Form C YA 2022: R&D Activities in respect of Controlled Transactions

Recent changes were made to Form C by the Inland Revenue Board in preparation for the YA 2022. One of the most critical changes is for those businesses participating in transfer pricing arrangements. As a result, the disclosure items have been significantly expanded to cover new areas.

These new areas include stating the characterisation of your company by reference to its functional profile, the business restructuring undertaken by the group during the year, and whether or not your company engages in cash pooling activities, performs any research and development activities or owns any intellectual properties.

Form C Requires Additional Disclosures

The taxpayer must indicate if the Company is involved in any controlled transaction concerning R&D Activities.

If the Company has controlled transactions, the Company is further required to state the types of R&D activity.

Definition of “Research and Development”

“Research and Development” under Section 2 of ITA 1967 means any systematic, investigative and experimental study that involves novelty or technical risk carried out in the field of science or technology with the object of acquiring new knowledge or using the results of the study for the production or improvement of materials, devices, products, produce, or processes, but does not include:—

1. quality control or routine testing of materials, devices or products;
2. research in the social sciences or the humanities;
3. routine data collection;
4. efficiency surveys or management studies;
5. market research or sales promotion;
6. routine modifications or changes to materials, devices, products, processes or production methods; or
7. cosmetic modifications or stylistic changes to materials, devices, products, processes or production methods.

R&D Issues in Transfer Pricing

Companies undertaking research and development (R&D) activities may qualify for pioneer status, investment tax allowance or double deduction of revenue expenditure under the Income Tax Act 1967 (ITA) on approved R&D, depending on the nature of their activities.

If the R&D activity fulfils the definition of R&D and its qualifying criteria under section 2 of the ITA, the incentive can be claimed as –

1. a special provision under subsection 34(7) of the ITA (single deduction); or
2. a special deduction under section 34A of the ITA (double deduction), which has to be approved by the Minister; or
3. a special deduction under section 34B of the ITA (double deduction), which has to be approved by the Minister.

Therefore, IRB is responsible for conducting a comprehensive investigation into the R&D activities carried out by taxpayers and, if applicable, the transfer pricing payments for such activities.

The Objective of an R&D activity

• create new products or processes；
• acquire new knowledge; or
• improvement of existing products or processes

Creating new products or processes refers to the incorporation or representation of an increase in the overall knowledge or capability in a field of science or technology through the new product or process.

Acquiring new knowledge refers to the seeking of new additional knowledge and devising new applications of available knowledge to achieve an advancement in the overall knowledge or capabilities in a field of science or technology.

Improvement of an existing product or process refers to a substantial improvement through scientific or technological changes to the existing product or process.

Types of R&D Activities

C 2022 Guidebook list three common types of R&D activity carried out by MNEs:

1. Systematic, investigative and experimental study that involves novelty
2. Technical risk carried out in the field of science or technology with the object of acquiring new knowledge
3. Study for the production or improvement of materials, devices, products, produce, or processes

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