Research & Development (R&D) Tax Measures - Singapore

Research & Development (R&D) Tax Measures - Singapore | Bestar

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Research & Development (R&D) Tax Measures - Singapore

Singapore provides a robust set of Research & Development (R&D) tax measures to encourage businesses to innovate and build up R&D capabilities. These incentives, which include enhanced tax deductions and cash payouts, are primarily managed by the Inland Revenue Authority of Singapore (IRAS) and are part of the broader Enterprise Innovation Scheme (EIS).

Key R&D Tax Measures

The Enterprise Innovation Scheme (EIS), effective from Year of Assessment (YA) 2024 to YA 2028, offers significant tax benefits for qualifying R&D activities conducted in Singapore.

• Enhanced Tax Deduction:

  
  

  • Businesses can claim a 400% tax deduction on the first $400,000 of qualifying R&D expenditure per YA.

  • This is in addition to a 100% base tax deduction on the total R&D expenditure.

  • Any qualifying R&D expenditure exceeding the $400,000 cap is eligible for an additional 150% tax deduction.

    
    

• Qualifying Expenditures: The enhanced deduction applies to specific costs incurred on R&D projects, including:

  
  

  • Staff costs: Salaries and other employment costs for R&D personnel.

  • Consumables: Materials used directly in the R&D process.

  • Outsourced R&D: 60% of the fees paid to an approved R&D service provider in Singapore.

Cash Payout Option

Businesses may choose to convert a portion of their qualifying expenditure into a non-taxable cash payout, in lieu of the tax deductions.

• Conversion Rate: Up to $100,000 of the total qualifying expenditure across all EIS-eligible activities can be converted into cash at a 20% conversion rate.

• Cash Cap: This results in a maximum cash payout of $20,000 per YA.

Eligibility Criteria for R&D Projects

To qualify for these tax measures, a project must meet the definition of R&D as outlined in the Income Tax Act. It must satisfy three key requirements:

1. Objective: The primary purpose of the project must be to:

   
   

   • Acquire new knowledge.

   • Create new or improve existing products or processes.

     
     

2. Novelty / Technical Risk: The project must either:

   
   

   • Create something that is "first of its kind" in Singapore.

   • Involve a degree of scientific or technological uncertainty that cannot be easily resolved by a competent professional in the field.

     
     

3. Systematic, Investigative, and Experimental (SIE) Study: The project must involve a series of planned and structured activities aimed at testing new ideas or resolving uncertainties.

How to Claim R&D Tax Measures

Businesses can self-assess their eligibility and claim the deductions in their annual corporate income tax returns (Form C-S/Form C).

• Documentation: It is crucial to maintain detailed records to substantiate the claim, including:

  
  

  • R&D project plans and objectives.

  • Records of the scientific or technological uncertainty addressed.

  • Documentation of the systematic, investigative, and experimental process (e.g., test results, experiments conducted).

  • Invoices and receipts for all R&D-related expenses.

    
    

• Filing: The claim for enhanced deductions or the cash payout option should be completed in the "Enterprise Innovation Scheme" section of the tax return. The election for the cash payout is irrevocable and must be submitted by the income tax filing due date.

Other Related Incentives

In addition to the R&D tax measures, Singapore also offers other incentives to support innovation and intellectual property development, which are also part of the Enterprise Innovation Scheme:

• Intellectual Property (IP) Registration: 400% tax deduction on the first $400,000 of qualifying IP registration costs.

  
  

• IP Acquisition and Licensing: 400% writing-down allowance and/or tax deduction on the first $400,000 (combined cap) of qualifying expenditure on the acquisition and licensing of IP rights.

  
  

• Training: 400% tax deduction on the first $400,000 of qualifying training expenditure for courses that are eligible for SkillsFuture Singapore funding.

Fees

There are no government-mandated fees to apply for the R&D tax measures in Singapore. The tax deductions and cash payouts are incentives provided by the government to businesses, not a service you have to pay for.

The only costs a business might incur are related to professional services if they choose to hire a tax consultant or firm to help them with the claim. These services are optional and would involve fees from the professional firm, not a government entity.

How the Process Works

• The R&D tax measures are claimed when a business files its annual corporate income tax return with the Inland Revenue Authority of Singapore (IRAS).

• The business self-assesses its eligibility and calculates the qualifying R&D expenditure.

• The claim for enhanced tax deductions or the cash payout is made within the tax return itself, and there is no separate application form or fee payable to the government.

Bestar Professional Fees

Hiring a professional firm to assist with R&D tax measures in Singapore is a common practice, especially for businesses with complex R&D activities or those that lack in-house expertise. These professional services can help ensure that claims are maximized and that all supporting documentation is in compliance with IRAS requirements.

While the government does not charge a fee for the R&D tax measures themselves, professional firms charge for their services. These fees are not standardized and can vary significantly based on several factors:

Factors Influencing Professional Fees

• Complexity of the R&D Projects: The more complex and numerous the R&D projects, the more work is involved in documenting and substantiating the claim. Bestar's fees will be higher for a company with a portfolio of diverse and technically challenging R&D projects compared to a company with a single, straightforward project.

  
  

• Scope of Services: Fees will depend on the level of service provided. This could range from a basic review of the company's self-assessed claim to a full-service engagement that includes:

  
  

  • Identifying all eligible R&D activities.

  • Reviewing project documentation and technical reports.

  • Analyzing and compiling all qualifying expenditures.

  • Preparing the necessary forms for submission to IRAS.

  • Liaising with IRAS on behalf of the company in case of an audit or query.

    
    

• Pricing Models: Bestar uses various pricing models, including:

  
  

  • Hourly Rates: Bestar bills for the total hours spent on the project. Rates can range from a few hundred to over a thousand dollars per hour.

  • Project-Based Fees: A fixed fee is agreed upon for the entire engagement, regardless of the hours spent. This provides cost certainty for the business.

  • Success-Based Fees: Bestar's fee is a percentage of the tax savings or cash payout generated from the claim. This model is attractive to businesses as the fee is contingent on a successful outcome, but the percentage can be high (10-20% of the benefit).

  • Retainer/Hybrid Models: Bestar may offer a combination of a base fee and a success-based component.

Fee Ranges

A general idea of professional fees for R&D tax claim assistance can be:

• For a small, straightforward claim: A fixed fee could start from SGD 3,000 to SGD 10,000.

  
  

• For medium-sized businesses with moderately complex claims: Project fees could range from SGD 10,000 to SGD 30,000 or more.

  
  

• For large corporations with extensive and complex R&D activities: The fees can be substantially higher, potentially reaching six figures, especially if a success-based model is used on a large tax benefit.

It is important to note that these figures are general estimates, and businesses should always request a detailed proposal from Bestar. The proposal will clearly outline the scope of work, the fee structure, and the expected outcomes to ensure a good return on investment.

How Bestar can Help

Navigating Singapore's R&D tax measures can be a complex task, and for many businesses, especially small and medium-sized enterprises (SMEs), engaging a professional firm offers significant benefits. Bestar provides expertise that can help businesses maximize their claims and mitigate risks.

Here's how Bestar can help with R&D tax claims in Singapore:

1. Identifying All Qualifying R&D Activities

Many companies may not realize that their everyday activities could qualify for R&D tax benefits. Bestar can:

• Conduct a technical and financial review: We will interview key personnel from the technical, engineering, and product development teams to understand the full scope of a company's projects.

  
  

• Identify overlooked activities: This can include seemingly routine but technically challenging tasks, such as developing new software for internal use, improving a manufacturing process, or integrating new technologies to create a new service.

  
  

• Ensure projects meet the three key criteria: We will assess each project against the IRAS's requirements for "objective," "novelty/technical risk," and "systematic, investigative, and experimental study" to ensure eligibility.

2. Structuring and Substantiating the Claim

A successful R&D tax claim is not just about identifying the activities; it's about proving them with robust documentation. Bestar can:

• Prepare technical narratives: We will draft detailed project descriptions that clearly explain the R&D objective, the technical challenges faced, and the systematic process undertaken, all in a manner that aligns with IRAS's expectations.

  
  

• Analyze and allocate costs: We will work with a company's finance and accounting teams to correctly identify and categorize all qualifying expenses, including staff costs, consumables, and outsourced R&D fees. We can help set up systems for better cost tracking in the future.

  
  

• Create a clear audit trail: We will compile a comprehensive package of supporting documentation, such as project plans, timesheets, lab notes, test results, and invoices. This is crucial in case of a review or audit by IRAS.

3. Maximizing the Claim and Navigating Complexities

The R&D tax measures can be intricate, and Bestar is well-versed in the nuances of the scheme. We can help a company:

• Optimize the claim amount: We ensure that all eligible expenses, including those that might have been overlooked, are included to maximize the tax deduction or cash payout.

  
  

• Advise on the best option: We can help businesses decide whether the enhanced tax deduction or the cash payout option is more beneficial, based on the company's profitability and financial position.

  
  

• Handle specialized scenarios: We have experience with complex situations, such as R&D conducted in collaboration with universities, projects involving a mix of in-house and outsourced work, and the interplay between R&D tax measures and other government grants.

4. Mitigating Risks and Ensuring Compliance

Making an incorrect R&D tax claim can lead to an audit by IRAS and a potential penalty. Bestar provides peace of mind by:

• Ensuring compliance: We stay up-to-date with the latest IRAS guidelines and e-Tax Guides to ensure the claim is fully compliant.

  
  

• Managing potential audits: In the event of an audit, we will act as a liaison between the company and IRAS, handling queries and defending the claim based on the prepared documentation.

  
  

• Developing an internal process: We can help a company establish a robust internal system for identifying and tracking future R&D activities, making subsequent claims easier and more efficient.

  
  

In essence, Bestar acts as a strategic partner, helping a business to not only secure its R&D tax benefits but also to embed a culture of innovation and systematic documentation that can pay dividends for years to come.

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