The Inland Revenue Authority of Singapore updates the third edition of the Guidance on Tax Treatment of Research & Development and Intellectual Property-Related Expenditure for the pharmaceutical manufacturing industry, with four types of measures regarding deduction being illustrated. The guidance also provides a visualisation of value chain in the pharmaceutical industry in its Annex A.
Pharmaceutical manufacturing companies typically incur substantial R&D expenditure. The R&D activities may be (1) undertaken in-house by the company, (2) outsourced to a R&D organisation or (3) undertaken under a R&D cost sharing agreement (“CSA”). Such R&D activities may be related to the company’s existing trade or business, or otherwise. The company may claim 100% deduction under section 14D on the following R&D expenditure, excluding any government grant/subsidy enjoyed by the company on the R&D project for existing trade or business or for new trades or businesses (up to and including YA 2025). The company may also claim additional 50% deduction under section 14 DA (1) and enhanced deduction under section 14DA (2) (i.e. PIC3 deduction) on qualifying R&D expenditure (i.e. allowable staff costs and consumables). In addition, the company may claim a deduction on expenditure incurred on qualifying R&D activities conducted in Singapore (and outside Singapore for CSA payment with effect from YA 2018) even if the R&D is not related to their existing trade or business.
A company may be given written down allowances (“WDA”) under section 19B of the ITA for IPRs it has acquired. It may also qualify for enhanced allowance on costs incurred to acquire IPRs for use in its trade or business under the Productivity and Innovation Credit Scheme 5.
For companies undertaking R&D activities on behalf of their affiliates or head office within the company’s manufacturing facility, any IPRs arising from the R&D activities are usually owned by the affiliate or head office and not by the Singapore company carrying out the R&D activities. In this regard, the Singapore company should charge an arm’s length fee for the provision of R&D services, and the R&D service fees would be taxed at the normal corporate tax rate unless such services are explicitly covered by incentives.
Pharmaceutical manufacturers often pay royalties to their head office for the use of rights to manufacture drugs. Pharmaceutical manufacturing companies typically compute royalty payments based on the ex-factory basis or in-market basis. The deduction rules and the corresponding withholding tax implications will depend on when the liability to pay the royalty crystallises. For the former, royalty accruals and income from sale of intermediate product are recognised in the accounts when the sales take place, and the deduction is allowed if the expenditure has been “incurred” (crystallised liability to pay) under section 14(1) of the ITA; for the latter, a company may make a provision for royalties under FRS 376 at the point of sale of intermediate product to the intermediary. This is to better match royalty expenses and incomes derived, and simultaneously recognise that inventories are still held by the intermediary, pending sales to end-customers.
Source: IRAS eTax Guide
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