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Frequently Asked Questions & Answers on Completion of Supplementary Form S3 – Expenditure on research & development (applicable for year of assessment 2018/19 and subsequent years)
Introduction
For the benefit of the tax paying public and their tax representatives, some frequently asked questions and their answers are listed below for general information and guidance.
Section 1 – R&D expenditure
1.
Q:
I know that from the year of assessment 2018/19, enhanced tax deduction is allowed on research and development (R&D) expenditure. How is the amount of deduction arrived?
A:
Deduction on R&D expenditures is the sum of "Type A expenditure" which qualify for 100% deduction, and "Type B expenditure" which qualify for 300% for the first $2 million of the aggregate amount of payments and 200% for the remaining amount.
2.
Q:
What is Type A and Type B expenditure?
A:
| Type B expenditure is an R&D expenditure falling within any of the following descriptions: | |
| (a) | a payment to a designated local research institution (DLRI) for a qualifying R&D activity related to your trade, professional or business; |
| (b) | a payment to a DLRI which has, as an object, the undertaking of a qualifying R&D activity related to the class of trade, profession or business to which your trade, profession or business belongs, where the payment is used for pursuing that object; |
| (c) | a qualifying expenditure related to your trade, professional or business. |
| Type A expenditure is an R&D expenditure other than a Type B expenditure. For example, a payment made to an overseas university for qualifying R&D activities related to the trade, professional or business. | |
3.
Q:
In Table 1, shall I claim the whole R&D expenditure for an R&D project as deduction on either Type A or Type B expenditure only?
A:
An R&D project may involve different kinds of activity and payment/expenditure. As long as the payment/expenditure fulfills the criteria for Type A or Type B expenditure, you can claim deduction on the corresponding type of expenditure.
4.
Q:
Where can I find the list of DLRI and their codes for filling in column 1(g) and 1(k) in Table 1?
A:
You can find them in the web site of Innovation and Technology Commission (ITC) (www.itc.gov.hk/en/fund_app/dlri/list.html). For example, The University of Hong Kong is a DLRI, its code is "D001". If you find that the R&D institution is not a DLRI, please fill in the code "N001" for a local university or college or "N002" for a university or college outside Hong Kong, and provide the name of the R&D institution.
5.
Q:
What is a qualifying R&D activity?
A:
| A qualifying R&D activity is an R&D activity that is wholly undertaken and carried on in Hong Kong, and falls within the below description: | |
| (a) | an activity in the fields of natural or applied science to extend knowledge; |
| (b) | an original and planned investigation carried on with the prospect of gaining new scientific or technical knowledge and understanding; or |
| (c) | the application of research findings or other knowledge to a plan or design for producing or introducing new or substantially improved materials, devices, products, processes, systems or services before they are commercially produced or used. |
| but excludes: | |
| (a) | any efficiency survey, feasibility study, management study, market research or sales promotion; |
| (b) | the application of any publicly available research findings or other knowledge to a plan or design, with an anticipated outcome and without any scientific or technological uncertainty; |
| (c) | an activity that does not seek to directly contribute to achieving an advance in science or technology by resolving scientific or technological uncertainty; or |
| (d) | any work to develop the non-scientific or non-technological aspect of a new or substantially improved material, device, product, process system or service. |
6.
Q:
How do I know that the qualifying R&D activity is related to trade, profession or business?
A:
| It includes – | |
| (a) | a qualifying R&D activity that may lead to or facilitate an extension, or an improvement in the technical efficiency, of the trade, profession or business (or the class of trade, profession or business); and |
| (b) | a qualifying R&D activity of a medical nature that is of particular relevance to the welfare of employees employed in the trade, profession or business (or the class of trade, profession or business). |
7.
Q:
In addition to providing figures in sections 1.1 and 1.2, what kind of information do I need to provide for claiming deduction on Type A and Type B expenditure?
A:
You have to complete Table 1 and provide the breakdown of Type A and Type B in respect of each R&D project . The figure in 1.1 should be equal to the sum of the subtotals in columns 1(c), 1(d), 1(e) and 1(f) in Table 1 while the figure in 1.2 should be equal to the sum of the subtotals in columns 1(h), 1(i) and 1(j) in Table 1.
8.
Q:
Can I claim consultancy fees paid for expert advice on an in-house R&D activity as Type B expenditure?
A:
| Only two kinds of qualifying expenditure related to trade, profession or business for in-house activities are qualified to be Type B expenditure: | |
| (a) | an expenditure in relation to an employee who is engaged directly and actively in a qualifying R&D activity [Table 1, column 1(h)]; |
| (b) | an expenditure on a consumable item that is used directly in a qualifying R&D activity [Table 1, column 1(i)]. |
| The other R&D expenditures, such as consultancy fees paid for expert advice, are not falling within the above definition, but they may still be eligible for 100% deduction as Type A expenditure. | |
Section 2 – Trading receipts / Sale proceeds from intellectual property rights generated from R&D activities
9.
Q:
Royalties from (or proceeds from sale of) intellectual property rights generated from R&D activities were received, what information should I provide in the form?
A:
You have to report the figure in section 2.1 (or section 2.2 for sale proceeds) and complete Table 2 to provide the breakdown and details.
10.
Q:
I cannot find the appropriate type and code of intellectual property right for filling in Table 2. What should I do?
A:
You can select "IP8" and state the nature of the intellectual property right separately.
11.
Q:
If space provided in Table 1/2 is insufficient, what should I do?
A:
You can give the details on a separate sheet of paper and staple it to the Control List for Supplementary Form and Other Form (IR1477). For each sheet, you have to put the file number and sign at the bottom of the sheet. Do not complete another set of the form to provide the additional information.