Singapore: R&D expenses under cost-sharing agreement (appellate court decision)

An appellate court decision concerning R&D expenses under cost-sharing agreement

An appellate court decision concerning R&D expenses under cost-sharing agreement

An appellate court concluded that payments made by a Singapore subsidiary of a U.S. company and pursuant to a cost-sharing agreement were not deductible under the then-applicable provision of Singapore’s income tax law.

The appellate court, thus, affirmed a decision of the Income Tax Board of Review to disallow the taxpayer’s claims for deductions on research and development (R&D) expenses incurred under the cost-sharing agreement.

The case is: Intevac Asia v. Comptroller of Income Tax (CIT) [2020] SGHC 218

Summary

The taxpayer (a company incorporated in Singapore) and its U.S. parent company are engaged in the business of manufacturing, repairing, and trading in electromechanical systems and equipment.

The taxpayer entered into an R&D services agreement with the U.S. company in October 2008. Under that agreement, the U.S. company would undertake R&D activities in the United States for the benefit of the taxpayer.

The taxpayer and the U.S. company subsequently entered into a cost-sharing agreement in November 2009 that superseded the R&D services agreement. The purpose of the cost-sharing agreement was to allow the companies to combine their R&D efforts and to share the costs and risks of R&D—with both companies to acquire the right to exploit any intellectual property (IP) and intangible property rights developed under the arrangement.

Under the cost-sharing agreement, the taxpayer made payments to the U.S. company during its financial years 2009 and 2010 and claimed those payments as tax deductions for the expenses for the years of assessment (YAs) 2010 and 2011.

At issue was whether the payments pursuant to the cost-sharing agreement qualified as tax deductible expenses and satisfied specific requirements of Singapore income tax law. In particular, then-applicable Section 19C explicitly provided the circumstances under which writing-down allowances could be made under cost-sharing agreements for R&D activities approved by the Economic Development Board (EDB). [Note that in 2012, the Section 19C regime was replaced by Sections 14D(1)(e) and (f) that provide for the deduction of payments under cost-sharing agreements from the YA 2012 onwards.]

The tax authority asserted that relief for R&D expenses incurred under the cost-sharing agreement was governed exclusively by Section 19C until YA 2012, and that the payments made by the taxpayer under the cost-sharing agreement were not deductible under Section 14D. The Income Tax Board of Review agreed, and on appeal, the appellate court concluded that the board’s analysis was the proper approach.

In concluding, the appellate court held the cost-sharing agreement payments made to the U.S. company for the years at issue did not fall within the ambit of Section 14D(1)(d), and accordingly were not deductible under this section. 

KPMG observation

With the replacement of the Section 19C regime by Sections 14D(1)(e) and (f), cost-sharing agreement payments are allowable as tax deductions (as well as enhanced tax deductions) instead of being treated as a writing-down allowance from the YA 2012 onwards. Furthermore, there is no longer a requirement to obtain approval from EDB in order for the cost-sharing agreement payments to be deductible.

It has been observed that with an increasing need for collaboration in R&D and the benefit of the enhanced tax deductions under Section 14DA, taxpayers need to consider the circumstances under which cost-sharing agreement payments can be deductible. For example, certain payments related to a cost-sharing agreement (e.g., buy-in payments to participate in a cost-sharing agreement) would not be deductible, and there must be valid agreements in place to demonstrate how the taxpayer would benefit from the arrangement.

Read an April 2021 report [PDF 288 KB] prepared by the KPMG member firm in Singapore 

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