Budget 2018: Singapore R&D tax perks could be among world's weakest when PIC expires, says KPMG

Staff of precision-engineering firm Feinmetall Singapore at work. The company received cash help from the Productivity and Innovation Credit scheme to upgrade software, train staff and purchase new equipment. PHOTO: ST FILE

SINGAPORE (THE BUSINESS TIMES) - More targeted measures are needed for companies to drive innovation, with the expiry of the Productivity and Innovation Credit (PIC) scheme this year, said small and medium-sized enterprises (SMEs) and observers.

If not, Singapore's standing as a research and development (R&D) hub may be impacted, as well as its ability to attract and develop high-potential startups, they added.

"The expiry of the PIC scheme threatens to make Singapore's R&D tax incentive one of the least attractive globally, even as other countries enhance their R&D schemes," said Chiu Wu Hong, head of tax, KPMG.

According to an analysis by KPMG, SMEs in Hong Kong would have up to 49.5 per cent of tax savings as a percentage of R&D expenditure, while Ireland and China would have up to 37.5 per cent. Singapore is lagging behind at 25.5 per cent.

Tan Bin Eng, partner, business incentives advisory leader, Ernst & Young Solutions LLP, concurred that other countries are fast nipping at Singapore's heels. She said: "Given the intensifying global competition to tap the explosive growth in innovation activities that is transforming economies, there is now greater urgency for Singapore to address this issue."

With the expiry of the PIC scheme this year, SMEs will lose out on a valuable resource they could tap for cash and tax deductions on automation and digital equipment, worker training, as well as R&D initiatives - areas that they need to focus on for business transformation.

"We are worried about the PIC expiring. We want PIC in the current form as it's an easier approach to productivity enhancement," said M Palaniappan, managing director of SME Axis Engineering.

He had previously used the scheme for staff training and to buy machines, and found the process to be straightforward.

Christine Lim, managing director of food distributor San SeSan Global, had to shelve plans to upgrade to an enterprise resource planning (ERP) system at the end of 2017. As its financial year-end was March 2017, the business was unable to make use of the PIC grant.

"It affected our decision to invest in new systems, software and hardware as now we will have to bear 100 per cent of the costs," she said, even as she is accepting about the scheme's expiry.

But despite the PIC scheme's popularity, it is unlikely for the broad-based PIC scheme to be continued, as the government had made clear its intention to move in the direction of more targeted, industry-specific measures.

Alvin Ea, CEO of Hub Logistics, said: "We've prepared ourselves for this, hence the issue is not that bad. But continuity in PIC is always better for us."

The PIC scheme remains the top government scheme used by 85.4 per cent of businesses in 2017, according to a report by the Singapore Chinese Chamber of Commerce and Industry (SCCCI).

But while industry transformation maps and current R&D tax incentives may help to fill the void for innovation, industry watchers say that much more must be done.

Some pre-Budget 2018 wishlists submitted to the government include tax incentives and further streamlining of processes to make it easier and more affordable for SMEs to undertake R&D.

They also argue that the expiry of the PIC scheme could potentially place a dent on Singapore's ambitions to attract and develop high-potential startups, if there are no further moves to bolster innovation.

There have been growing calls by the Singapore Business Federation-led SME Committee (SMEC) to focus on "unicorns" - or startups valued at over US$1 billion - as a growth strategy for Singapore in the upcoming Budget.

The hope is either to groom or attract the next Grab and to hail it as a Singapore brand.

But attracting big and successful startups is not just for the sake of novelty, but also for jobs, said Lawrence Leow, chairman of the SMEC.

"Grab is Malaysian, but it's seen as a Singapore company. If we start looking into this, we're going to have a lot of these unicorns here. The potential to the economy will be very positive. Once they're here, they create jobs, they create a lot of other spinoffs," he said.

To attract these high-potential startups over, as well as for Singapore's own enterprises to get a lift, securing the right talent is key.

While surveys have shown that businesses are getting used to a manpower-lean environment, the lack of talent in the right skills could potentially stall growth in companies.

Both the Singapore Business Federation and KPMG had earlier suggested that manpower policies can be adjusted to meet the needs of firms keen to move into emerging growth areas, but are still lacking in those skills.

San SeSan Global's Ms Lim said that her hope is for the government to support resource-strapped SMEs to "hire more workers and create more job opportunities".

"Our challenge is to be able to attract higher calibre people at reasonable wages, as they tend to work for bigger companies. We may not be able to match the salaries, but we have to be able to try to attract them in other ways," she explained.

Lee Seng Shoy, managing director of fishing equipment distributor Hong Guan (Tackle), hopes for manpower levies to be reduced, as well as for the foreign manpower quota to either loosen or to be more industry-specific rather than a blanket policy.

Finally, another chief concern weighing heavily on the minds of SMEs is the prospect of tax hikes.

A rise in taxes could hurt consumer sentiment and curb retail spending, reversing what little progress that has been made in the past year.

The goods and services tax (GST) - which has remained at 7 per cent since 2007 - is widely seen as the top candidate for a hike. With the economic recovery still fragile, businesses worry about the potential implications.

"Raising the GST will fizzle any hopes of a recovery for Singapore's retail sector," said Ms Lim. However, she welcomed the establishment of GST for e-commerce transactions, which she believes is "reasonable".

Levying GST on foreign online players could level the playing field for local businesses, as goods purchases that amount to less than S$400 and digital services from e-commerce firms based abroad are currently exempt from GST.

But e-commerce taxes aside, SMEs hope for the others - GST, personal income, and corporate tax, in particular - to remain status quo.

"We are already one of the most expensive cities in the world to run a business… I am not asking the government for handouts - I am simply asking (for) a breather," said Mr Lee.

Goh Seng Wee, managing director of venture capital firm Brain-Too-Free Ventures, also expressed concern that it might slow down SMEs' restructuring efforts.

Tax hikes of any form, however necessary they are to raise revenue to spend on essential areas such as healthcare or education, will "inevitably add more weight and burdens" on corporations, he said.

This could result in lesser capacity for SMEs to invest in their transformation efforts, he added.

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