whether the selling price used is to be GST-inclusive or exclusive, then using a GST-inclusive selling price will inflate the royalty paid by the recipient to the supplier, leading to disagreements between the parties.

When to account for GST

When GST needs to be accounted and reported for will vary depending on the type of supply.

For example, if the supply of IP is made on a continuous basis, with payment determined periodically, Regulation 8 of the GST Regulations 2014 requires that GST is payable in respect of each periodic payment as if it were a separate supply. This means that if an IP licence is granted continuously for a period over 1 year, with licence fees payable quarterly, the GST is to be accounted for when each quarterly licence fee is imposed, as if it were for a separate supply i.e. the GST is not all payable upfront.

Where the supply is not a continuous supply, but a one-off, discrete supply, then GST is payable in respect of the entire consideration for the supply during the earlier part of the tax period (a) when any part of the consideration is received, (b) when a tax invoice for any part of it is issued or (c) when the supply (the right) is performed (granted).

In some cases, the amount of consideration for a supply of IP (which is not a continuous supply) may not be known at the time the supply is made (e.g. where consideration is in the form of a royalty that is to be calculated in reference to the end of year net profit margin or operating revenue). Regulation 10 of the GST regulations states that if the amount of consideration is unknown at the time GST would otherwise be payable, then GST becomes payable during the earlier part of the tax period in which a tax invoice is issued or any consideration is received.

Thus care needs to be taken to assess the type of supply of IP in reference to the relevant contract terms, and to ensure that GST is accounted for in the correct tax period.

Connected Persons and GST Groups

For GST purposes, the supply of IP between connected persons needs to be considered.

The Third Schedule of the GST Act 2014 contains "connected person" provisions that apply where the consideration for a taxable supply between connected persons is nil or below open market value and where the recipient of the supply would not have been entitled to full input tax credits on the acquisition of the IP. The rules require that an open market value is used to determine the consideration for the supply for GST purposes.

Furthermore, Regulation 8 of the GST Regulations 2014 impacts the above supplies between connected persons by requiring that GST be accounted for no later than the end of three months after the supplies first commenced and thereafter at the end of each subsequent period of 3 months.

If the connected persons are part of a GST group, then the GST on any supply of IP between them is disregarded, as supplies between members of the same GST group are deemed not to be taxable supplies. However, taxable supplies between GST group members and parties outside of the GST group are not afforded the same concession.

Imported services

Where the supply of IP is received from a non-resident supplier, Section 13 of the GST Act 2014 makes the Malaysian recipient (consuming the service in Malaysia) liable to report and remit 6% GST. The recipient is entitled to claim an input tax credit if the acquisition was used to make taxable supplies; otherwise the input tax credit is reduced by the extent used for making of exempt supplies. The net result renders the recipient liable to pay GST, regardless of whether or not they would be entitled to claim the input tax credit.

Conclusion

With any IP transactions, such as licensing of IP between Malaysian companies or to non-residents, the key is to determine whether the supply is subject to GST or whether the GST treatment is altered by any special provisions in the GST Act. Other ‘special provisions’ such as those dealing with time of supply, supplies between connected persons, GST group members and imported services (to name a few) need careful consideration to ensure companies meet their GST obligations.

If you require any clarification on the above points or wish to ask any questions pertaining to IP, please feel free to contact any of our indirect tax specialists for assistance.

Nicolaos Giannopoulos is an Executive Director with PwC Malaysia's Indirect Tax Advisory Group.