e-Tax Guide: Tax treatment of R&D and intellectual property-related expenditures of the pharmaceutical manufacturing industry

23 August 2011

This e-Tax Guide provides guidance on tax treatments for the following items common to pharmaceutical manufacturing companies in Singapore:

  • Deduction of R&D expenditure under sections 14D and 14DA of the Singapore Income Tax Act (“SITA”);
  • Writing down allowances under sections 19B and 19C of the SITA;
  • Provision of research and development (“R&D”) services;
  • Deduction of royalty payments and withholding tax implications.

A pharmaceutical manufacturing company may claim deductions and/or writing down allowances on R&D expenditure relating to existing trade or business in the year of assessment in which it was incurred. The manner of set-off against income depends on whether the expenditure can be directly identified to specific products. As a matter of principle, the matching of expense and revenue should be observed where feasible.

Deductions can be claimed on R&D expenditure relating to a new trade or business, provided the expenditure is for qualifying R&D activities conducted in Singapore during the basis periods from YA 2009 to YA 2015 under the liberalised R&D tax treatment. Such deductions may be set off against normal income first with the remaining balance available for set off against concessionary income in accordance with section 37B of the SITA.

When a pharmaceutical manufacturing company undertakes R&D activities on behalf of its affiliates or head office, it should charge an arm’s length service fee. The R&D service fees would be taxed at the normal corporate tax rate unless such services are explicitly covered under the Letter of Offer of Incentives issued by the Economic Development Board (EDB).

As for royalty payments for the use of intellectual property rights, the deduction rules and the corresponding withholding tax implications will depend on when the liability to pay the royalty crystallises.

Please click here to view the e-Tax Guide.

Source: This article was extracted from the Inland Revenue Authority of Singapore (IRAS) website. Visit http://www.iras.gov.sg/irashome/default.aspx for more information.