New acronym to “EIS” (ease) your innovation journey

New acronym to “EIS” (ease) your innovation journey

One of the very few things that Singapore is infamous for is an overuse of acronyms. Singapore Budget 2023 introduced a new one—EIS—that would be EIS-y (read: easy) on the ears of business owners and leaders.

The Enterprise Innovation Scheme announced during Budget 2023 looks set to be a game changer for businesses stuck between the crucial need to innovate to stay competitive and tackling rising costs amid a tight labour market.

As Deputy Prime Minister and Finance Minister Lawrence Wong said, innovation is not without risk; and with geopolitical uncertainties and headwinds added to the mix, investing in innovation may be a difficult move to make for many.

The EIS appears to tip the scales in the right direction by significantly enhancing tax deductions and providing a cash payout option for five key activities along the innovation value chain.

Research and development conducted in Singapore, registration of intellectual property (IP) (including patents, trademarks, and designs), acquisition and licensing of IP rights, and training via approved courses will now enjoy a 400 per cent tax deduction on the first S$400,000 of qualifying expenditure. Collaborative innovation with polytechnics, the Institute of Technical Education or other qualified partners (collectively referred to as partner institutions) will also enjoy the tax deduction but with a lower cap of S$50,000.

R&D tax

The enhanced deduction on R&D expenditure is a significant boost to Singapore's R&D tax regime and should help strengthen local innovation and encourage companies to maintain or increase their investments in R&D activities in the Republic.

More importantly, it will benefit small and medium enterprises the most, as they will make up the majority of claimants. According to recent data from the Inland Revenue Authority of Singapore, 83 per cent of R&D tax claims by SMEs are approved in full.

In addition, with the EIS in place, multinational enterprises evaluating the feasibility of undertaking R&D activities in the region would likely consider Singapore a very attractive option compared to other jurisdictions, especially when viewed together with the availability of a skilled workforce and the ease of doing business in the city-state.

The enhanced R&D tax deductions available as part of the EIS are currently limited to expenditure on staff costs and consumables incurred on qualifying R&D activities conducted in Singapore. While such generous support should help soften the impact of rising labour and material costs, the finance ministry could consider widening the scope of qualifying costs to include overheads. This would be particularly beneficial for companies facing increasing energy costs, which represent a significant portion of their overhead expenses.

IP registration, acquisition, and licensing

The proposed enhancements to tax deductions for expenses related to IP registration, acquisition and licensing are aligned with the Singapore IP Strategy 2030 plan, which aims to support enterprises in creating, protecting, managing and commercialising their IP.

These enhancements will strengthen Singapore's IP ecosystem and enable companies to leverage their IP for continued innovation and future value creation. Specifically, the increased tax deductions on qualifying expenditure related to IP rights acquisition and licensing will benefit SMEs and most other companies, as the 400 per cent tax deduction is only available to businesses generating less than S$500 million in annual revenue.

While these would hopefully enable businesses to better leverage IP for growth, there are some requirements for companies to benefit from the enhancements.

Currently, companies must acquire both legal and economic ownership of qualifying IP Rights to claim writing-down allowances, unless a waiver of the legal ownership requirement is approved by the Singapore Economic Development Board on a case-by-case basis.

Training

Building on the government's SkillsFuture initiative, significantly enhanced deductions for training expenses incurred on qualifying training courses will further encourage both businesses and their people to continually upskill and reskill to take advantage of opportunities in an increasingly dynamic and unpredictable world.

Leveraging SkillsFuture and the Skills Framework to curate eligible courses is a smart move as it enables potential skill gaps to be filled and for skill sets required in high-demand sectors such as the green, digital and care economies to be prioritised.

Encouraging collaboration between innovative companies and partner institutions through the introduction of enhanced deductions on expenses incurred for qualifying innovation projects could potentially be another excellent move.

This arrangement would not only help companies facing challenges in hiring R&D personnel for their projects, but also provide students from partner institutions with the opportunity to collaborate with these firms on R&D projects. This will give the next generation of Singapore's skilled workforce valuable hands-on experience.

Combining academic expertise with professional experience and deep domain knowledge can help businesses at the beginning of their innovation journey to flatten the steep learning curve.

It is slightly disappointing, however, that qualifying innovation expenditure is capped at S$50,000 and restricted to a limited list of innovation activities. While oversight of the activities is understandable given the need to focus R&D efforts on key priority areas, the expenditure cap may limit the depth and breadth of R&D projects.

Summary

As many have noted, the EIS has similarities to the popular Productivity & Innovation Credit scheme (PIC). However, it remains to be seen if the EIS will meet expectations.

The government's cautious optimism with the new scheme is a positive sign, with measures in place to support local innovation, while ensuring that eligible individuals are trained and costs are controlled.

The option of a cash payout with the EIS will greatly benefit smaller firms at the early stages of their innovation lifecycle that may not yet be profitable, or those that pay little to no tax.

The option for the cash payout currently applies across all five EIS qualifying activities and is capped at 20 per cent of the first S$100,000 in qualifying expenses. That said, companies would prefer a higher percentage of their expenses to be convertible or have a higher cap given rising business costs. This is in contrast with the PIC that allowed companies to convert up to S$100,000 of their qualifying expenditure at a cash payout rate of 60 per cent each year.

In the EIS, the government has made clear its intent to embed a culture of innovation and continuous learning across the entire innovation value chain, building on the vibrant IP ecosystem it has cultivated. Businesses that press on with their innovation journey in an increasingly dynamic and volatile world will continue to face headwinds, but the EIS should make the ride a little EIS-ier.