R&D tax deductions: Has the High Court set a high bar?

R&D tax deductions: Has the High Court set a high bar?

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James Choo

22 Dec 2020
Categories Thought leadership
Jurisdictions Singapore

The recent case of Intevac Asia Pte Ltd v Comptroller of Income Tax may have ramifications for tax deductibility of R&D expenses.

The Singapore High Court has recently issued a decision involving the interpretation of Section 14D of the Income Tax Act (Chapter 134) (ITA) and its related provisions. As far as we are aware, the case is the first of its kind at the level of the Singapore High Court, marking this as a landmark case in respect of the deductibility of research and development (R&D) expenses.

Intevac: An outcome that creates uncertainty?

In the recent case of Intevac Asia Pte Ltd v Comptroller of Income Tax Intevac)[1], the appellant is a Singapore subsidiary of Intevac, Inc., a US-based group in the business of manufacturing, repairing and trading in electromechanical systems and equipment. The appellant signed a Research and Development Services Agreement (RDSA) with Intevac US in 2008 to provide R&D services for the benefit of the appellant. In 2009, the appellant became a party to a Cost-Sharing Agreement (CSA) with its parent to share the costs and risks of R&D activities. The appellant had made payments to its parent pursuant to the CSA and claimed deductions pursuant to Section 14D(1)(d) of the Income Tax Act (ITA).

The Inland Revenue Authority of Singapore (IRAS) disallowed the deductions on the basis that the expenses incurred under the CSA did not qualify for deductions under such legislation. The taxpayer appealed to the Income Tax Board of Review (ITBR), but the appeal was dismissed. The taxpayer then appealed to the High Court and the appeal centred on the following issues:

  • Whether the CSA payments qualified as payments made for undertaking R&D on the taxpayer’s behalf under Section 14D(1)(d) of the ITA
  • Whether the taxpayer had satisfied the requirement under Section 14D(3)(a) of the ITA

On 12 October 2020, the High Court ruled in favour of the IRAS and upheld the ITBR’s decision.  In making its decision, the High Court raised a few interesting interpretational findings that lay out several important principles surrounding the interpretation of key R&D requirements that need to be satisfied specifically in connection with outsourced R&D arrangements. These will be crucial for taxpayers to take note when structuring such arrangements and seeking to claim R&D deductions under the ITA.

Relevant sections of the ITA

The relevant sections of the ITA that were mentioned in the Intevac case include the following:

Section 14D

(1) For the purpose of ascertaining the income of any person carrying on any trade or business and subject to subsection (4), the following expenditure incurred (other than any amount which is allowable as a deduction under section 14) by that person shall be allowed as a deduction:

(d)     payments made by that person to a research and development organisation for undertaking on his behalf outside Singapore research and development related to that trade or business.


(3) For the purposes of subsection (1)(d), a claim for deduction shall be allowed to a person only if –

(a)     there is an undertaking by the person that any benefit which may arise from the conduct of the research and development shall accrue to the person; and
(b)     the claim is made by the person in such manner and subject to such conditions as the Comptroller may require.

Section 19C

Provides for writing-down allowance for approved costs-sharing arrangements, which was in effect for the relevant years of assessment for the Intevac case (Section 19C was replaced by Section 14D (1), (e), (f) and (g) from year of assessment 2012 onwards).

Material takeaways

Concept of agency

The High Court held that the phrase “for undertaking on his behalf” found in Section 14D(1)(d) of the ITA implies the concept of “agency”, where the taxpayer outsources the R&D to an organisation, which then undertakes R&D wholly and exclusively for the taxpayer’s benefit.

Following on from this interpretation, the High Court further held that payments under the CSA, where the taxpayer and its parent had agreed to share costs and risks from R&D activities, could not fall within Section 14D(1)(d) of the ITA.

CSA payments would be covered under separate provisions in the ITA. For the relevant years of assessment, Section 19C of the ITA explicitly provides for the circumstances under which writing-down allowances can be made for approved cost-sharing agreements for R&D activities. The Parliament had intended to create a differentiated scheme for cost-sharing arrangements as evident from the fact that taxpayers had to satisfy a specific set of conditions to qualify for the writing-down allowances under Section 19C.

As such, the legislative framework had already set out a clear demarcation between arrangements where the costs and benefits of undertaking R&D are shared amongst two or more parties, and arrangements that accrue R&D benefits solely to the taxpayer. Allowing cost-sharing expenses as deductions under Section 14D(1)(d) would have allowed the circumvention of conditions under Section 19C via a backdoor route.

Benefits of R&D activities

In order to claim deductions under Section 14D(1)(d), Section 14D(3) of the ITA has to be satisfied as well. Section 14D(3)(a) requires an undertaking that “any benefit which may arise from the conduct of the research and development shall accrue to the person”. The High Court held that the understanding of the word “any” given the statutory context and interpretation of the Section 14D regime means “all” and the word “may” means that even an iota of benefit that is produced from the R&D activities must accrue to the taxpayer.


The decision by the High Court in Intevac could bring important ramifications in respect of R&D arrangements.

Specifically, regarding outsourced R&D arrangements, e.g., Section 14D(1)(d), the High Court suggests that the person conducting the R&D is undertaking activities as an agent on behalf of the principal (as agent). The R&D activities conducted must be wholly and exclusively conducted for the taxpayer’s benefit.

Following on from this, through the suggested interpretation of the words “any” and “may” in Section 14D(3)(a), and the requirement that even an iota of benefit that is produced from the R&D activities must accrue to the taxpayer, the High Court may have set a very high bar in the interpretation of Section 14D(3)(a).

Consideration is highly recommended especially in situations where there is a commercial necessity for the sharing of benefits, e.g., where multinational groups may choose to retain legal ownership of their intellectual property rights in a different entity from the entity that is funding the R&D activities and commercially exploiting the rights to the intellectual property. Companies should consider all their outsourced R&D arrangements and whether deductions are still available given the decision in Intevac.

Having said that, we also note that these requirements do not appear to be requirements set out by the IRAS in the administrative procedure to claim R&D expenses.[2]

Although we have observed increased scrutiny on R&D deduction claims in general, these are typically in the form of requiring substantiation that the taxpayer has a robust process to identify R&D projects versus non-R&D ones, evaluation of the nature of the R&D activities undertaken, as well as ensuring that the general requirements of Section 14D are satisfied. We have not seen the IRAS challenging the tax deductibility on grounds that the Singapore taxpayer is not the only beneficiary of the R&D activities. It is yet to be seen whether the high bar set by the Intevac case will impact how the IRAS handles R&D claims.

Nevertheless, taxpayers should be prepared to handle the increased scrutiny and questions from the IRAS on their R&D arrangements, maintain robust documentation, and consider requirements for outsourced R&D arrangements.

The authors are James Choo, Partner, International Tax and Transaction Services from Ernst & Young Solutions LLP and Johanes Candra, Director, International Tax and Transaction Services from Ernst & Young Corporate Advisors Pte. Ltd.