Cost-sharing agreement for innovation activities

Budget 2025 introduced a significant tax measure aimed at fostering innovation through collaborative efforts. Effective from 19 February 2025, a tax deduction will be granted for payments under an approved cost-sharing agreement (CSA) for innovation activities. This initiative is designed to stimulate collaborative innovation that may not strictly fall under the research and development (R&D) definition in section 2 of the Income Tax Act 1947, which tends to be interpreted narrowly by the Inland Revenue Authority of Singapore (IRAS).

Where the scope of innovation activities takes reference from internationally developed guidelines such as the Organisation for Economic Co-operation and Development's (OECD) Oslo Manual 2018 on Guidelines for Collecting, Reporting and Using Data on Innovation (the Oslo Manual 2018), a wider array of innovation activities may potentially be included. In such a case, this measure can stimulate partnerships and co-development efforts among businesses. By acknowledging the importance of collaborative innovation, the new measure aligns with global trends towards open innovation models.

The newly introduced tax deduction allows companies to claim a full deduction on payments made under a CSA specifically for innovation activities. The Economic Development Board (EDB) will provide further details on eligibility criteria and the approval process by the second quarter of 2025.

Businesses stand to benefit substantially from this deduction. Primarily, it reduces the financial burden associated with collaboration in innovation projects, making it more attractive for companies to engage in such activities. This is particularly advantageous for small and medium-sized enterprises (SMEs) that may lack the resources to undertake innovation independently.

However, the measure could also present challenges. It is anticipated that the primary challenge lies in the definition of 'innovation activities'. One measure of innovation could be based on the Oslo Manual 2018. According to the manual, innovation is generally defined as 'the implementation of a new or significantly improved product or process.' Innovation activities are viewed to encompass all developmental, financial and commercial activities undertaken with the intention of resulting in an innovation. These activities include R&D, acquisition of external knowledge or technology, and other preparatory steps necessary to support the implementation of innovative processes or products. While the broadening of the scope for tax deduction is a welcomed move, this broad scope of what constitutes innovation could also lead to ambiguity and difficulties in ensuring consistent application across different contexts. The use of highly subjective terms such as "new" or "significantly improved" can also be a source of contention.

The introduction of this tax deduction signifies a progressive move by the Government to expand the scope of innovation incentives beyond traditional R&D activities. While the new measure is seemingly similar to the erstwhile section 19C prior to Year of Assessment 2012 where qualifying expenditure incurred under an R&D CSA approved by the EDB was eligible for a writing down allowance of 100% of that expenditure, it addresses the gap left by the former section 19C, which limited deductions to qualifying R&D activities.

As a next step, businesses should proactively engage with the EDB once the details are released. Companies should also assess their current and planned innovation expenses and activities to identify projects that could potentially benefit from the new tax measure.