Several Asia Pacific countries recently expanded or increased their R&D tax incentives:
- Australia introduced a new tax credit systems with enriched 'cash offset' benefits for companies with turnover under 20 million Australian dollars (AUD).
- India increased in-house R&D benefits to 200 percent (from 150 percent) and increased benefits to approved institutions to 175 percent (from 125 percent), and to 200 percent for some programs.
- Singapore increased its R&D deductions to 400 percent (from 150 percent) on the first 400,000 Singapore dollars (SGD) of eligible expenses.
- South Korea extended its R&D tax credits to development expenses for new services and service delivery systems.
- Sri Lanka doubled its R&D tax deduction to 200 percent but canceled tax holidays under its Board of Investment regime. Countries that succeed in promoting more R&D investment can reap substantial spin-off economic benefits. By creating cost-effective conditions for innovation, they can attract lucrative foreign research funds, create high-value employment opportunities, improve domestic research capabilities, and promote technological advancement.
As R&D incentives across the region continue to mature, companies should take a strategic approach in deciding where and how to conduct their innovation work within this globally competitive environment.
When determining the best location and structure for R&D activities in Asia Pacific, critical factors to consider include:
- net cost of R&D
- intellectual property (IP) and transfer pricing issues
- country-specific tax benefits
- short-term economic stimulus measures
- role of regulators.
Net cost of R&D
When assessing the after-tax costs of performing R&D, the analysis should factor in available country-specific R&D tax benefits, qualifying activities, costs and restrictions, other foreign investment incentives or subsidies, and labor and capital costs.
IP and transfer pricing issues
The net cost of performing R&D should be considered in conjunction with the strategy for managing potential IP created by successful research. Issues to consider include which entity within the group funds the creation of IP, legal and economic ownership, and the tax consequences of any income generated by the IP. Moving IP within the group once it has been developed can create significant tax liabilities, and so the strategy for subsequent IP ownership is crucial when planning R&D activities.
Tax authorities in the Asia Pacific region — including India, Australia, China and Japan — are increasing their transfer pricing audits and zeroing in on issues arising from IP development, ownership and compensation for usage. Whatever strategy is adopted for R&D activities and IP ownership, transfer pricing issues are inescapable. Intra-group arrangements need to be priced in accordance with the transfer pricing rules of the relevant jurisdiction, including R&D services, funding of R&D, management of R&D, cost-sharing arrangements for the development of IP and the licensing of IP.
Country-specific tax benefits
Many countries provide tax credits for taxes paid by a resident business to other countries; countries also offer a range of other tax incentives to attract investment and encourage exports. Be sure to assess the impact of R&D costs on other tax benefits when determining the value of R&D tax benefits.
Short-term economic stimulus measures
Economic stimulus packages — including tax holidays, accelerated depreciation and tax rate reductions for foreign investment — can top up existing R&D benefits for a limited time period.
Role of regulators
While eligibility criteria for R&D tax incentives are similar across the region, be sure to account for differences in regulators’ approach to the application process and matters of interpretation. For example, is the R&D claim 'self assessed' or are there hurdles to be passed before benefits are received? Based on a review of all of these factors, you can then determine the optimal location and structure for your company’s R&D programs. For companies that depend on innovation for success, the more cash that can be channeled from savings in other areas, the more the company can invest in R&D activities to support profitability and growth.
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