This article was first published in the April 2014 Malaysia edition of Accounting and Business magazine.
This year’s Budget once again puts the emphasis on transformation, but this time the impact is intended to be just as much social as economic. While the Government has introduced more measures designed to spur business productivity and innovation, this is also a Budget that uplifts ordinary Singaporeans, with a commendable focus on funding increased social spending.
With many Singaporean companies just starting a transformation to productivity-driven and innovation-led growth, it’s encouraging to see support measures such as the Productivity and Innovation Credit scheme (PIC) enhanced and extended for three years until 2018.
Of course, incentives such as the PIC are not a silver bullet to drive behaviour, but it is important that they are made available in the longer term to allow them to gain traction, and support the still nascent efforts of Singapore businesses to become more productive and innovative.
In a further bid to boost productivity, the Government has also introduced the PIC+ scheme. Aimed at helping small and medium-sized enterprises (SMEs) with substantial investments for revamping their businesses, this is another welcome indication that this Budget is looking to up the ante when it comes to incentives for quality growth, both in terms of innovation and deeper capabilities.
Meanwhile, the extension of the research and development (R&D) tax incentive for a further 10 years to 2025 shows that the Government has responded to calls by businesses for longer-term support of their innovation efforts. The extended timeframe will give businesses a significant boost in building up their capabilities and improve their existing products and services. It is also a sign that the Government appreciates it takes time to realise the benefits of investing in innovation.
Towards a fairer society
Increased social spending has been a feature of the past few Budgets as the Government attempts to address a growing income gap.
This year is no exception, with enhanced subsidies for school-going children, increased Central Provident Fund contributions for workers and a generous S$8 billion Pioneer Generation Package of healthcare benefits designed to honour the first generation of Singaporeans who built the city state.
There’s a close link here to the Government’s productivity-focused economic strategy, with the increases in social spending intended to drive home the message that even the elderly, the ill and low-income groups will not be left behind.
As always, any new spending initiatives bring questions about how they will be funded. While the Government has traditionally used mainly tax revenue to fund such spending, operating revenue (mainly comprising tax revenue) may not be sufficient to cover these increases in the future.
With competitors in the region planning to reduce corporate tax rates (Malaysia, for example), it could be detrimental to Singapore’s competitiveness to lift corporate tax rates to fund social spending.
Meanwhile, raising individual taxes and GST also has political costs that the Government has to weigh carefully. Some may argue that the Government should, as a principle, explore more innovative ways to tackle social issues so as to keep social spending more sustainable and perhaps consider tapping other non-tax revenue sources to fund its social programmes.
Geared to growth
A tough message is contained for some businesses in the raft of measures showing the Government’s intention to press on with policy changes to position Singapore-based companies for growth based on skills, productivity and innovation.
This evolution may have a significant impact on some SMEs – with companies ultimately being forced to downsize, change industries or even close, all in the name of revitalising the SME scene.
The message to businesses is simple: they have no choice but to restructure to adjust to the realities of the new economic environment.
At the same time, the extension and enhancement of the PIC scheme raises some interesting questions about just how beneficial it has proved to be as a measure to drive innovation.
Recent KPMG research showed that the Government’s push to improve productivity has been relatively effective among Singapore businesses. However, the results have been weaker in the area of innovation-led growth statistics as the take-up of the PIC has shown that fewer than 3% of PIC claims involved R&D activities.
It may be relevant to consider whether one reason for this low take-up is the uncertain interpretation of R&D under the PIC and R&D tax incentive scheme. The question of what type of innovation is intended to be incentivised under the scheme and how it ought to be defined is important.
First of all, there should be a clearer understanding of what constitutes innovation. It is important that both the tax authority and taxpayers are aligned.
Due to the non-alignment, there is confusion over what is perceived as the policy intent of encouraging pervasive innovation in Singapore, especially for SMEs and the services sector, and the way the tax incentive for innovation is administered. We are entering the next phase of quality business growth and it is appropriate that we have more clarity in what constitutes innovation for tax purposes.
Ultimately, if businesses cannot see that there is clear and industry-focused application of the scheme that is consistent with the policy intent, the incentive will fall short of its objectives.
This points to a critical need to review how the incentives for innovation are administered in order to increase uptake among companies in Singapore.
Growth of SMEs
Also notable is this Budget’s focus on channelling resources into SMEs in order to address the specific challenges these businesses face. The slew of funding and incentive schemes range from encouraging the adoption of ICT investment, to supporting the restructuring of the construction industry.
With the enhancements to the Internationalisation Finance Scheme, and the Global Company Partnership Programme, the Budget will also boost companies’ ability to do business in regional and global markets from their Singapore base. It is a significant step, given the regional economic integration enabled by the ASEAN Economic Community 2015 master plan.
While perhaps short on headline-grabbing announcements, very few could argue that this Budget did not contain a commendable recognition of some of the challenges Singapore faces if the country is to meet the social demands of the population as well as its economic growth targets.
Singapore Budget 2014 recognises that economic and social enhancements need to go hand in hand for sustainable long-term progress – and that can only be a right step forward provided these initiatives are effectively communicated and executed.
Productivity & Innovation Credit (PIC) Scheme
- $400,000 of expenditure per YA per activity can be combined across YA 2016 to YA 2018 i.e. $1.2 million per activity
- PIC benefits allowed on training expenses on individuals hired under centralised hiring arrangements with effect from YA 2014
- Businesses to meet the 3-local-employees condition for a consecutive period of at least three months prior to claiming PIC cash payout with effect from YA 2016. From YA 2014, individuals deployed under centralised hiring arrangements also regarded as employees for purpose of the 3-local-employees condition
- Tax deferral option would lapse with effect from YA 2015
- Applicable to SMEs. An entity (sole-proprietorship, partnership and company) qualifies as an SME if its annual turnover is not more than $100 million or employment size is not more than 200 workers (criterion applied at group level). Businesses will self-assess their eligibility
- From YA 2015 to YA 2018
- Maximum $600,000 of expenditure per YA per activity, or combined expenditure cap of up to $1.2 million per activity for YA 2013 to YA 2015 with an additional $200,000 for YA 2015; and up to $1.8 million per activity for YA 2016 to YA 2018
- Same six qualifying activities as PIC
- PIC cash payout capped at $100,000 of qualifying expenditure per YA
This article is contributed by Tay Hong Beng, head of tax and Harvey Koenig, tax partner at KPMG in Singapore. The views expressed are their own