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Hong Kong: New research and development (R&D) tax regime

New R&D tax regime in Hong Kong

Hong Kong's new research and development (R&D) tax regime has been approved. Certain "minor" amendments were made to the R&D tax regime as originally proposed.

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In general, the new R&D rules classify R&D expenditures into two broad categories (Type A and Type B), and the expenditures are deductible if certain conditions are satisfied. 

  • A Type A expenditure qualifies for a basic 100% tax deduction. 
  • A Type B expenditure qualifies for an enhanced two-tiered tax deduction (300% for the first HK$2 million and 200% for any remaining amount).

During the consultation and legislative process, certain professional bodies and industry organizations raised concerns that the complicated qualifying criteria would make it difficult to assess whether an expenditure would constitute a Type B expenditure and thus be eligible for the enhanced R&D tax deduction. The government’s response was that the criteria are a matter of fact to be considered on a case-by-case basis. To some, this explanation was not entirely satisfactory because experience in other parts of the world has shown that similar R&D definitions can be interpreted very differently by the different tax authorities and much will depend on the attitude of the tax authorities in assessing claims. 

The Inland Revenue Department (IRD) is expected to release guidance that would elaborate on and clarify the provisions of the new law and the level of proof required from taxpayers to enable the IRD to assess any enhanced tax deduction claim. Whether the guidance will set out a reasonable degree of flexibility in terms of documentation requirements and will fulfill the government’s intention of encouraging R&D activity in Hong Kong remains to be seen.

One area in which the Hong Kong legislation appears to be problematic is the limited range of payments qualifying for enhanced deductions—only employment costs, costs of consumables, and payments to “designated research institutions” qualify. To address these concerns, organizations, including those operated for commercial gain, may apply for this designation, and it is expected the IRD guidance will address the procedures and criteria for application. 

 

Read a November 2018 report prepared by the KPMG member firm in Hong Kong

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