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WASHINGTON D.C. - 21 SEPTEMBER 2011
PUBLISHED BY HENLEY MEDIA GROUP LTD IN ASSOCIATION WITH THE COMMONWEALTH SECRETARIAT
WASHINGTON D.C. - 21 SEPTEMBER 2011
PUBLISHED BY HENLEY MEDIA GROUP LTD IN ASSOCIATION WITH THE COMMONWEALTH SECRETARIAT
TAX RELIEFS AND CREDITS FOR RESEARCH AND DEVELOPMENT
SPECIAL REPORT BY
PKF International is a contributor to the Commonwealth Finance Ministers Reference Report 2011,
produced by Henley Media Group.
1
AUSTRALIA
New definition of R & D brings uncertaintyOn 24 August 2011 the Australian Parliament approved
legislation to change the taxation incentive regime for companies
conducting R&D activities in Australia. Effective for income years
commencing from 1 July 2011, the new provisions provide an
increased level of financial assistance to an expanded range of
companies. The downside for existing claimant companies is
that the legislation defining what is R&D for tax purposes has
been changed considerably and has introduced uncertainty as
to how the scheme will be administered.
From Tax Deductions to Tax CreditsOne of the fundamental changes to the R&D tax incentive
regime involves changing the nature of the tax benefit from
additional tax deductions to a tax credit. Under the existing
incentive, companies were allowed a 125 per cent tax
deduction on eligible R&D expenditure with up to 175 per cent
tax deduction on increased R&D expenditure. For tax loss
companies with group turnover under Aus$5 million and R&D
expenditure under Aus$2 million, the R&D tax deductions were
refundable at the 30 cents in the dollar company tax rate.
Under the new credit regime, R&D expenditure will become
non tax-deductible but subject to a tax credit at either the 45
per cent or 40 per cent rate. The rate of tax credit will depend
on whether group turnover is less than Aus$20 million (45 per
cent credit) or more than Aus$20 million (40 per cent credit).
This equates to 150 per cent and 133 per cent rates of tax
deductions under the current scheme, hence the increased
level of headline financial assistance.
For sub Aus$20 million group turnover companies, the 45 per cent
credit is refundable if the companies are in a tax loss position. Unlike
the existing tax concession rules, access to the refundable tax
credit is not restricted by a maximum R&D expenditure threshold.
Further, there is no limit on the amount of R&D expenditure for which
the R&D Tax Credit can be claimed. This will be of particular benefit
to start up technology companies that will now be able to effectively
‘cash out’ their R&D expenditure at the 45 per cent rate. Many of
these companies were previously precluded from the refundable
benefit because of the previous Aus$2 million R&D expenditure
thresholds applied to the refund criteria.
Access for Foreign CompaniesThe new regime also expands the range of entities that can
access the R&D tax benefit. The concession will be expanded
to encompass foreign companies operating in Australia through
a permanent establishment. This will bring in foreign companies
carrying on R&D through a branch in Australia. Foreign ownership
of the results of the R&D activity is specifically accommodated
under the new regime.
Changes to the R&D Activities Eligibility CriteriaWhile the benefits of the new regime are obvious, there are also a
number of areas where the eligibility criteria have been tightened
to potentially exclude a range of activities that are currently eligible
for the tax incentive. The definition of what constitutes R&D for tax
purposes has been completely overhauled with the introduction of
new terminology.
The previous focus for ‘core R&D’ on ‘systematic, investigative and
experimental activities involving innovation or high levels of technical
risk’ has been replaced with ‘experimental activities for the purpose
of creating new knowledge’. While there would appear to be little
substantive difference in the application of the new terminology, it
TAX RELIEFS AND CREDITS FOR RESEARCH AND DEVELOPMENTWith many of the developed world’s economies still struggling to recover from the global economic crisis, governments are looking at
targeted fiscal incentives for high-tech industries as a potential engine for future growth. Some of the most popular measures adopted
in many territories are tax reliefs and credits for research and development (R & D) expenditure.
In this report, tax experts from PKF International member firms in four of the key Commonwealth nations – Australia, Canada, South
Africa and the United Kingdom summarise the latest R & D developments in their countries while the Indian firm gives an introduction
to transfer pricing legislation in India.
2
will be in the administrative interpretation where uncertainty is likely
to be introduced, with the Government flagging the intent for a
tighter interpretation of eligibility.
Areas targeted for specific tightening are those where the
Government considers the activities to be part of ‘business
as usual’ of certain businesses. Those targeted include
businesses engaged in some form of production such as
manufacturers and mining companies, together with certain
computer software developments.
Changes to the definition of supporting R&D in the new R&D Tax
Credit will subject companies to a ‘dominant purpose’ test if they
conduct activities that produce or are directly related to producing
goods or services. Such activities will need to support core
experimental development. Production activities that are core
experimental activities will continue to be eligible R&D.
New feedstock rules will also be applied to producers where R&D
results in the production of goods of value. The new rules do not
impact on the deductions for material inputs, however, they may be
deemed assessable income, depending on the value of the output
of the R&D. There is concern amongst the business community that
an unsupportable and narrow interpretation of the new legislation
will confine assistance to companies whose R&D is a failure, with
limited entitlement for successful R&D conducted by productive
companies. While the terms of the legislation are fairly innocuous,
according to the Government’s stated position in published material
associated with the new legislation, there is an intent to move away
from supporting applied ‘industry R&D’ towards supporting more
basic and early stage development activities.
Computer SoftwareComputer software developers are also subject to a new
‘dominant purpose’ test applying to their core experimental
activities. Computer software development whose main
purpose is for performing internal administrative functions,
including the administration of business functions, is precluded
from eligibility as ‘core R&D activities’. This test replaces the
‘multiple sale’ criterion as a means of excluding development
of ‘internal’ software from the scope of the R&D Tax Incentive.
For further information please contact:
CANADA
Longstanding program to promote the advancement of technologyCanada has a longstanding tax incentive program aimed
at promoting the advancement of technology in Canada.
Companies making qualified expenditures in connection
with Scientific Research and Experimental Development
(SR&ED) activities in Canada are entitled to receive a federal
investment tax credit. The credits reduce federal tax payable
but, for certain entities, the credits are fully refundable where
there is no federal tax liability. The refunds assist emerging
businesses and others that are not taxable in the year. The
federal program is administered by the Canada Revenue
Agency (CRA). Most provinces offer parallel programs with
tax credits for qualifying activities in the particular province.
Available Tax BenefitsQualifying current and capital expenditures are fully deductible
in computing taxable income.
The federal credit rate and the availability of a cash refund
are dependent upon the nature of the entity and, in the case
of a corporation, its tax status and associated group’s prior
year taxable income and prior year taxable capital employed
in Canada.
A Canadian-controlled private corporation (CCPC) is essentially
a private corporation that is not controlled by one or more
non-residents of Canada or one or more public corporations
or a combination of those parties. A CCPC can earn a federal
investment tax credit of 35 pet cent on up to Can$3 million of
qualified current expenditures and that credit is 100 per cent
refundable. For current expenditures in excess of the Can$3
million limit, the credit rate is 20 per cent and that credit is 40
per cent refundable.
The corporation’s expenditure limit will be eroded on a pro-
rata basis by the aggregate of its associated group’s taxable
income over the threshold amount (Can$500,000 in 2010)
or the aggregate of its associated group’s taxable capital
employed in Canada above the threshold amount (Can$10
million in 2010). Slightly different rules apply for capital
expenditures relating to computers, equipment and machinery
used in SR&ED.
A corporation which is not a CCPC will receive a 20 per cent credit
on all qualifying expenditures. This credit can only be applied
to reduce taxes payable and is not refundable. Individuals,
partnerships and trusts carrying out qualifying SR&ED activities
will also receive a non-refundable 20 per cent credit.
Provincial tax credits are generally at a lower rate than the
federal credit. The combined federal and provincial tax credits
range from:
Graham Wakeman,
Partner - Government Incentives,
PKF East Coast Practice
Tax Consulting Group,
Sydney,
NSW 2000,
Australia
Tel: +61 2 9251 4100
Direct Line: +61 2 9240 9901
Email: [email protected]
www.pkf.com.au
3
• 35percentto48percentforCCPCs
• 20 per cent to 32 per cent for non-CCPCs and non-
corporate entities.
Federal investment tax credits claimed in a particular year
reduce the SR&ED expenses used to compute taxable
income in the following year. Provincial tax credits and other
government assistance generally reduce the SR&ED expenses
in the current year. Provincial tax credits on the proxy amount
used to substitute for overhead expenses reduce SR&ED
expenses in the following year.
Qualifying Expenditures and ProjectsFrom the CRA’s perspective, the particular project must meet
three main criteria to qualify for SR&ED incentives:
1. Technological advancement or advancement of scientific
knowledge
2. Technological uncertainty
3. Systematic investigation.
Work that qualifies for the SR&ED program specifically includes:• Basic research where there is no specific practical
application in view
• Applied research where there is a specific practical
application in view
• Experimental development to achieve technological
advancement to create new materials, devices, products
or processes or to improve existing ones
• Support work in engineering, design, operations research,
mathematical analysis, computer programming, data
collection, testing or psychological research but only if the
work is commensurate with, and directly supports, the eligible
experimental development or applied or basic research.
The following activities are specifically NOT eligible for benefits under the program:• Marketresearchorsalespromotion
• Quality control or routine testing of materials, devices,
products or processes
• Researchinthesocialsciences(psychology,economics,
business, law, history, archaeology, literature, philosophy)
and humanities research
• Prospecting,exploringordrillingfororproducingminerals,
petroleum or natural gas
• Commercial production of a new or improved material,
device or product, or the commercial use of a new or
improved process
• Stylechangestoanexistingproduct
• Routinedatacollection.
Expenditures incurred for SR&ED may include wages, materials,
contract services, equipment lease costs, third party payments
and certain capital expenditures. Overhead expenses may
be claimed either on a specifically identifiable cost basis or by
electing to use the simplified ‘proxy method’ which substitutes
the actual overhead expenses with a proxy amount determined
by multiplying eligible SR&ED wages by 65 per cent.
For further information please contact:
Bill Macaulay, CA
Tax Partner,
SmytheRatcliffe LLP,
Vancouver,
Canada
Email:
Direct Telephone:
+1 604 694 7536
4
INDIA
An introduction to Transfer Pricing Law in IndiaThe law on Transfer Pricing (TP) has evolved in India as
a logical consequence of the exponential increase in
international transactions post-globalisation. The participation
of multinational groups in the economic activities of India has
given rise to complex issues, particularly so when it involves
transactions between two enterprises belonging to the same
multinational group.
The Finance Act 2001, which introduced an entire gamut of
provisions dealing with TP, came into force on 1 April 2002
and was applicable to the assessment year 2002–03 and
subsequent years.
The law essentially mandates arm’s length pricing of
international transactions between associated enterprises,
specifies the methods for determining the arm’s length price
(ALP), details the documentation requirements for companies
entering into international transactions, and stipulates
penalties for non-compliance.
Key Features of Transfer Pricing RegulationsThe Transfer Pricing law in India requires that pricing of
international transactions between two Associated Enterprises
(AEs), either or both of whom are non-residents, should be at
arm’s length, a detailed definition of which has been given in the
law. The definition is given based on certain objective parameters
to assess the relationship between two entities and include:
• ShareCapitalCriterion:WhenoneAEholds26percent
or more of share capital in the other or when a third party
holds 26 per cent or more share capital in both AEs
• Loan-basedCriterion:LoanadvancedbyoneAEconstitutes
51 per cent or more of total assets of another AE
• Management Control Criterion: More than half of the
directors or one or more executive directors are actually
appointed by one AE in the other AE.
If the TP provisions are applicable, the ALP of the international
transaction(s) has to be determined. The pricing at arm’s
length would need to be established by internationally
accepted transfer pricing methods including:
1. Comparable Uncontrolled Price Method (CUP)
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)
4. Profit Split Method (PSM)
5. Transactional Net Margin Method (TNMM)
To date, judicial pronouncements indicate a bias towards the
CUP method.
Safe Harbour Provisions‘Safe harbour’ refers to circumstances in which the tax authorities
will accept the transfer price declared by the assessee. The
principle is that, where the application of the most appropriate
method results in more than one price, a price which differs
from the average of such prices within a permissible range
may be taken as the ALP. The allowable variation will be such
percentage as may be notified by the Central Government. As
of now, no percentage has been notified.
Penalties for Non-compliance Assessees with international transactions of the value
exceeding Rs.1 core are statutorily required to maintain
and submit the prescribed documents with regard to the
international transactions entered into by them. A report from
aCharteredAccountant, asprescribed in Form3CEB, also
needs to be provided before the due date for filing the return
of income.
Non-compliance with these statutory requirements attracts a
levy of penalties under the law.
The penalty can be waived if the assessee can prove that the
default is due to a reasonable cause.
Advance Pricing Agreement (APA) An APA is an arrangement between the taxpayer and the taxing
authority whereby the two parties agree on the transfer pricing
policy for specified transactions of the taxpayer over a given period
of time. Such a ruling would be binding on the taxpayer and the
tax authorities. The scheme is intended to bring certainty in the tax
Nature of Default Penalty Prescribed
Failure to maintain
prescribed information /
documents
2 per cent of value of
international transaction
Failure to provide
information / documents
during audit
2 per cent of value of
international transaction
In case of adjustment to
taxpayer’s income by AO
consequent to determination
of ALP and assessee not
being able to explain the
genuineness (leading to
inference of concealment)
100 – 300 per cent of the
tax on adjustment amount
Failure to provide certificate
inForm3CEB
Rs. 1,000,000
5
liability of the transacting parties but, as the concept is not yet in the
current law, the provisions are still at the conceptual stage.
In summary, Transfer Pricing Law in India is in an evolving stage
and, considering the practical issues, there is considerable
scope for litigation in this area. Hopefully, in the near future,
the law would become streamlined by means of amendments
to remove the difficulties in application and also by way of
judicial pronouncements.
For further information please contact:
S. Santhanakrishnan
PKF Sridhar & Santhanam, Chennai, India
Tel: +91 44 2811 2895 -
Email: [email protected]
Website: www.pkfindia.in
SOUTH AFRICA
R&D incentive to help maintain South Africa’s position as economic powerhouseSouth Africa’s (SA) existing R&D incentive aims to promote
increased private sector R&D investment in SA, enhance its
role as an R&D and innovation location and generally promote
R&D and innovation-led industrial development and job
creation. The main features of the R&D incentive are:
Operational ExpenditureA 150 per cent deduction is allowed for operating expenses
(for example: salaries, overheads, materials and such like)
directly incurred for the purposes of:
• discoveringnovel,practicalandnon-obviousinformation
• devising, developing or creation of an invention, design,
computer program or knowledge essential to the use of
such invention, design or computer program of a scientific
or technological nature.
Taxpayers must carry on a trade and must either intend to
use the information, invention, design, computer program or
knowledge in the production of income or such items must be
discovered, devised, developed or created by the taxpayer
for the purposes of deriving income.
Interest and expenditure incurred for the right of use of any
property do not qualify for the 150 per cent deduction.
It is not a requirement for a person to physically carry out the
R&D activities – the activities can be contracted to a third
party. However, the R&D activities must be undertaken in
SA and qualifying expenditure must be directly related to the
R&D activity.
Where a connected person in relation to the taxpayer carries
out the R&D activities on behalf of the taxpayer, the taxpayer
can only claim the 150 per cent deduction to the extent of
expenditure incurred by the connected person in carrying out
qualifying R&D activities.
A deduction of only 100 per cent of qualifying operational R&D
expenditure may be claimed to the extent that such expenditure is
funded by a third party through a fee or a non-government grant
paid to the taxpayer. Should the funder not be entitled to claim a
R&D deduction in respect of the amount paid, for whatever reason,
the taxpayer will be allowed to claim a 150 per cent deduction.
Where funding is received in the form of a taxable government
grant, the 150 per cent deduction may only be claimed in
respect of qualifying operational expenditure that exceeds
twice the amount of the government grant received. Should
a non-taxable government grant be received, a deduction
(equal to 150 per cent) may only be claimed in respect of
qualifying operational expenditure that exceeds the amount of
the government grant received.
Capital ExpenditureThe cost of any new and unused building or part thereof,
machinery, plant, implement, utensil or article or improvement
thereto owned by the taxpayer, which is used solely and
directly for carrying out qualifying R&D activities is depreciable
over three years on a 50 per cent: 30 per cent: 20 per
cent basis. Any building or part thereof must be specifically
equipped and regularly used for R&D purposes.
Excluded ActivitiesExpenditure related to the following activities does not qualify
for the R&D tax incentive:
• explorationorprospecting
• managementorinternalbusinessprocess
• trademarks
• thesocialsciencesorhumanities
• marketresearch,salesormarketingpromotion.
R&D expenditure incurred by any person carrying on any
banking, financial services or insurance business falls outside
the R&D regime.
Proposed Amendments to the R&D Tax RegimeNo pre-approval is currently required to claim a deduction
in terms of the R&D tax incentive. Taxpayers are required to
annually submit information about their R&D claims to the
Department of Science and Technology and to the South
African Revenue Service.
In terms of proposed amendments applicable to R&D
expenditure incurred on or after 1 April 2012 but before 1
April 2017, a pre-approval process will be introduced. More
precise definitions of R&D activities, clarification of qualifying
expenditure and streamlining of the calculation of R&D tax
deductions are also proposed.
6
ConclusionThere is a clear link between the intensity of R&D expenditure
and competitiveness. SA was ranked 54th out of 139 countries
in the 2010/2011 Global Competitiveness Report of the World
Economic Forum, the second-highest ranked African country
after Tunisia (ranked 32nd). SA’s R&D tax incentive not only
aims to increase its productivity and competitiveness through
increased local innovation, research and technological
development but also to maintain its position as the economic
powerhouse of Africa.
For further information please contact:
UNITED KINGDOM
Changes proposed to remove current restrictions on qualifying expenditureThe UK Government has taken significant measures this
year to encourage innovation and research & development
activity in the UK through a series of proposed reforms to the
corporate tax system.
R&D Tax ReliefThe UK has had a special tax relief for R&D expenditure
since2000.Broadlyspeaking,reliefisavailabletosmalland
medium-sized companies (SMEs) for 175 per cent (130 per
cent for large companies) of eligible expenditure (including
staff costs, computer software and consumable items) on
projects that seek an advance in science or technology
through the resolution of uncertainties. Loss-making SMEs
are able to claim a payable tax credit instead of claiming an
enhanced tax deduction.
The rate of relief is increased from 175 per cent to 200 per
cent from 1 April 2011 and to 225 per cent from 1 April
2012. These increases are subject to EU state aid approval.
Further changes, also proposed to apply from 1 April 2012,
are intended to remove some current restrictions on qualifying
expenditure and to make the rules easier to apply. The
changes are expected to be of most benefit to SMEs.
• The existing requirement for the company to spend at
least £10,000 in the year concerned on qualifying R&D
expenditure is to be abolished.
• Thecurrentcapontheamountofpayabletaxcreditistobe
removed. At present, the credit cannot exceed the income
tax and National Insurance payments made by the company
in respect of all its employees during the year concerned.
• TheGovernment isconsideringhowitcould implementa
system whereby the benefit of the tax relief is recognised
‘above the tax line’ in the company’s accounts. This would
probably require the extension of the payable tax credit to
large companies.
• Changes are proposed to the rules for allowing relief
for expenditure on sub-contractors and externally
provided workers.
• There iscurrentlyuncertaintyas to theamountofeligible
expenditure where R&D is carried out in the course of
production activities. Draft guidance has been published
which will hopefully clarify the boundaries in this area.
• Anewupfrontclearanceprocedurehasbeenproposedfor
smaller companies and new start-ups.
If you have any queries regarding the availability of R&D tax
relief in the UK, please contact Denise Roberts, PKF (UK)
LLP’s leading expert in this area ([email protected]).
Patent BoxThe Government has also proposed that a new patent box
regime, based on the Dutch model, will be introduced from
1 April 2013. Although all UK resident companies (and UK
branches of overseas companies) will be able to apply the
regime, it is expected to be of most benefit to larger companies
with significant patent and similar income.
The regime would apply a reduced rate of tax on income
from patents granted by the UK’s Intellectual Property Office
and the European Patent Office. It may also apply to patents
granted by selected national patent offices of some other
European countries.
In addition, the Government proposes to include other
forms of intellectual property (IP) within the regime that have
a strong link to R&D and high-tech activity and are subject
to examination by an independent authority. These include
regulatory data protection and certain plant variety rights.
It is proposed that the rate of tax on eligible income will
eventually fall to 10 per cent by 2017 but this will be preceded
by a gradually reducing rate year-on-year from 2013 onwards.
The reduced rate is intended to apply both to the legal owner
of the IP and anyone holding an exclusive licence to exploit
it commercially. However, the company concerned must
have performed significant activity in developing the patented
invention or its application. In addition, it must remain actively
involved in the ongoing decision making connected with
exploitation of the IP.
Eugene du Plessis
Director – Tax, PKF
Johannesburg, South Africa
Tel: +2711 384 8116
Email: eugene.duplessis@pkf.
co.za
Website: www.pkf.co.za
7
The regime would cover worldwide income earned by UK
businesses from inventions covered by a currently valid
qualifying patent. This would include both royalties and
income from the sale of any products incorporating at least
one of such inventions.
Companies will be free to opt in and out of the regime at any
time and some companies may choose to remain outside if
the prospective tax saving is small and the administration cost
in identifying that saving is comparatively high.
For further information please contact:
A world of tax advice for the Commonwealth of Nations from PKF
From Adelaide to Cape Town, Mumbai to Vancouver - wherever
you are in the Commonwealth, you are never far from good
tax advice. With tax experts in 34 Commonwealth nations,
the PKF International network of accounting and business
advisory firms can provide you with the answers to your local
and international tax questions.
PKF Tax Guides for Commonwealth Nations
For any business moving into international markets, a key deciding
factor will be the target country’s tax regime. What is the corporate
tax rate? Are there any tax incentives or grants? Are there double
tax treaties in place? How will foreign source income be taxed?
You can find answers to all these questions for the 25 starred
Commonwealth Nations on the map by visiting http://www.pkf.
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(You can also download the PKF Worldwide Tax Guide 2011 plus
country tax guides for a further 74 countries around the world.)
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publications/tax-alerts to download a free copy.
About PKF International Limited
PKF International Limited (PKFI) administers the PKF network
of legally independent member firms. There are over 245
member firms and correspondents in 440 locations in around
125 countries providing accounting and business advisory
services. PKFI member firms employ around 2,200 partners
and more than 21,000 staff.
PKFI is the 10th largest global accountancy network and its
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The PKF International network of legally independent firms does not accept any
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member firm or firms.
Jon Hills
Partner - Tax services,
PKF(UK)LLP, Accountants and
business advisers,
London, United Kingdom
Tel: +44 (0) 20 7065 0000 -
Email: [email protected]
Website: www.pkf.co.uk
“Tax experts from
around the PKF
International network at
the Madrid International
Tax Meeting in
November 2010.’
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