The Hong Kong Inland Revenue Department (“IRD”) released its practice note regarding the research and development (“R&D”) tax concession in Hong Kong. DIPN 55 sets out the IRD’s interpretation of the R&D tax concession, the practical application of the concession and documentation requirements.
Commencing from the year of assessment 2018/19 (expenditure incurred from 1 April 2018), qualifying R&D activities are eligible for either Type A expenditure (100% tax deduction) or Type B expenditure (300% tax deduction for the first HK$2 million and 200% of the amounts exceeding HK$2m). Please refer to our Tax Alert – Enhanced tax deduction for R&D activities in Hong Kong for additional details relating to the legislative requirements.
DIPN 55 sets out the practical guidance, and we note the following:
DIPN 55 clarifies both the nature of qualifying activities and associated R&D expenditure under the enhanced deduction regime. The IRD confirms that R&D is very wide and the concessions may apply to all industry sectors provided that the necessary conditions are met.
Notwithstanding this, it is important for companies to identify qualified R&D activities ‘upfront’ and to understand the current state of the art, extension of knowledge and technical improvements involved in the project outcomes. Companies should identify and segregate qualified R&D activities from routine ‘business as usual’ and indirect activities that are not sufficiently connected to the main experiment(s).
Determining whether activities qualify under the R&D program depends on the facts associated with specific activities and must be assessed on a case by case basis. The documents companies maintain in respect of such activities will be critical to successfully defending a potential audit by the IRD. The case studies included in DIPN 55 are helpful for companies to determine their eligibility for enhanced deductions. Companies undertaking any R&D should therefore assess eligibility and establish processes and procedures now to facilitate successful R&D claims.