Business profits and payments for the use of/right to use industrial, commercial or scientific equipment

The income characterisation issues could arise over the classification of income relating to digital or physical products.

Digital products

Payments could arise from time-limited use of digital products such as limited duration software and digital information licences. Payments for such digital products are generally not considered as payments for “for the use of, or the right to use, industrial, commercial or scientific equipment” because:

  1. Digital products cannot be regarded as “equipment” because the word “equipment” denotes a tangible product.
  2. Many digital products (music, videos, games) supplied over the internet  are supplied to private consumers so they cannot be considered “industrial, commercial or scientific” products.
  3. Those sorts of payments cannot be considered to be “for the use, or right to use” the product since ownership of digital consumer products is intended with a short useful life. 

Computer equipment

Factors found indicative of a rental lease rather than the provision of services include:

  1. the customer is in physical possession of the property
  2. the customer controls the property
  3. the customer has a significant economic or possessory interest in the property
  4. the provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is non performance under the contract.
  5. the provider does not use the property concurrently to provide significant services to entities unrelated to the service recipient; and
  6. the total payment does not substantially exceed the rental value of the computer equipment for the contract period.

 Applying these factors to application service provider transactions, it is found that these should generally give rise to services income as opposed to rental payments.

Similarly data warehousing transactions are treated as services transactions rather than lease rentals.

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