Hong Kong Gazettes Enhanced R&D Deduction

Hong Kong Gazettes Enhanced R&D Deduction

The author is Alex Hunter, Editor, TP News. He oversees and updates the publication and also  regularly writes news stories about transfer pricing and international tax law. Alex is reachable on email (editor@transferpricingnews.com) and by phone (+447808558597). 

Hong Kong Government has gazetted law to allow enhanced tax deduction for expenses incurred by business enterprises on research and development (R&D) activities in Hong Kong.

The measure was announced by Carrie Lam, Chief Executive of Hong Kong, in her 2017 Policy Address.

The Inland Revenue (Amendment) (No. 7) Ordinance, 2018 – which was gazetted on November 2 – classifies R&D expenditures into “Type A expenditures” and “Type B expenditures.”

“Type A” expenditures qualify for 100 percent deduction.

“Type B expenditures” qualify for enhanced tax deduction as part of a two-tier deduction regime. The deduction is 300 percent for the first SGD2m of the aggregate amount of payments made to “designated local research institutions” for “qualifying R&D activities” and expenditures incurred by the enterprises for in-house qualifying R&D, and 200 percent for the remaining amount.

There is no cap on the amount of enhanced tax deduction. The arrangement is applicable to R&D expenditures incurred by enterprises on April 1, 2018, and thereafter.

The Ordinance empowers the Commissioner for Innovation and Technology to designate an entity or corporation that undertakes qualifying R&D activities in Hong Kong as a “designated local research institution” for tax deduction purposes.

R&D service providers may apply to the Innovation and Technology Commission (ITC) for designation. The procedure for designation would be published on the ITC’s website.

A government spokesman said that the Ordinance provides “enhanced tax deduction to encourage more enterprises to conduct R&D locally so as to promote technological innovation and economic development as well as to groom local R&D talent.”

“This also addresses the calls from the business community. We aim to encourage more R&D investment from private enterprises, thereby gradually reversing the ratio of public sector expenditure versus private sector expenditure on R&D from government-led to private-led, which is more sustainable.”