The MOF seeks public feedback on research and development guidance

On 21 August 2008, the Ministry of Finance (MOF) issued a draft circular to provide guidance on proposed amendments to the definition of research and development (R&D) in the Income Tax Act, and sought feedback on the clarity of the guidelines. The public consultation period ended on 10 September 2008.

The MOF had earlier held a public consultation exercise on the draft Income Tax (Amendment) Bill 2008 over June and July 2008. Included in the proposed amendments were changes to the definition of research and development (R&D) in section 2 of the Income Tax Act which seek to distinguish R&D that "involves novelty, originality or high levels of technical risk in the field of science and technology " from R&D that merely results in "routine alterations and stylistic or cosmetic improvements that do not improve function of the product, process or production methods". The intention being that only innovative R&D is seen as deserving preferential tax treatment.

The draft circular is intended to provide guidance on what constitutes R&D for income tax purposes in light of the proposed amendments, and the list of general information required of taxpayers making R&D claims. As pre-approval is not required for most of the R&D tax schemes, the onus is on the taxpayer to self-assess whether it is eligible for the R&D schemes. In addition to grappling with what constitutes R&D, the taxpayer now has the unenviable task of also distinguishing routine development from innovative R&D; and even as the draft circular attempts to provide guidance, it is evident that the line between the two will not be easily drawn.

As the MOF rightly observes in the draft circular, it will need to strike a balance between ensuring valid claims for the R&D tax benefits and making it possible for taxpayers to claim these benefits with minimal administrative inconvenience. However, in the absence of a pre-approval process, the onus will be on the taxpayer to convince the Inland Revenue Authority of Singapore (IRAS) that its claims are valid, and it remains to be seen what the IRAS procedures and information requirements will be.

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