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Putting businesses on the path to innovation 

15 February 2013
Even as the government ponders the best way to encourage businesses to innovate, how should the government define innovation?

The answer may seem obvious – innovation is the introduction of something new, such as an idea, method or device. But should innovation refer equally to both the creation of something new, as well as to improvements to pre-existing products, methods or ideas that lead to increases in productivity or profits?

This distinction is important because it can shape government incentives that promote innovation and productivity. And incentives that target a broad range of innovative activities tend to have broader impact.

Singapore’s government rightly recognises innovation as a critical growth factor for the economy – as evidenced by its aim to raise research and development (R&D) spending to 3.5 percent of gross domestic product (GDP) by 2015. But the government should consider broadening the scope of activities it considers “innovative” as it prepares its upcoming budget.

To be sure, Singapore is already encouraging innovation through the Productivity and Innovation Credit (PIC) scheme. It offers tax benefits to businesses investing in design and R&D. For example, the scheme provides a generous 400 percent tax deduction (providing an after-tax benefit of up to 68 percent) for up to $1.2 million of expenditure for the Years of Assessment 2013 to 2015, or a 60 percent cash grant for up to $100,000 of expenditure annually.

The trouble is – many businesses are not taking advantage of these incentives.

Some of the reasons for lack of take-up have been discussed at length. For instance, we have found that many Singapore businesses are now more aware of the PIC benefits applying to training and purchase of automation equipment, but many more don’t apply for PIC tax benefits for their innovative activities simply due to a lack of awareness of how the benefits would affect them.

Another issue is the lack of time and resources devoted to navigating the PIC scheme’s administrative processes by many small-to-medium sized enterprises (SMEs). The government has taken efforts to better publicise the PIC through seminars and PIC clinics, and this has to continue.

An equally critical issue concerns the scope of activities the government considers innovative. The Oslo Manual, published by the Organisation for Economic Cooperation and Development (OECD) and an authoritative source on innovation, defines innovation broadly as the implementation of a new or significantly improved product (goods or services), or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations. Referring to the technological aspect of innovation, innovation can be broadly defined as the implementation of a new or significantly improved product (goods or service) or process. This definition recognises that R&D is only one source of innovation.

By contrast, Singapore currently incentivises innovation only through R&D or design activities. Although the current definition of R&D for PIC purposes intends to target activities beyond those carried out in laboratories, it may still not address innovations happening at the firm or market level. Smaller companies, in particular, may pursue activities genuinely innovative but not considered as such by the PIC. For example, a firm may implement a “go paperless” project through innovative workflow redesign using existing IT solutions, but this may not qualify as a R&D project under the PIC program because the innovation does not involve scientific or technological novelty or technical risks.

Other examples of unconventional innovation include a restaurant that designs a new facebook application to generate new and loyal customers, or a retailer that implements a new technology application to use information about consumer spending habits to design more timely promotions. These applications may be innovative in concept and ideas, but do not require new technological breakthroughs.

These kinds of activities may lead to large gains in productivity – but they may be risky and involve extra costs. Indeed, in KPMG’s recent pre-budget 2013 survey, many respondents indicated that undertaking innovation activities is risky, and greater government support for such undertakings is warranted.

To provide greater support for innovation at the firm level, and especially for smaller companies that may find it difficult to qualify for the incentive, the following proposals to tweak the PIC scheme could be considered:

  • Rebrand the current R&D incentive as an “Innovation” incentive to improve awareness of the incentive.

  • For the purposes of the PIC, tweak the current R&D definition (or replace this with a definition of Innovation) to allow firm level innovations to qualify as R&D activities under the PIC. Firm level innovations are innovations that are new to the firm, and these would apply to innovations to goods, services and processes. In contrast, the current definition considers only scientific or technological innovation at the national level, a condition which many smaller companies find difficulty meeting. This expanded definition would not be applicable to the broader R&D tax incentive (which provides a 150 percent tax deduction) to focus the benefits on smaller companies.

  • Increase the cash payout limit on the PIC. Currently, on an annual basis, companies are allowed to receive a 60 percent cash grant on a total of $100,000 of eligible expenditure, comprising costs on various expenditure such as automation equipment, training, purchase of intellectual property etc. The overall cash payout limit should be increased to provide more scope for claims across all qualifying activities.

  • Alternatively, there should be separate cash payout limits for innovation-related activities to reflect the total innovation cost, which not only includes R&D, but intellectual property registration and acquisition and other activities.

  • Provide flexibility for the cash payout to be claimed by companies with less than three employees, in view that many start-ups are owner-run with few or no employees at the start-up phase.

These would encourage innovation to put Singapore businesses on the path to greater innovation in products, services and processes.

This article is contributed by Harvey Koenig, Tax Partner, and Lynton Peters, Manager at KPMG in Singapore. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in Singapore.