Qualifying R&D Expenditure in Singapore

Start with the technical project, not the ledger

Accounting labels such as R&D, engineering, software development or product development can help identify where to look, but they do not determine the tax treatment.

The correct sequence is:

A wider development programme may include qualifying experimental work alongside routine development, implementation, commercial activity, capital expenditure and other non-R&D costs. The technical project boundary therefore needs to be established before the financial claim is quantified.

See what qualifies as R&D

In-house expenditure

Staff costs

For the enhanced local R&D deduction, qualifying staff costs broadly include salary, wages and other employment benefits paid or granted to employees for carrying out qualifying R&D activities. Directors' fees are excluded from the enhanced staff-cost category.

Employees do not need to work exclusively on R&D. Where a person divides time between qualifying R&D and other activities, only the attributable portion of the relevant staff cost should enter the enhanced expenditure calculation.

Job title is not the test. Payroll records establish the employment cost; technical and project evidence establish the appropriate R&D allocation.

Consumables

Consumables are materials or items used in the R&D activities that are consumed or transformed so that they are no longer usable in their original form.

Examples can include laboratory chemicals, raw materials used in experimental production, ingredients used in formulation trials, components incorporated into prototypes and other physical inputs transformed through the R&D process.

Utilities, rent and general overheads are not R&D consumables simply because they support an R&D team.

Other qualifying expenditure and capital items

Staff costs and consumables are particularly important because they form the expenditure base for the enhanced local R&D deductions. Other expenditure directly connected with qualifying R&D may still be relevant to the underlying Section 14C position, subject to the statutory rules and exclusions.

Capital expenditure on items such as plant, machinery, land, buildings or acquisition of rights is not simply added to the R&D expenditure calculation. Separate capital-allowance treatment may apply to qualifying plant and machinery used for R&D.

Outsourced R&D and the 60% rule

Qualifying R&D can be outsourced to an external R&D organisation, subject to the applicable claimant and beneficiary conditions.

Where the relevant conditions are satisfied, the qualifying outsourced R&D fee can potentially support the 100% base deduction.

For the additional and enhanced deductions, the rules generally allow 60% of the relevant outsourced R&D fee to be treated as qualifying R&D expenditure where the supplier's qualifying staff and consumable costs are not separately established.

For example, a S$200,000 outsourced qualifying R&D fee would produce a deemed qualifying staff-cost and consumables base of S$120,000 under the 60% mechanism.

The 60% is not a tax-deduction rate. It is a mechanism for determining the qualifying staff-cost and consumables component within the outsourced fee.

Where more than 60% of the fee actually relates to qualifying staff costs and consumables, a higher actual amount may potentially be used if it can be properly substantiated.

R&D cost-sharing agreements

Multinational groups and collaborating companies may conduct R&D under a cost-sharing agreement, or CSA, rather than a conventional outsourced-service arrangement.

For the 100% deduction, the relevant CSA payment is broadly the R&D expenditure allocated to and borne by the company under the cost-sharing arrangement. A buy-in payment made to acquire the right to join an existing arrangement is excluded from that CSA payment.

For the additional and EIS enhanced deductions, a deemed 60% of the relevant CSA payment can generally form the qualifying expenditure base, subject to the detailed CSA rules and applicable caps.

The analysis should establish what the agreement requires each participant to contribute, what expenditure the Singapore participant actually incurs and bears, which activity forms part of qualifying R&D and how the amount is supported by the agreement and financial records.

An estimated monetary value assigned to an in-kind contribution should not automatically be treated as the deductible amount. The underlying qualifying expenditure still needs to be established.

Singapore, overseas and mixed R&D

Location matters because the enhanced R&D deduction is targeted at qualifying R&D activities undertaken in Singapore.

Qualifying staff costs and consumables relating to Singapore R&D can potentially receive the enhanced Section 14D and EIS treatment.

Qualifying overseas R&D expenditure can potentially receive the 100% base deduction where the relevant trade requirements are satisfied, but it does not receive the enhanced local-R&D deduction.

A single project can involve work in several locations. In that case, the expenditure should be separated according to where the relevant R&D activity is actually performed rather than simply where payroll sits.

Government grants and subsidies

R&D tax and public funding can potentially support the same broader innovation programme, but the same expenditure cannot simply receive both benefits in full.

Where qualifying R&D expenditure is or is to be subsidised by a Government grant or subsidy, the relevant R&D tax calculation is generally made on expenditure net of that support.

For example, if S$100,000 of qualifying R&D staff cost is supported by a S$30,000 Government grant, the net expenditure potentially available for the R&D tax calculation would be S$70,000.

The grant should be mapped to the expenditure it actually subsidises. Approved or reasonably expected Government support may need to be considered even before the cash is received, and a later change in the final grant amount may require the original tax position to be revisited.

One project can contain several tax treatments

There is often no single answer to the question, "What percentage of our R&D expenditure can we claim?"

The same qualifying project may contain local staff costs and consumables eligible for enhanced deductions, other qualifying costs receiving only base treatment, outsourced or CSA expenditure subject to the 60% or actual-cost methodology, overseas R&D, capital expenditure and Government-funded costs that must be netted.

The claim therefore needs to be built cost category by cost category and structure by structure.

Example: project budget versus claimable expenditure

If the project is also grant-funded, the subsidy must then be mapped to the expenditure it supports.

How Reeve | R&D determines qualifying expenditure

Our financial analysis follows the technical assessment.

1. Define the qualifying R&D project. Establish the technical scope and boundaries first.
2. Map how the R&D is delivered. Identify in-house, outsourced, CSA, Singapore and overseas activity.
3. Connect costs to qualifying activity. Map payroll, accounting data, invoices and agreements to the technical project.
4. Apply the correct expenditure rules. Separate staff, consumables, other R&D expenditure, outsourced fees, CSA expenditure, capital items and excluded costs.
5. Allocate mixed activity. Establish a supportable allocation where people or costs serve both qualifying R&D and other work.
6. Account for grants and subsidies. Map Government support to the expenditure it subsidises.
7. Calculate the base and enhanced deductions. Apply the relevant Section 14C, Section 14D and EIS treatment by cost category and project structure.

The objective is a financial R&D position that follows the qualifying technical work and can be substantiated.

Assess your qualifying R&D expenditure

We can review your project structure, payroll, R&D costs, outsourced work, cost-sharing arrangements and Government funding to determine the expenditure that can appropriately support your Singapore R&D tax claim.