This is the big trouble with R&D tax initiatives in Singapore

SMEs can’t make the most of these schemes.

Singapore boasts one of the world’s most competitive tax regimes when it comes to fostering research and development (R&D), but small and medium enterprises (SMEs) in the city-state simply seem unable to make the most out of the generous tax cuts

Under the popular Productivity & Innovation Credit (PIC) scheme, every dollar spent on qualifying activities—including R&D initiatives—would qualify for enhanced tax deductions or allowances of 400%, subject to an expenditure cap of $400,000, per activity per year of assessment (YA). This cap is increased to $600,000 for qualifying SMEs.

However, data from the Inland Revenue Authority of Singapore (IRAS) show that in 2012/2013, a mere 3% of all PIC claims were related to R&D and other qualifying activities. 

In EY’s wishlist for Budget 2016, analysts noted that the low percentage of R&D-related claims might be linked to the cumbersome process of applying for tax incentives under the scheme.

EY noted that taxpayers have encountered significant administrative hurdles in their R&D claims, including multiple rounds of queries and protracted discussions with the IRAS on the technical eligibility of the projects.

EY suggested that there should be more urgent efforts to bridge the gap between policy and implementation of the R&D tax incentives, which will be critical in fulfilling the city-state’s goal of driving widespread innovation.

“We propose that an IRAS technical evaluation team with broad technical or industry expertise reviews the technical eligibility of the projects from the start, raises queries on the technical eligibility to the taxpayer, and assesses the technical eligibility of the projects,” said Tan Bin Eng, Partner, Business Incentives Advisory, Ernst & Young Solutions LLP.

She added that this team could potentially be seconded from existing industry or economic government agencies so that tax deduction claims can be processed more easily and efficiently.

“Such arrangement will alleviate issues of confidentiality and ensure that the taxpayer is engaging with officers who have the general technical background to appreciate and understand the technical discussions of the R&D project,” she said.

Apart from faster processing of R&D tax deduction claims, Tan also suggested that the PIC scheme could be tweaked by potentially reallocating the support for the automation equipment segment, which accounts for a significant portion of the total PIC expenditure claim, to other categories. 

“This is to ensure that the scheme supports companies that undertake productivity leap-throughs via true automation and R&D, rather than those that make incremental steps or use the subsidies to reduce ‘business-as-usual’ costs,” she said.

“The government may wish to consider a more realistic definition of R&D, taking into account the current state of technology and level of innovation, so that businesses are incentivised to proactively consider process improvements or new ways of doing things. Further, additional tax benefits could be given for R&D that results in truly novel products and outcomes,” Tan added.