Summary of Responses - Draft Circular : "Guidelines on What is Research & Development (R&D) for Income Tax Purposes"

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A public consultation exercise on a draft circular entitled “Guidelines on What is Research & Development for Income Tax Purposes” was held between 21 Aug and 10 Sep 2008 to obtain public feedback.

2. Several R&D tax changes were introduced in Budget 2008, so as to encourage pervasive R&D in Singapore companies. They are in Annex A. More information on these R&D tax changes can be found on the Inland Revenue Authority of Singapore’s website. The public was consulted to seek comments on the draft circular that contained the definition of R&D and the list of general information required for making R&D claims. Ministry of Finance (MOF) and Inland Revenue Authority of Singapore (IRAS) have used the public feedback to refine and finalise the circular, “Research & Development Tax Measures” issued by IRAS on 31 Oct 2008.

Responses to the Public Consultation Exercise

3. A total of 43 comments were received on the scope of issues covered within the draft circular. MOF wishes to thank all respondents.

Summary of Comments

4. MOF considered all the comments carefully with IRAS. Of the 43 responses received, MOF accepted 27 responses for incorporation into the circular issued by IRAS. 16 other responses could not be accepted for implementation as they suggested changes that were inconsistent with the policy intention for the R&D tax changes.

5. The major public feedback received and MOF’s responses are summarised below:



Some respondents felt that it will be too restrictive if R&D projects need to involve both “novelty and technical risk”.

MOF’s response: Accepted for implementation. MOF would like to clarify that the R&D project is only required to satisfy either “novelty” or “technical risk” requirement. As a whole, to ascertain whether the activity can indeed be eligible, a qualifying R&D project needs to meet three requirements:

What did the taxpayer do? – The activity undertaken must involve a systematic, investigative and experimental study in the field of science or technology;

Why did the taxpayer do the study? - The objective of the study must be to:
Acquire new knowledge; or
Create new or improve existing products or processes;


What did the study involve? – To achieve the objective of the study, the study must Seek to create novel products or processes; or Involve technical risk, i.e. a scientific or technological issue which cannot be readily resolved by a competent professional in the relevant field.

2. Start and end of R&D project

It is important to identify the start and end of the project because only expenditure related to the project are eligible. Some respondents suggested providing illustrations in the guidance circular to explain the start and end of an R&D project.

MOF’s response: Accepted for implementation. The guidance circular will include an example to provide more clarity on the start and end of an R&D project.

3. Projects involving novelty

Some respondents requested for examples to illustrate the circumstances under which improvement may achieve novelty.

MOF’s response: Accepted for implementation. Part B of the guidance circular provides several examples of the type of projects that may qualify as R&D for tax purposes. As IRAS gains experience in administering the new R&D tax incentives, it will also periodically provide an update on examples of the type of projects that may qualify as qualifying R&D for tax purposes.

4. Services Sector

Some respondents requested to include more examples in the R&D guidance circular to illustrate qualifying R&D projects in the services sector.

MOF’s response: Accepted for implementation. We will include more examples of R&D in the services sector as IRAS gains more experience in administering the R&D tax incentives.

5. Software development activities

The draft circular listed the following as an excluded activity: “Software development not intended for purpose of sale, rent, licence, hire or lease to two or more persons which are not related persons.” Respondents proposed that the exclusion was meant to refer to "two or more persons who are not related to the relevant taxpayer" rather than referring to two or more persons who are not related to each other.

MOF’s response: Accepted with modification for implementation. The multiple sale requirement is satisfied when the taxpayer undertakes the software development work with the intent to sell, rent, licence, hire or lease to two or more persons who are unrelated to each other and who are unrelated1 to the taxpayer.



1. Systematic, experimental and investigative study

Respondents suggested that the proposed new R&D definition may become more restrictive by changing the phrase “systematic or intensive study” to “systematic, experimental and investigative study”. Respondents suggested removing the words “systematic, experimental and investigative” altogether, or alternatively, changing the word “and” to “or”.

Suggested wording: “any study” or “any systematic, experimental or investigative study”

MOF’s response: Not accepted for implementation. The change of the wording from “systematic or intensive study” to “systematic, experimental and investigative study” is not intended to make the definition more restrictive. Rather, the change is in response to feedback from taxpayers for a more descriptive phrase, as “intensive” is ambiguous. By its very nature, R&D work is “systematic, experimental and investigative”. Taxpayers may find further guidance of the intended meaning of this phrase in the checklist accompanying the circular (Chart C of the draft circular). Accordingly, the phrase will not prejudice genuine R&D activities.

* In the final circular and legislation, the actual wording will be “systematic, investigative and experimental study”, to be consistent with wording used in other countries. The change in the order of the words is not intended to change the overall meaning of the phrase.

2. Technical risk

Some respondents felt that the term “technical risk” is too narrow as there are many situations which involve other risks which may not be technical in nature, e.g. financial risks.

MOF’s response: Not accepted for implementation. For the purpose of the R&D incentives, there is a need to differentiate R&D projects from other types of projects that businesses undertake. The suggestion to delete the word “technical” and allow projects with other types of risks such as financial risk to also qualify as R&D can potentially cover any business undertaking. This would go beyond the scope of the R&D tax incentives. As the key focus of the concessions is to build up R&D capabilities in the field of science or technology, the R&D incentives are targeted at projects that are intended to have novel outcomes (hence the “novelty” requirement) or involve attempts to resolve some scientific or technological uncertainty (“technical risk” requirement).


3. Software development activities

For software development activities to qualify as R&D, in addition to satisfying the R&D definition, the activities must also meet the “multiple sale” requirement. Respondents commented that the current drafting of the “multiple sale” requirement in the circular may not be consistent with policy intention. The draft circular listed the following as an excluded activity: “Software development not intended for purpose of sale, rent, license, hire or lease to two or more persons which are not related persons.”

Other respondents questioned the rationale for the multiple sale requirement.

MOF’s response: Not accepted for implementation. The policy intention is to allow software development activities to be regarded as R&D for the purpose of the R&D incentives if (a) the “multiple sale” requirement is satisfied, or (b) the software development activity is undertaken primarily to support a qualifying R&D project.

We wish to take this opportunity to explain the rationale for the multiple sale requirement. The experience of other countries such as Australia and Canada has shown that assessing whether software development activities qualify as R&D has been very difficult and problematic, especially when the software is developed for in-house use. The difficulty with software development activities in particular is due to the intangible and constantly evolving nature of software. Routine software development or software development which amounts to customisation of software for a customer or a group of related companies may inadvertently be classified as qualifying R&D when they are not intended to be incentivised by Government. Australia and Canada have thus introduced a similar multiple sale requirement. This is to reduce the risk of routine software development and software customisation being classified as qualifying R&D, thus alleviating the incidence of protracted disputes between taxpayers and the tax authority on whether a software development constitutes qualifying R&D. Similarly, MOF has decided to introduce a multiple sale requirement for software development activities.

The multiple sale requirement is, however, not applicable if the software development activity is undertaken primarily to support a qualifying R&D project. Such latter software development can be qualifying R&D.

4. Routine modifications and changes, and cosmetic modifications and aesthetic changes

Respondents have expressed concerns that the wording ‘routine modifications or changes’ and ‘Cosmetic modifications or stylistic changes’ is unclear and may result in a more restrictive definition. One respondent indicated that in some cases, the work scope in connection with the modification of existing products would also involve aesthetic updates such as applying new or unproven materials to existing products. In such cases, the aesthetic updates will be required to go through various workflows where design engineers need to ensure aesthetic updates can be applied on existing product design, study potential chemical reaction on different materials used, consider how to apply aesthetic updates to manufacturing process etc.

MOF’s response: Not accepted for implementation. Enterprises need to periodically improve their products or processes. R&D incentives are intended to apply to improvements of products and processes that would not have occurred in the routine and ordinary course of the taxpayer’s work. There is a need to distinguish R&D from routine improvements. It is also not our policy intent to incentivise cosmetic or stylistic changes to products or processes.

MOF submits that it is difficult to develop precise wordings that can give absolute clarity of what type of activity will be regarded as routine, for instance. This will be a matter of case-specific facts.

With regard to the specific example quoted, MOF is aware that there are instances where aesthetic updates are not merely cosmetic, but may result in functional improvements in the product or processes. If the improvements are non-routine, the activities involved may be regarded as R&D. We have attempted to clarify this position with the example in Part C(a) contained in the draft circular. We will include more examples as IRAS gains more experience in administering the R&D tax incentives.


5. Payments for outsourced R&D

The Enhanced Tax Deduction for Expenses Incurred on R&D currently only describes the increase from 100% to 150% for R&D done in Singapore. Respondents suggested amending the description to also state the level of deduction that would apply for payments for outsourced R&D, as follows:

• An increase from 100% to 150% in tax deduction for in-house R&D done in Singapore.

• An increase from 100% to 130% in tax deduction for R&D outsourced to an organisation in Singapore.

MOF’s response: Not accepted for implementation. MOF would like to clarify that the incentive enhancing the tax deduction for expenses incurred on R&D will apply to allow businesses to claim an additional 50% deduction on R&D carried out in Singapore. This applies regardless of whether the R&D is carried out in-house or outsourced to another organisation carrying out the R&D in Singapore. If the R&D is not conducted in Singapore, or if part of the R&D is not carried out in Singapore, the portion of expenditure related to the R&D project conducted outside Singapore will only qualify for 100%, not 150% deduction.

The amount of expenditure qualifying for the 150% deduction is the expenditure incurred on R&D manpower and consumables, not all expenses associated with the qualifying R&D (such as rentals, depreciation). The 150% deduction is restricted to R&D manpower and consumables costs as these are in line with the government’s intent to develop capability to do R&D in Singapore. The other expenses incurred for a qualifying R&D will still enjoy deduction, but at 100%.

For R&D outsourced to a R&D organisation in Singapore, taxpayers will need to identify the portion of the outsourced payment that relates to R&D manpower and consumables, for which they can enjoy the 150% deduction.

But MOF recognises that there may be situations where the R&D organisation in Singapore, to which the taxpayer has outsourced R&D to be done on its behalf, cannot (or will not, for whatever reasons) provide a detailed breakdown of its charges. For such situations that taxpayers may face, for administrative ease, the 150% deduction will apply to no more than 60% of the payments which a taxpayer has made to an R&D organisation in Singapore for R&D done on the taxpayer’s behalf. We adopted 60% as generally, R&D manpower and consumables form about 60% of the charges levied by R&D organisations for doing R&D on behalf of its customers.

Nonetheless, if taxpayers can provide the breakdown of the outsourced payments they make for R&D done on their behalf in Singapore, the 150% deduction will be granted for payment portions relating to R&D manpower and consumables.

6. Submission of claims details

Respondents expressed that if the objective is to allow companies, big and small, to do more R&D in Singapore, the claim process for the R&D tax concessions should also be simple. However, the amount of details required in the Project Checklist and Details seem quite onerous and complex, particularly from SMEs’ perspective. Respondents therefore suggested either reducing the level of details required or raising the threshold limit from $150,000 to a higher quantum (say $500,000) for the purpose of submitting project details.

MOF’s response: Not accepted for implementation. MOF agrees with the respondents’ submission that the claim process for the R&D tax concessions should be simple. Many of our tax incentives require taxpayers to first make an application with a relevant government agency, and if approval is obtained, taxpayers will then make the claims for the relevant tax incentive in their tax return, and where required, provide relevant documentation to confirm that they meet the conditions of the tax incentive on an on-going basis. On the other hand, for the R&D incentives, taxpayers intending to make claims for the incentives need not go through any pre-claim application process.

Subsequent to the announcement of the R&D tax changes in Budget 2008, a number of taxpayers have enquired about the type of information they would have to submit to IRAS as part of their claims. In response to these enquiries, IRAS drew up the Project Checklist and Details in the draft circular to guide taxpayers on what information should be submitted or maintained. MOF and IRAS are of the view that the list of information required strikes a fair balance between ensuring valid claims for the R&D benefits and making it possible for taxpayers to claim these benefits with minimal administrative inconvenience. Taxpayers should judge for themselves the level of detail they wish to provide to IRAS, but the guiding principle should be whether the information provided is sufficient for an ordinary person to determine whether a project should qualify as R&D.

Further, the requirement to complete the claim form with details of R&D projects only applies to taxpayers who incur R&D expenditure of more than $150,000 in the relevant basis year. As more than 90% of SMEs incur less than $150,000 of R&D expenses annually, the majority of taxpayers will not be subject to this requirement. Nonetheless, taxpayers should continue to maintain sufficient documentation in the event IRAS subsequently calls for supporting documents.

MOF and IRAS will monitor the situation, and if need be, refine the claims procedure accordingly.


7. Financial sector R& D

Respondents explained that banks usually develop new financial products based on market needs. Accordingly, market research would be a key component of any research and development project carried out by a bank to create a new product. It is highly unlikely for a bank to explore innovative financial products in isolation; that is, without any reference to existing or potential customers' requirements. Since the proposed revision to the R&D incentives still excludes market research costs, it is not likely that banks will be able to benefit significantly from this incentive.

In addition, the low qualifying amounts would appear to suggest that the incentive is targeted at SMEs rather than large corporations like banks.

MOF’s response: Not accepted for implementation. Market research activities will not be regarded as R&D activities under the R&D incentives. Market research undertaken to identify what products to create are in the nature of pre-R&D activities. However, we would like to highlight that financial institutions may apply to the Monetary Authority of Singapore (MAS) for the s14J further tax deduction incentive, which provides up to 200% tax deduction.

We would also like to take the opportunity to clarify that while the R&D Incentive for Start-Ups and the R&D Allowance schemes are more targeted at SMEs, the enhanced deduction scheme (which grants 150% deduction for expenditure on R&D incurred in Singapore) has no cap limits as it is targeted at all businesses that do R&D, large and small.

Annex A

In Budget 2008, four income tax changes were introduced to encourage pervasive R&D in Singapore. We recognise that whether an enterprise chooses to undertake R&D will be based on commercial considerations. The R&D tax changes introduced in Budget 2008 are a means of additional recognition for enterprises that do R&D, while at the same time encouraging the build-up of R&D capability in Singapore. The four R&D tax changes are:

(a) Enhanced Tax Deduction for Expenses Incurred on R&D

• An increase from 100% to 150% in tax deduction for R&D done in Singapore

•For example, for every $100,000 of expenses on R&D done in Singapore, $150,000 can be claimed as a tax deduction.

(b) R&D in New Areas

• The tax deduction for R&D can be claimed even if the R&D is not relevant to the taxpayer’s existing trade or business.

•This will benefit taxpayers intending to do R&D in unrelated fields.

(c) R&D Tax Allowance (RDA)

• This is a tax concession to encourage companies to invest in R&D.

• Taxpayers can earn this allowance amounting to 50% of the first $300,000 of income chargeable to income tax (i.e. amount of R&D allowance earned each year of assessment is capped at $150,000 per year).

• The allowance can be used to offset taxable income if they spend more on R&D done in Singapore.

(d) R&D Incentive for Start-Up Enterprises (RISE)

• A grant scheme for R&D intensive start-ups that incur losses in any of their first three years of assessment.

• The scheme enables loss making start-ups spending annually at least $150,000 on R&D done in Singapore to convert up to $225,000 of tax losses arising from the R&D expenditure to cash grants at a rate of 9%, translating to a grant of up to $20,250, from the government.

• Start-ups can also choose not to convert their tax losses into grants and instead, carry forward their losses to offset against future years’ taxable profits.

Public Consultation