20200305-毕马威-HONG_KONG_TAX_ALERT_Departmental_Interpretation_and_Practice_Notes_No._55_-_Deduction_for_Research_and_Development_Expenditure__DIPN_55__4页_934kb

HONG KONG TAX ALERT Summary - DIPN 55: Deduction for Research and Development Expenditure

Core Content

The Hong Kong Inland Revenue Department (IRD) issued Departmental Interpretation and Practice Notes No. 55 (DIPN 55) to clarify the research and development (R&D) tax concession introduced in Hong Kong. This concession allows eligible companies to claim enhanced tax deductions on qualifying R&D expenditures, either at 100% (Type A) or 300% for the first HK$2 million and 200% for amounts exceeding HK$2 million (Type B), starting from the year of assessment 2018/19.

The note outlines the definition of qualifying R&D activities, eligible expenditure, and documentation requirements to support R&D claims. It emphasizes that while the R&D concession is broad and applies to all industries, companies must ensure their activities meet the necessary criteria to qualify for the enhanced deductions.

Main Points

1. Qualifying R&D Activities

• Definition: Activities in the fields of natural or applied science aimed at extending knowledge, applying research findings to introduce new or substantially improved materials, devices, products, processes, systems, or services before commercial production.
• Scope: The definition is broad, but R&D must exceed minor or incremental upgrades and focus on innovation and advancement.
• Location: R&D activities do not need to be conducted entirely in Hong Kong, but only local expenditures qualify for enhanced deductions.
• Patents: Registration of patents is not required for an activity to be considered R&D.

2. Qualifying R&D Expenditure

• Eligible Costs:
  • In-house staff costs
  • Direct consumables
  • Payments to designated local research institutions
• Excluded Costs:
  • Employee costs of associated entities (unless under a secondment arrangement)
  • Payments to external consultants who are not employees
  • Payments to external contractors (excluding designated local research institutions)
• Cost Contribution Arrangements (CCA):
  • May be eligible if:
    • All participants derive proportionate benefits
    • Each participant actively participates in the project
    • Co-ownership of rights is established among participants

3. Documentation Requirements

• Contemporaneous Documentation is required throughout the project lifecycle.
• Project Planning Material must include:
  • R&D objective
  • Link between R&D outcomes and commercial applications
  • Current state of knowledge
  • Foreseen technical difficulties
  • Project structure
  • Notes on staffing and expertise
• Ongoing Documentation should cover:
  • Findings and results
  • Notes on uncertainties and challenges
  • Details of patents filed (if any)
  • Internal progress reports
• Specific Evidence:
  • For outsourced activities, contracts and payment evidence must be retained
  • For in-house staff, records such as employment contracts, payroll, and timesheets (for part-time staff) are required
  • Invoices for consumables must be kept

Key Information

• The R&D concession is not limited to specific industries, but must meet defined criteria.
• Pre-identification of qualified R&D activities is essential to ensure proper allocation of costs and compliance with the IRD's expectations.
• Documentation is a critical component of the R&D claim process and must be maintained from the start of the project.
• Case studies included in DIPN 55 are useful for companies to assess their eligibility and understand the practical application of the concession.

KPMG Observations

• DIPN 55 provides clear guidance on qualifying R&D activities and associated expenditures.
• Companies are advised to establish procedures for identifying and separating R&D from routine business activities.
• Audit preparedness is emphasized, with the quality of documentation being key to defending claims.
• KPMG recommends early assessment of eligibility and implementation of internal processes to support successful R&D claims.

Contact Information

For more information and assistance, contact the following KPMG professionals:

Disclaimer

The information provided is of a general nature and is not intended to address the specific circumstances of any individual or entity. It is not a substitute for professional advice. KPMG does not guarantee the accuracy or completeness of the information, and it may change over time.