Overview of the Enterprise Innovation Scheme

Net savings on R&D expenditure

The Enterprise Innovation Scheme (EIS) in Singapore is introduced in 2024, allowing for a 400% enhanced tax deduction of R&D expenditure spent by companies and resulting in substantial net savings of up to 68% on R&D expenditure. This enhancement brought by the Enterprise Innovation Scheme on top of the deductions that are previously allowed in the Income Tax Act under 14C and 14D (1) has sparked a growing interest among companies to leverage the R&D Tax Measures and the Enterprise Innovation Scheme to drive research and innovation.

Difficulties in Understanding Eligibility Criteria

However, assessing project eligibility under the R&D Tax Measures and Enterprise Innovation Scheme (EIS) is a challenging task. To ensure that the scheme is correctly applied, the Inland Revenue Authority of Singapore (IRAS) has laid out rigorous project eligibility criteria. Companies must clearly demonstrate that their projects qualify as R&D projects by submitting a project description to IRAS along with its R&D Claim Form when claiming the benefits of R&D Tax Measures and Enterprise Innovation Scheme.

For software development projects, eligibility assessment and justification are more demanding, as IRAS clearly states in the 7^th edition of IRAS e-Tax Guide for R&D Tax Measures that it “generally has to request for more information” on software development project claims. The complexity in project eligibility assessment is best illustrated with a total of 16 pages of guidelines in Annex G of the e-Tax Guide for R&D Tax Measures dedicated specifically to project eligibility for software development projects.

In this article, FI Group will help companies unveil the basics of project eligibility assessment for tax deductions under R&D Tax Measures and Enterprise Innovation Scheme based on the e-Tax Guide for R&D Tax Measures, while discussing key points to consider for eligibility assessment for software development projects.

Insights into eligibility requirements for Enterprise Innovation Scheme

The eligibility criteria for projects to qualify under the R&D Tax Measures and Enterprise Innovation Scheme comprises of three pillars: Objective, Novelty / Technical Risk, and Systematic, Investigative, and Experimental Studies. For a project to qualify under the R&D Tax Measures and Enterprise Innovation Scheme, the project must satisfy all three “pillars” shown in the figure below. We will look into the three pillars one by one.

Three Pillars of eligibility requirements for Enterprise Innovation Scheme

Objective Requirement Pillar

The “Objective” pillar requires the primary purpose of the project to be one or more of the following:

Acquiring new knowledge.
Creating new products or processes.
Improving existing products or processes.

The objective(s) of the project must be clearly stated at the beginning of the project. Additionally, companies must clearly identify the gap between existing scientific and technological knowledge and the desired outcome, and aim to close that gap with the project.

Novelty / Technical Risk Requirement Pillar

The “Novelty / Technical Risk” pillar requires projects to either create products or processes that are “first of its kind” in Singapore, or involve significant scientific / technological uncertainty that cannot be solved by a competent professional. Projects need only satisfy one out of the two characteristics described in this pillar. Nevertheless, a considerable number of eligible R&D projects satisfies both of them.

For projects that look to satisfy the Novelty criterion, the creation or improvement of a product / process needs to be beyond minor or routine upgrading, and should not be a mere importation of existing knowledge outside of Singapore. For example, simple deployment of a software that existed in the US on a Singapore-based server will not qualify as R&D, even if this software did not exist in Singapore before this project.

For projects that look to satisfy the Technical Risk criterion, things could get a bit more complicated, and more ground is left for case-by-case considerations. In most cases, however, projects will need to create products / processes that exceed the performance of existing products / processes, approach existing problems in a new way, or raise new scientific / technical questions and aim to answer them.

Systematic, Investigative, and Experimental Studies Requirement Pillar

The “Systematic, Investigative, and Experimental Studies” (SIE studies) pillar is closely linked to the two previous pillars. It states that in order to qualify as a R&D project, a series of planned activities to test or find out something that is not known or readily deducible in the field of science or technology must be carried out in the project. A breakdown of the three characteristics of the required studies in this pillar can be found below:

Systematic: A planned and orderly approach of the steps or activities to be taken in the study must exist.
Investigative: Activities must be undertaken to explore and uncover information to help in the understanding of the problem.
Experimental: A series of structured steps undertaken to test the potential solution for solving a technical problem. An iterative process is often needed.

We can see that this pillar is closely related to the previous pillars, as it requires the study to investigate the scientific or technological gaps that are identified in the “Objective” pillar, and it requires the study to tackle the uncertainties brought about by potential solutions to challenges identified in the “Novelty/Technical Risk” pillar through experiments and tests.

Complexities in identifying boundaries of R&D activities

But there is more than what we discussed about the pillars individually. When the pillars are combined, they also lay out rules for identifying the boundaries of R&D projects, as most of the time, the full process of product development will not all qualify as R&D activities even if some of them are eligible as R&D activity. Some good examples will be market surveys, which are carried out before the objectives are set for this project and thus do not satisfy the “Objective” pillar, and production activities, which are carried out after the technical uncertainties have been removed.

With the overview provided above, we can see that the rigorous rules that is implemented for the R&D Tax Measures in Singapore makes it a complex task to determine the eligibility of R&D activities under the R&D Tax Measures and the Enterprise Innovation Scheme, especially in identifying (1) what projects qualify as R&D projects, and (2) what activities in a project qualify as R&D activities and can thus have their cost claimed under the R&D Tax Measures, and people with expertise and experience in both the R&D Tax Measures and the Enterprise Innovation Scheme and the science and technology field are required to assess project eligibility and provide justification to IRAS.

Assessment of Software Development Project Eligibility

Assessment of software development projects is a task that is notoriously difficult, considering the intricate nature of software development and the evolving landscape of technological innovation, along with the rigorous eligibility criteria. A deep understanding of the eligibility criteria, the project, and state-of-the-art knowledge on the technology involved in the projects is often required to conduct such assessments.

Complexities in Eligibility Assessment of Software Development Projects

The most common misconception regarding project eligibility assessment of software development projects is that while software development is about developing a new product for the company, and Software Development Life Cycles often signify systematic development in the project, such characteristics do not automatically render all software development projects as eligible R&D projects for R&D Tax Measures and the Enterprise Innovation Scheme. Developing new software for the company itself does not justify the project under “novelty,” and the necessity of the project involving also an “investigative and experimental” study is often overlooked.

In this section, we will discuss some of the key pitfalls in project eligibility assessment and justification of software development projects for R&D Tax Measures and the Enterprise Innovation Scheme.

Misconception of the Objective criterion in eligibility assessment

As the name implies, this pitfall is closely associated with the Objective criterion that requires companies to clearly identify the scientific or technological objectives to be achieved prior to the commencement of the project.

A common misconception is that business objectives of software development projects equal scientific or technological objectives. Business objectives focus on the business challenges that the final deliverables of the project will address. For example, for a software development project that aims to develop an HR system for tracking expenditure claims of employees, it aims to address the challenge of keeping track of various receipts and reimbursement slips, and thus the business objective is to make it easier for HR to track claims and supporting documents.

However, this is completely different from what is required as scientific or technological objectives for projects to qualify as R&D projects. Scientific or technological objectives focus on the level of science or technology that the project aims to achieve at the end of the project and identifies the gap that lies between the current level of science and technology and the level that it aims to achieve. In our previous example with the HR system, the level of science and technology that the project aims to achieve is unclear, and the gap between the current level of science and technology and the level that the project aims to achieve is not clearly defined. Therefore, the eligibility of the software development project that develops such a system is unclear with such description.

Here is a better example of describing the scientific or technological objectives of a software development project: Our project aims to develop an HR system that helps expenditure claim tracking by automatically classifying scanned receipts from expenditure claims of employees. This autoclassification feature must achieve 98% accuracy. Our preliminary studies have shown that a mere combination of existing text classification algorithms and classification algorithms based on supervised learning can only achieve 92% accuracy, which indicates a gap between our objective and the existing level of technology.

Wrong Definition of Novelty / Technical Risks in eligibility assessment

The Novelty / Technical Risk pillar is by far the hardest to handle in project eligibility assessment and justification. It requires technical expertise in the relevant fields, since it is related to identifying the existing level of science and technology and comparing it with the targets of the project to justify why the targeted end results are novel / why technical uncertainty exists in reaching the end results.

The nature of software development projects adds another layer of complexity to the eligibility assessment and justification, as at first glance, almost every software development project creates something “new” for the company’s business, it automatically satisfies the novelty criteria. This is untrue, as the product must be first-of-its-kind in Singapore to satisfy the Novelty criterion. It is also quite common for companies to claim that they are launching a new software with new features to the market and thus qualify under the Novelty requirement. For example, a new e-commerce platform that provides random cashback upon successful payment could be new in the Singapore e-commerce market. However, this feature itself will not satisfy the novelty criteria, as many apps with a cashback feature exist in Singapore, from banking apps to payment apps.

It is well known that software development is never an easy task for your dev team, and thus people tend to fall into the trap that since working with code is something technical and it is challenging to develop the end product with the time and effort consumed, it is something that involves technical challenges and thus fulfils the Technical Risk requirement. In fact, this is one of the most common misconceptions that we have ever seen at FI Group.

The key to understanding this requirement is to understand if any uncertainty arises from the lack of publicly available information about the scientific and technological specifications involved in the project. For example, designing a relational database management system (RDBMS) and implementing it in SQL may be challenging for your data team, as it takes time to understand the data to be kept in the DBMS and the schema to be used, as well as how the schemas should connect with each other. However, this is not considered technical uncertainty because there is plenty of information available on the internet about how to design a RDBMS from data requirement gathering to schema and relationship designing, and a competent individual, who might be an expert in RDBMS with 5 years of experience, can handle the design and implementation with certainty on the approaches and expected results. However, if your RDBMS project aims to develop certain indexing techniques that make the average query response time shorter than what is achievable with existing indexing techniques that are publicly available, then technical risks are involved because how to achieve a shorter query response time is uncertain.

Misidentification of R&D boundaries in software development projects

It is crucial to understand that even though various activities may be grouped under one single software development project, and that some activities in the project may qualify as R&D activities, it does not mean that the entire project is considered as an R&D project.

We all know that there exist many functionalities in a software to be developed, and not all of them may satisfy the three pillars listed in our previous discussions. The development of functionalities that do not satisfy the three pillars, e.g. login and logout functions of an investment platform, will not qualify as R&D activities. The expenses incurred for developing these functionalities in the software application should be excluded from the R&D Tax Measures and Enterprise Innovation Scheme claims.

On the other hand, a software development project may not qualify as an R&D project, but the development of certain functionalities in the software application may satisfy the requirements listed above and thus qualify as R&D activities. For example, developing a digital banking application is not considered as an R&D project in general, considering that numerous digital banking applications already exist in Singapore. However, if you aim to develop a smart contract system for investment management based on blockchain technology that is more secure and more reliable than existing smart contract systems in your digital banking application, then it involves technical risks because how to achieve the goals in security and reliability is uncertain, and it requires SIE activities to study potential solutions before producing the smart contract system with the desired specifications. Thus, this part of the digital banking application development project that is related to the development of the smart contract system is considered as eligible R&D activities, and expenses incurred for this part of the project can be claimed under R&D Tax Measures and the Enterprise Innovation Scheme.

Despite the rules listed above, there is also a special guideline on the eligibility of software development projects. It states that if a company can demonstrate that the functionalities that involve scientific and technological uncertainties are the core functionalities developed for the software, then the entire project may qualify as an R&D project.

This rule makes it extremely important to consider projects on a case-by-case basis. For example, if the software development project is to develop an ERP solution, and part of its functionality is to automatically recognize handwritten documents. It is technically challenging for handwriting recognition to achieve the level of accuracy laid out in the requirements. However, as the software application to be developed is an ERP system, this handwriting recognition functionality is not the core functionality, and therefore the project does not qualify as an R&D project as a whole under this special guideline. Conversely, if the software application to be developed is a scanner application that automatically reads handwritten documents and extracts the text from these documents, then the project may qualify under this special guideline as an R&D project.

Expert guidance for project eligibility assessment

With the complexities involved for assessing the project eligibility of software application development projects, nothing is more effective than a discussion with experts in project eligibility assessment for the Singapore R&D Tax Measures and Enterprise Innovation Scheme.

FI Group offers a one-stop solution for companies to benefit from the R&D Tax Measures and Enterprise Innovation Scheme in Singapore, from project eligibility assessment to technical justification reports and claims. We have nearly 30 years of experience in partnering with companies to help them leverage R&D Tax Measures internationally.

FI Group methodology for Enterprise Innovation Scheme eligibility assessment and claims

Our experts look forward to discussing the eligibility of your projects for the R&D Tax Measures and Enterprise Innovation Scheme. The teams from FI Group consist of PhDs and engineers in various industries, including cutting edge IT fields like software engineering, machine learning, artificial intelligence, and the industrial applications of these technologies. Our expertise in both R&D Tax regulations and science and technology allows us to maximize the benefits that clients get from R&D Tax Measures, securing €2.5+ Billion R&D savings every year for over 20,000 clients around the world.

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