|It has been two years since the government announced its long term economic strategy of improving productivity in Singapore. In view that the emphasis would be to sustain Singapore's long term competitiveness, this productivity story seems likely to feature strongly again in Budget 2012.
The goal of this strategy involves raising productivity at a rate of three percent annually over ten years. The three key tools to achieve this aim are:
(a) the Productivity and Innovation Credit (PIC) scheme;
(b) the National Productivity Fund; and
(c) increasing foreign worker levies.
Among the three tools, the PIC scheme has the most potential to drive productivity gains across all industries due to its broad relevance.
The PIC scheme is unprecedented in its scale, coverage and benefits. This highly generous scheme effectively subsidises up to two-thirds of qualifying expenditure on productivity and innovation by way of tax benefits. Qualifying activities include staff training, investments in automation equipment, design, registration and purchase of intellectual property rights, and research and development (R&D). It even applies in cases where a business has benefitted from other government grants as the benefits will be computed on the amount of expenditure net of government grants.
That's not all. The PIC scheme also allows an enterprise to defer payment of their taxes, and allows a portion of the tax benefits to be claimed in cash.
However, despite its generous benefits and efforts of the government to publicise the scheme, the active take-up rate of the scheme appears to be lower than expected.
Most businesses simply leave their tax agents at tax filing time to make a claim for the PIC scheme's benefits on the obvious expenditure such as training and purchases of computer and software. This leaves little time for tax advisors to help their clients make better use of the scheme.
Besides missing out on opportunities to improve productivity in their businesses, many businesses are also missing out on claims for existing initiatives.
So, why are businesses not making better use of the scheme?When we work with businesses on the claims under the PIC scheme, the usual question is: When will we know that the claims are accepted? Unlike applications for government grants, where the application status would be known within a matter of months, the PIC claims are assessed under the usual timelines that tax returns are assessed. This means that claims could take as long as four years to be considered as finalised. When businesses realise this, enthusiasm ebbs.
As it takes time and effort to compile a PIC claim, it becomes hard to justify the additional effort if there is no assurance that the claims would be successful. If businesses were successful in their claims, they tend to be more confident at making PIC claims in the following years.
The government could therefore consider a fast-tracked assessment process for PIC claims. This could for example, entail the Inland Revenue Authority of Singapore (IRAS) providing a final assessment for the PIC claims within three months of submission of the tax returns or six months for more complicated cases. To further streamline the process, the IRAS could also allow businesses to submit their PIC claims for a binding evaluation before submission of the tax returns. This is to help businesses in the planning stage of a new productivity or innovation initiative.Currently, a business may convert up to $100,000 of its eligible PIC expenditure into cash on an annual basis at a rate of 30 percent. Hence, for $100,000 of expenditure, the business may apply to the IRAS to receive cash of $30,000 in lieu of tax benefits.
However, the cash benefit is small compared to the potential benefit of up to $68,000 in terms of tax savings. With the low conversion rate, the cash benefit option would make sense only in cases where the business has significant amount of tax losses, or when its effective tax rate is below 7.5 percent.
When the economy slows and businesses cut costs, it can be hard to justify new investments. In order to encourage businesses to continue investing in innovation and productivity measures — especially with smaller companies where cashflow could be an issue — the cash conversion rate should be increased.The use of technology is one of the key drivers of innovation and productivity in many businesses today. In the service sector, where high quality customer service is not just an aim but a necessity, businesses must constantly innovate to raise customer service to new levels. For many projects in the service industry, significant innovation and R&D efforts are invested to utilise technology to deliver new or improved service offerings or customer experiences.
Unfortunately, a restriction under the PIC scheme states that software development projects must ultimately be licenced or sold to external parties. This is called the 'multiple sale' condition, and some projects utilising technology cannot qualify for the PIC scheme. Examples of such projects may include developing customer analytics software, or simply improving internal processes that enhance productivity of front-line staff such as in a travel agency.
The multiple sale condition should therefore be reviewed to ensure the PIC scheme's relevance to the services sector.While the PIC scheme is broad in its scope, the range of expenditure that can qualify is unfortunately restrictive and not always reflective of the degree of investment required. For example, for internal training, only expenditure relating to time spent by the trainer qualifies, while preparation time does not. For R&D, there are significant costs relating to direct overheads (such as utilities, rents for R&D personnel), royalties and equipment that must be incurred. However, as these are not qualifying expenditure, unlike R&D schemes offered in countries such as Australia and Ireland and to an extent, the United Kingdom. The list of expenditure qualifying under the PIC should therefore be reviewed.With the Budget Statement due to be delivered shortly, we hope that the above issues can be addressed to firmly put the productivity strategy on track even with the anticipated economic slowdown.
Harvey Koenig is a Partner and Ho Kah Chuan a Senior Manager, both of Tax Services at KPMG in Singapore.