By Elaine Ng, Tax Partner and Amit Hindocha, Senior Manager at PwC Services LLP
Talk to anyone about research and development (R&D) and you can’t help but conjure up images of scientists in white lab coats conducting experiments in laboratories, or IT-savvy geeks tinkering away in their bedrooms trying to develop the latest app.
In fact, R&D is undertaken by a range of businesses from banks and insurance companies to construction companies, from online game developers to fish canning operations. All these businesses are trying to exploit the almost daily advances in technology, and an important area of focus for their R&D these days is on developing software that can help them keep ahead of the competition; whether it is for proprietary trading, servicing customers, managing logistics or for operational purposes.
The commercial rationale for making an investment in software R&D can also be varied, from trying to gain a competitive advantage in the market through product development or securing cost efficiencies and improving productivity, to developing better methods of encryption and security for existing applications.
In this regard, and in order to promote innovation, the Singapore tax regime supports taxpayers by providing enhanced tax deductions through the Productivity and Innovation Credit (PIC) scheme, and with a 150% deduction for qualifying expenditure incurred on ‘research and development’ as defined by the lncome Tax Act.
Indeed the definition of ‘research and development’ has evolved in accordance with the changing commercial landscape and in line with the government’s efforts to promote entrepreneurship and to encourage businesses to move up the innovation value chain. Most recently in the 2012 Budget, it was announced that the “multiple sales” requirement for software R&D expenditure would be removed. Prior to this, expenditure incurred on software which was not developed to be commercially sold, leased, licensed or otherwise marketed to third parties did not qualify as R&D expenditure.
But before businesses could become too excited about this change, it was mentioned at Budget 2012 that the removal of the “multiple sales” requirement for software R&D was to be accompanied by restrictions on the types of software development that can qualify as R&D. Most notably, that expenditure incurred on software for routine internal administration of a business would not qualify.
In a surprising yet pleasing move, after receiving feedback from the business community, the Ministry of Finance has decided that not only will the entire “multiple sales” requirement be removed from the legislation but that no additional condition will be introduced to exclude expenditure incurred on software R&D meant for the routine internal administration of a business. To provide further guidance to taxpayers, on 2 July 2012, the Inland Revenue Authority of Singapore published on its website a list of expenditure on software that does not qualify as software R&D. Whilst the examples are varied in nature, they are consistent in requiring the software R&D to exhibit either ‘novelty’ or ‘technical risk’ – and these two requirements are the basic elements of the definition of R&D within the legislation.
This response is to be lauded for its acknowledgement of commercial realities. Importantly, it would have the merit of providing greater certainty for taxpayers by enabling them to more easily determine whether their expenditure on software development does qualify as R&D. This in turn would enable those businesses (especially SMEs) who are not currently claiming a tax deduction for their software R&D expenditure to easily identify qualifying expenditure and thereafter submit valid claims for the tax deductions that they are rightly entitled to.
In any case, given that the change in the rules will apply to Year of Assessment 2012 tax returns, taxpayers would be well advised to start reviewing their expenditure on software R&D for possible claims now and collating the necessary information.
The relaxation of the rules offers real tax-saving opportunities for many businesses; such an outcome would be welcomed by taxpayers no matter what their line of business!