Boosting Hong Kong’s innovation and technology through R&D tax incentives

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Distinctiveness of R&D and enhanced incentives regime are essential

HongKong, 31 Oct 2017  - The Chief Executive Carrie Lam recently delivered her maiden Policy Speech. As eagerly anticipated, the Chief Executive announced in the speech that a 300% tax deduction will be offered to the first HK$2 million of qualifying research and development (R&D) expenditure incurred by enterprises. A further 200% tax deduction will be available for any remaining expenditure. The aim is to implement the measure in 2018.

Innovation is regarded as an engine of economic growth. The largest economies are already pursuing this goal by encouraging R&D inputs through tax incentives and other allowances.

PwC China South and Hong Kong Tax Leader Charles Lee pointed out in a recent press conference “The HKSAR Government’s enhanced tax deduction on R&D expenses should mark a first and important step in boosting the development of innovation and technology in Hong Kong through R&D tax incentives. Although the details of the enhanced R&D expense deduction have yet to be released, the proposed new measure, which has taken into consideration the operational and development issues of SMEs, should be welcomed by businesses.”

Based on PwC’s observations, while Hong Kong is currently an international metropolis with a strong and competitive economy, its R&D expenditure still needs to catch up with those of other major economies. For example, Hong Kong’s R&D expenditure as a ratio to GDP is around 0.73%, which is lower than many major economies. Moreover, the share of R&D expenditure funded by the public sector is much higher than in most other economies. It is believed that the new R&D tax deduction measure could stimulate overall R&D expenditure to catch up with international benchmarks.

“Based on our observation of similar legislation in many jurisdictions, how the HKSAR Government defines qualifying R&D activity and expenditure will largely affect the overall results of the policy. The differentiation of R&D activity/expenditure recorded by businesses from those encouraged by enhanced deduction policy is usually crucial to help enterprises to obtain the benefits while avoiding potential abuse,” says PwC partner Roger Di, member of the PwC global R&D Incentive Services Steering Committee and PwC China R&D Incentive Services Leader, “Apart from enhanced tax deduction, other incentive regimes such as government cash grants, R&D tax credit, as well as IP-based incentives may also be considered.”

To conclude, Charles Lee says, “In the long run, Hong Kong may consider establishing a competitive R&D incentive regime to cover the whole value chain of R&D, with the formulation of enhanced R&D expense deduction being a good start. Putting time and effort into this policy area, and by working in tandem with the long-term Guangdong-Hong Kong-Macau Bay Area development plan, Hong Kong can enjoy a bright future in terms of economy, innovation, technology, and social well-being.”

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