TAX CREDITS ON R&D AND TRAINING EXPENDITURE

01/01/2001

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Article 6 Paragraph 2 of the Statute for Upgrad-ing Industries (SUI) provides that a company may offset 5 to 25% of its expenditures on in-vestments in research and development and on personnel training against corporate income tax for the year in which the expenditure is incurred. Where a company's expenditure on R&D or personnel training in a particular year exceeds its average annual expenditure in the same category in the preceding two years, 50% of the increase may be offset against corporate income tax for that year. Where the eligible amount cannot be fully offset in the year in question, the remainder may be offset over the four subsequent years.

Article 6 Paragraph 4 of the SUI empowers the Executive Yuan to determine eligibility for tax credits, the approving authority, time limits for application, application procedures, the period for which the measures are to remain in force, rates of credits and other related matters.

Under the above powers, on 25 October 2000 the Executive Yuan announced the Regulations Governing Tax Credits for Companies' Expen-ditures in Research and Development and Per-sonnel Training, with retroactive effect from 1 January 2000.

The most important aspect of the regulations is the maximum rates of tax credits set by Article 5 Paragraph 1 and Article 6 Paragraph 1. Where, within a single tax year, a company's expenditure on R&D exceeds NT$1.5 million or 2% of its net operating revenue, or its expenditure on per-sonnel training exceeds NT$300,000, it may offset 25% of the amount spent against its cor-porate income tax liability for the same year. These reduced thresholds will make it easier for SMEs and companies in traditional industries to qualify for tax credits, and should increase businesses' willingness to invest in R&D and personnel training.

Eligible measures by manufacturing entities to improve production technology or provide skills to personnel include those to:

Enhance the efficiency and capabilities of ex-isting machinery and equipment;

Manufacture or in-house design production machinery and equipment;

Improve the performance of instrumentation;

Improve production processes or systems for new products;

Design production processes or systems for new products;

Develop new raw materials or components;

Increase the efficiency of energy use or the reutilization of waste heat; and

Design pollution prevention or treatment technology.

Further, eligibility of expenditure on the use of patents, proprietary technology and copyrights is no longer limited to amortization of the cost of their outright purchase. Fees paid to merely acquire the right to use such intellectual property may also be declared as R&D expenditure. The rules regarding expenditure on commissioned research have also been relaxed to include re-search conducted by any full-time teacher at an ROC institute of higher education, instead of only professors as in the past. Therefore, spending on commissioned research by associate professors, assistant professors and lecturers may all be declared as R&D expenditure. As for
personnel training expenditure, the only major change vis-à-vis the old regulations is the addi-tion of a new Item 5 to Article 3, which makes eligible building depreciation, rent and salaries of full-time training staff at vocational training establishments approved by the Council of Labor Affairs.