This article was first published in the April 2012 Singapore edition of Accounting and Business magazine.
While Singapore’s 2012 Budget delivered little short-term financial help to the country’s small and medium-sized enterprises (SMEs), it did provide a slew of measures aiming to boost their productivity over the long term with further enhancements to the Productivity and Innovation Credit Scheme, as well as measures to enable them to spread their wings internationally.
Adrian Ball, head of tax services at Ernst & Young, believes this budget was clearly all about long-term competitiveness and trying to establish the small nation as a country of dynamic entrepreneurs and innovators. ‘It aims to position Singapore as a productivity leader with an SME base that has the ability to reap the rewards of an Asia-led growth story over the coming decades,’ he says.
According to finance minister Tharman Shanmugaratnam, Singapore remains some distance behind the most advanced economies in terms of productivity – it takes 10 Singapore workers to produce the same output as seven in the US or six in Switzerland – but Tharman reiterated the government’s aim to close that gap by raising productivity by 2% to 3% annually.
In 2010, the Economic Strategies Committee (ESC) drew up a blueprint for the economy to grow based on skills, innovation and productivity rather than by sheer increases in resources. It set new productivity growth goals of 2% to 3% a year for the next 10 years, a significant increase on the 1% growth average in the previous decade. Since then, a S$2bn National Productivity Fund has been created to help industries redesign and optimise their workflows, while the Productivity and Innovation Credit (PIC) scheme – first introduced in the 2010 Budget – has been tailored to provide significant tax deductions for investments in a broad range of activities.
This year, the government made it clear that it wants Singaporean companies to reduce their dependence on foreign workers, particularly in the manufacturing and services sectors. To this end, it announced a lowering of the dependency ratio ceilings which specify the maximum proportion of foreign workers that a company can hire; tightened criteria for work passes; and increased foreign worker levies.
Inspiration not perspiration
In trying to reduce the reliance on foreign labour, the government is acknowledging that ‘the way forward for Singapore has to be more inspiration and less perspiration,’ says Mark Tan, an economist at Goldman Sachs. ‘In other words, less of growth derived from pure accumulation of capital and labour, largely through foreign labour in recent years, and more through the increase in labour productivity and total factor productivity,’ he wrote in a research note.
The more limited access to foreign labour in an already near-full employment situation in the local labour market suggests that there will be tough times ahead for many SMEs, but the government expects that those that start redesigning jobs to attract a local workforce and manage to increase productivity will gain in the long term. ‘Necessity is the mother of invention,’ says Ball, and by restricting access to foreign labour, the government is creating ‘necessity’, forcing companies to be more creative.
Several fine-tuning measures to the PIC scheme have been announced, including ongoing programmes from earlier budgets. Wai Ho Leong, an economist at Barclays Capital, estimates that some S$1.4bn will be spent to help SMEs raise productivity and manage higher costs.
The PIC scheme currently confers a 400% tax deduction for up to S$400,000 of qualifying expenses incurred in six activities: training; research and development (R&D); investments in automation equipment; investments in design; acquisition of intellectual property (IP); and registration of IP.
In future, businesses will be given more cash upfront for their investments – a doubling from S$30,000 to S$60,000 in cash payout of a maximum total of S$100,000 of a firm’s approved PIC expenditure – and from 1 July, companies can claim payouts every quarter instead of at the end of the financial year. Additionally, there is a one-off cash grant of 5% of revenues, capped at S$5,000.
Although accountancy professionals welcome the move, pointing out that this tinkering with cash payouts will benefit companies with limited taxable income and help SMEs with their cashflow, some have suggested that the government could have been more generous. Poh Bee Tin, a tax services partner at Ernst & Young Solutions, says: ‘In light of the gloomier economic outlook, a higher cap would be more meaningful for SMEs.’
While the cash conversion or payout option might not give the same bang for its buck as taking advantage of the PIC itself against taxable income, the difference in absolute dollar amount has now become smaller, which is likely to make the cash option more appealing for a cash-strapped business. PwC Services calculates that assuming S$100,000 of qualifying PIC expenditure has been incurred by a normal taxpayer, the assumed S$68,000 of tax savings is only now a little higher than the cash payout of S$60,000, compared with the previous cap of S$30,000.
Another welcome fine-tuning measure introduced will make it easier for companies to claim PIC benefit for in-house training and allow them to claim for the cost of training agents under certain conditions. The requirement to have in-house training programmes certified by the Singapore Workforce Development Agency (WDA) or the Institute of Technical Education will now be waived and companies can make claims for in-house training costs of up to S$10,000 year.
In addition, SMEs can receive a 90% course subsidy for the upgrade of their workers’ skills through WDA and academic continuing education and training (CET) programmes, and receive more compensation from the government for the time that employees spend away from the office while attending courses. The absentee payroll cap will be increased from S$4.50 to S$7.50 an hour.
Tan Bin Eng, director of Business Incentives Advisory at Ernst & Young Solutions, describes the enhanced 90% course subsidy as ‘generous’ and ‘the icing on the cake’ for SMEs. ‘Together with the enhanced cash payout under the PIC, these measures will hopefully encourage SMEs to send more employees for training,’ he says. ‘Generous training cost subsidies will contribute to the drive towards increasing productivity.’
Another welcome bit of tinkering is the removal of the multiple sales requirement for expenditure incurred on development of computer software to qualify as R&D. Currently, the expenditure incurred on such development qualifies as R&D only if the computer software is sold, rented, leased, licensed or hired to two or more unrelated persons.
This change is ‘timely’, according to Low Hwee Chua, tax partner and head of R&D and government incentives tax services at Deloitte, who points out that ‘companies developing software for in-house purposes to improve productivity did not qualify for PIC, and this somewhat contradicted the objective of the scheme’.
Harvey Koenig, a tax partner at KPMG in Singapore, agrees, noting that this change will provide a significant boost to the services industry, which must constantly innovate to compete. But he adds that, while it is good to see that the Ministry of Finance is adopting many of the feedback suggestions given on the PIC scheme, ‘more could still be done in terms of fast-tracking the assessment process for PIC claims to boost confidence’.
Another important plank of the Budget aims to help SMEs expand overseas, with a 200% tax allowance on transaction costs related to mergers and acquisitions (M&A) such as legal and tax advisory fees, subject to a cap of S$100,000. This is in addition to the M&A allowance scheme introduced two years ago, whereby companies enjoy a tax allowance of 5% of up to S$100m of the value of the acquisition.
Kang Choon Pin, a tax partner at Ernst & Young Solutions, says that the 200% tax allowance on transaction costs is a welcome response to industry feedback, but adds that the cap of S$100,000-a-year cap is ‘too low’.
Finally, the M&A allowance scheme may be extended to foreign companies on a case-by-case basis, on review from the Economic Development Board. Gan Kwee Lian, head of M&A taxation at KPMG in Singapore, believes that this is likely to encourage more M&A activities in Singapore. ‘The availability of the M&A incentive may encourage multinational corporations to use their Singapore headquarter companies as a regional holding vehicle to complement their role as a headquarter company,’ he says.
To support the expansion of small and medium-sized enterprises (SMEs) overseas, the government has announced plans to establish a specialised project finance company. The company is expected to provide S$400m of financing annually, according to finance minister Tharman Shanmugaratnam, and it will operate in the same way as government-backed export-import banks and export credit agencies in other countries. The company, due to become operational in the second half of the year, will be formed by a consortium led by Temasek Holdings and includes DBS, Standard Chartered Bank and Sumitomo Mitsui Banking Corporation.
Sonia Kolesnikov-Jessop, journalist