How have our R&D tax measures performed and what’s next?
By Lee Tiong Heng (Tax Partner) and Eugene Penafort (Tax Manager), Deloitte Singapore
As published in the Singapore Business Review on 27 December 2016
As the clock runs down on 2016 and with people in a reflective mood, it is perhaps the perfect time to take stock of how the Singapore Government’s PIC-R&D tax incentive has performed as the PIC scheme itself draws to a close after the end of 2017.
Since the PIC scheme was introduced in Budget 2010, Gross expenditure on R&D (GERD), which includes both public and business expenditure, in Singapore has increased steadily to a record high S$8.5 billion1 in 2014. A 30.7%2 increase on GERD figures (between 2010 and 2014) suggests efforts to transform Singapore into a knowledge-based and innovation-driven economy appear to be headed in the right direction. While there is no evidence to suggest a direct linkage, the PIC scheme has definitely brought about more awareness amongst businesses on the national push for greater R&D and innovation.
While there has been an increase in public and business R&D spending, Singapore’s R&D intensity (GERD as a percentage of GDP) has been relatively flat, fluctuating between 2% to 2.2% from 2010 till 2014. Singapore has yet to achieve the 3% target it set way back in 20063.
By comparison, the OECD’s 2014 statistics on R&D intensity shows Singapore tracking behind South Korea (4.3%4 ), Japan (3.6%3) and Taiwan (3%3) in Asia and placing 13th overall globally, behind the OECD average of 2.4%3.
Business expenditure in R&D (BERD), for which a boost was expected through enhanced R&D tax deductions under the PIC scheme, remained flat at 61%1 of GERD although the quantum of BERD increased to $5.2 billion1 in 2014 from $3.9 billion in 20105.
The vast majority of countries that ranked above Singapore boasts government support for R&D activities via broad-based tax incentives in some way, shape or form. Specifically, all 3 Asian countries that placed above Singapore encourage investment in R&D activities primarily via tax credit systems.
Overwhelmingly preferred by the majority of countries that outperformed Singapore in R&D intensity, a tax credit (computed on certain prescribed percentage of R&D spend) is an amount that a taxpayer is able to subtract directly from its taxes owed. R&D tax credit systems promote the uptake of qualifying R&D activities as the tax credit amount tends to be linked directly to the quantum of R&D undertaken regardless of a company’s tax rate while excess credit may be carried forward to set off against future tax liabilities. This provides motivation for companies to undertake R&D even if its effective tax rate is low. Taiwan offers a volume-based tax credit for eligible R&D costs while both Korea and Japan provide a hybrid mix of volume-based as well as incremental tax credits.
Singapore’s R&D tax incentives on the other hand are based on enhanced R&D tax deductions, which allows eligible R&D costs to be subtracted from a taxpayer’s tax base at an enhanced rate before the tax liability is computed.
Boosted by the PIC scheme until FY 2017, every dollar spent on R&D would qualify for enhanced tax deductions or allowances of 400%, subject to an expenditure cap of $400,000 annually. This expenditure cap is increased to $600,000 for qualifying SMEs. Eligible activities include those carried out in Singapore or overseas, performed in-house or outsourced or as part of any cost-sharing agreement, as long as the taxpayer is the beneficiary of the R&D activities.
While Singapore’s existing R&D tax measures in the form of enhanced tax deductions (more commonly known internationally as super tax deductions) provide a compelling reason for firms to invest in R&D, coupling R&D tax benefits to a company’s corporate tax rate can dis-incentivise some strategic companies in Singapore enjoying reduced tax rates from carrying out or increasing their R&D activities.
Looking at how R&D tax incentives have performed, recent data on the IRAS website reveals that between 2013 and 2015, over 1,500 companies in Singapore submitted claims for enhanced tax deductions attributable to R&D expenditure that exceeded S$3 billion. SMEs which made up 76% of R&D tax claimants, benefitted the most, with 72% of R&D claims granted in full.
Although not representative of the full period the PIC scheme has been in existence, the number of companies that have attempted to access R&D incentives pale in comparison to the 143,000 companies that have benefitted (as at 31 March 2016) from the PIC scheme in general; suggesting perhaps that existing Government’s support to share the risks of undertaking knowledge-creating activities are not quite hitting the mark.
Rome was certainly not built in a day, it took Singapore 51 years to get us to where we are, and similarly, Singapore’s R&D tax measures have not had the luxury of longevity that most other countries that ranked above us have had. Taking this into context, it is remarkable for Singapore to be ranked 13th globally in R&D intensity based on 2014 data.
Singapore’s R&D tax measures under the PIC scheme has had its fair share of critics and detractors but there has been some positive takeaways. Any company that has submitted a R&D tax claim and experienced the assessment process would likely come away with a greater appreciation for documentation and record-keeping requirement. Opportunities for discourse arose amidst differing views and opinions on the scheme, not just between the tax authorities and taxpayers but also horizontally within the industry, resulting in mutual understanding of the issues faced by most parties. In addition, companies now have increased awareness of the suite of supporting schemes available in their innovation journey.
As part of his Budget 2016 speech, Singapore’s Finance Minister Heng Swee Keat announced that the PIC scheme would be allowed to expire, in line with the Government’s Industry Transformation Programme which would instead re-direct efforts and funding in a more targeted and sectoral-focused manner.
While it is a pity that enhanced deductions available under the PIC scheme will expire after 2017, the R&D tax scheme with a much more conservative additional deduction of 150% will continue to be available for eligible R&D activities until 2024.
Deloitte publishes a global R&D tax survey each year on R&D schemes available in each country and such publication has been used by business communities globally to identify suitable locations to set up R&D operations at the global level. The 400% super deduction scheme (PIC) which propels Singapore to the top of the global map for R&D since 2011 will no longer be available to put Singapore amongst the top locations which support R&D. Attracting global operations to Singapore we believe, remains compelling for Singapore to create an eco-system of R&D and innovation.
R&D tax incentives, such as the attractive tax deduction or credit schemes, can serve to alleviate the risks of investment by businesses in risky R&D projects.
A broad-based scheme to support R&D activities across various industries and companies of various sizes is still beneficial as R&D is sometimes unplanned. Companies may not know R&D activities are required before a project has commenced. In addition, industry trends and innovations are difficult to predict; nobody can really predict where and when the next big thing may happen. Having a targeted as opposed to a broad-based regime may miss out some of these big opportunities.
A hybrid approach may be the panacea required to bridge the shortfalls of both targeted and broad-based R&D incentives. Introducing sectoral-focused R&D tax incentives can achieve this while the broad based measures encourage and support R&D activities which may fall through the crack of targeted support. The broad based measures would provide valuable data that allows the Government to remain agile, keep an eye on R&D activities and to refine and update sectoral measures in-line with market developments.
In terms of broad-based measures, other than super deduction / PIC-type schemes, R&D tax credits can be considered as the next evolution of Singapore’s R&D tax regime upon expiry of the PIC scheme. R&D tax credits are based on the volume of R&D undertaken by a company and would not disadvantage those with a lower corporate tax rate. The R&D tax credit can be tiered to provide greater support not just for companies undertaking R&D in key sectors identified but also for smaller companies, with a refundable credit introduced for those in a tax-loss position to help with cashflow. A tax credit should also provide greater certainty in claims as it is less complex and only applied below the line.
Internationally, Singapore faces stiff competition from other nations competing for R&D activities and talent to be located in their countries. Many more developed R&D tax regimes in countries like the US, Europe and Australia have super deductions, R&D credits schemes and Patent/Innovation Box schemes. Regionally, countries in ASEAN such as Malaysia, Vietnam and Thailand are taking a leaf out of Singapore’s book and have started to introduce attractive R&D tax schemes. These countries have a clear cost-advantage and Singapore can clearly ill afford the consequences from allowing our R&D tax measures to regress.
In order to continue attracting high-value creation and adding R&D and Intellectual Property (IP) related activities, Singapore should continue to position herself competitively by improving our broad-based R&D tax measures instead of rolling these back as realistically, these headline regimes would be the one of the key factors considered when companies carry out feasibility and location studies for their R&D activities.
The time is ripe to introduce further tweaks and improvements to the next evolution of our R&D tax measures.
1 National R&D Survey of Singapore 2014, Agency for Science, Technology and Research Singapore (A*STAR)
2 National R&D Survey of Singapore 2010 (A*STAR) & National R&D Survey of Singapore 2014 A*STAR)
3 Science & Technology 2010 Plan, Ministry of Trade & Industry, February 2006
4 OECD (2016), Gross domestic spending on R&D (indicator). doi: 10.1787/d8b068b4-en (Accessed on 28 November 2016) (Accessed on 02 December 2016) (Accessed on 15 December 2016)
5 National R&D Survey of Singapore 2010 (A*STAR)
6 Inland Revenue Authority of Singapore (IRAS) Annual Report FY2015-16