Need to send clear signal on R&D to businesses
By Daniel Ho, Director of Taxes and Mael Garner, Manager, R&D Tax Services at Deloitte Singapore
This article was first published in Business Times on 13 February 2014
It is widely accepted that research and development (R&D) is a fundamental driver of productivity, particularly in knowledge-based economies like Singapore. R&D results in the creation of new products or processes or improves existing products or processes that can help to significantly boost the growth of a business.
Also, R&D upgrades the level of knowledge in an economy and skills of its workforce. The question is whether R&D is as pervasive currently as the Singapore government wants it to be.
There is a general misconception that R&D involves scientists huddling in a laboratory and engaging in highly complex, cutting-edge research.
The definition of R&D under Singapore's R&D tax incentive regime is actually much broader than that - it covers any systematic, investigative and experimental study that involves novelty or technical risk carried out in the field of science or technology, the objective of which is to acquire new knowledge or use the results for production or improvement of products or processes.
Usual productivity rhetoric aside, we only need glance at the numbers to see how well we have performed.
Since enhanced R&D incentives became available as part of the government's Productivity and Innovation Credit (PIC) scheme in 2010, Singapore's Agency for Science, Technology and Research's (A-Star) yearly survey on R&D reveals conservative growth in Business Expenditure on R&D figures as a percentage of gross domestic product.
From 1.27 per cent in 2010, growth in R&D spending rose marginally to 1.4 per cent in 2011 and then dipped to 1.3 per cent in 2012, indicating that the journey to achieving R&D and productivity targets is more of a marathon rather than a sprint.
Furthermore, statistics from the Inland Revenue Authority of Singapore (Iras) show that R&D tax claims accounted for less than 3 per cent of all PIC claims in the 2012/13 financial year. This is despite attractive R&D incentives under the PIC scheme and the domestic tax regime on top of the PIC bonus announced during Budget 2013.
Compared with R&D tax regimes in other jurisdictions, Singapore offers quite a compelling reason for businesses to undertake R&D. As part of the PIC scheme, a 400 per cent super deduction (up to a cap of $400,000 per year) is available to companies undertaking R&D while growing businesses that are cash-constrained can opt for a 60 per cent cash payout, although this is based on a cap of only $100,000 per year.
In addition, there is 150 per cent tax deduction for R&D spending in excess of the PIC cap of $400,000 per year, if the R&D is conducted in Singapore. In comparison, the UK offers super deduction of 130 per cent for large companies (such companies will likely go for the alternative 10 per cent tax credit which takes effect from 2013), and 225 per cent super deduction for SMEs, subject to a cap.
The term "novelty" for Singapore R&D purposes is broadly defined against the Singaporean context (as opposed to, say, a product being first-of-its-kind globally), while recent amendments in the rules have also broadened the regime to include software-related R&D for businesses including those in the financial services industry.
However, as with any scheme in its infancy, the regime is not without its fair share of teething problems.
Firstly, the assessment of R&D tax claims requires unique skillsets in the field of science and technology that might be better suited to assessors with technical backgrounds and who are specifically trained.
Currently the claims are vetted by Iras as part of income tax assessment and run the risk of being rejected due to a lack of understanding of the "novelty or technical risk" involved in each project.
Iras can consider tapping the technical expertise of the Economic Development Board (EDB) and Spring Singapore while retaining responsibility for the financial aspect of each claim.
This is because EDB and Spring Singapore have a wealth of experience in assessing grant-like applications for R&D or similar project funding and perhaps may be more suited to assess the technical aspects of the R&D claims. This should bring the administration of Singapore's R&D regime to be more in line with mature R&D schemes in countries such as Australia, which separates the technical assessment of R&D tax claims from the financial component.
To its credit, Iras has recently beefed up its technical capability by setting up a panel of experts, although it is still unclear how this panel can be consulted by taxpayers.
The impending expiry of enhanced R&D tax deductions at the end of this year gives the government the perfect opportunity to provide some certainty to businesses that are only beginning to reap the rewards of their recent investments in R&D and seeking to do more.
While most would be contented for the R&D scheme to be extended for a few more years, Singapore can send a strong signal to businesses by making R&D tax incentives permanent. The quantum of applicable incentives can be fine-tuned and R&D criteria periodically refined as and when needed, but the permanency of such a scheme will put Singapore on the right path for its aspirations to be an R&D hub.
In addition, an increase in the cap for cash payout for R&D spending to $400,000 (aligned with the cap for super deduction) should be welcome relief, especially for SMEs that do not pay much tax or are suffering temporary losses in the midst of spending on innovation to upgrade their products or processes.
There should also be better clarity in the claims procedure. Reflecting the broad reach of the R&D tax schemes, we have seen a wide range of firms in telecommunications, engineering, healthcare, financial services industries, submitting claims for R&D-related activities. Most of these firms are still awaiting the formal outcomes of their claims.
As we approach a crossroads for R&D tax incentives here, there is no better time for the government to send a clear signal to businesses that it will continue to support R&D and innovation as Singapore continues to evolve towards a knowledge- based economy with human capital and intellectual property as the nation's key assets.
Firms, on the other hand, must recognise that R&D can play an important part in sustaining long-term profitability and transforming their businesses for the economic restructuring ahead.