Singapore Budget 2015: Investing in companies amid restructuring

SINGAPORE - Budget 2015 unveiled measures to "sharpen" support to businesses that are making significant effort to raise productivity, especially by innovating and internationalising.

"Most of our firms are now engaged in thinking about productivity, and many are already adopting basic solutions. But we have to go beyond basic solutions, with a critical mass of businesses in each sector going for more significant breakthroughs in the way business is done," Deputy Prime Minister Tharman Shanmugaratnam said in his Budget speech on Monday.

In the next phase of restructuring, the Government will keep up its broad-based support for productivity but increase support for efforts to innovate, in all forms - new ways of reaching customers, devising a new design or brand; or creating value through major re-skilling of employees and a radical overhaul in the way work is done.

1. Gradual phasing out of Transition Support Package (TSP)

The TSP has been an important source of support to businesses since it was launched in 2013. It has three components: the Wage Credit Scheme, Corporate Income Tax Rebate, and Productivity and Innovation Credit Bonus (PIC Bonus).

It is due to expire this year, but the Government recognises that firms may need more time to adjust to rising costs as they restructure, Mr Tharman said. It will thus phase the transitional support out gradually by extending the WCS and CIT Rebate for two additional years, while letting the PIC Bonus expire.

The Government will extend the Wage Credit Scheme until 2017. During this time, the Government will co-fund 20 per cent of wage increases given to Singaporean employees earning a gross monthly wage of $4,000 and below.

This co-funding will apply to wage increases given in 2016 and 2017, over the employee's wage level in the preceding year. In addition, if wage increases given this year are sustained in 2016 and 2017, employers will continue to receive co-founding, at the new rate of 20 per cent.

The Government will extend the Corporate Income Tax rebate for Years of Assessment 2016 and 2017 at the same rate of 30 per cent of tax payable, but up to a lower cap of $20,000 a year. The reduced cap will ensure that more support is focused on small and medium-sized enterprises (SMEs), Mr Tharman noted.

2. Offsetting CPF changes

Last year, the Government announced a one-year Temporary Employment Credit (TEC), which provides employers an offset of 0.5 per cent of wages to help them adjust to the increase in Medisave contribution rates which took effect in January this year.

This year, it will enhance the TEC in two ways:

First, it will raise the TEC to 1 per cent of wages this year. This will provide additional support to firms for their labour costs, or an extra 0.5 percentage points on top of what was announced last year.

Second, the Government will extend the TEC by two years, to help employers adjust to the cost increases due to additional CPF changes, which include increased contribution rates for older workers.

These new changes will take effect from January next year. The Government will give an additional TEC of 1 per cent of wages next year and 0.5 per cent of wages in 2017.

In essence, the extension of the TEC will offset two-thirds of the employers' costs due to CPF changes next year, and one-third in 2017.

3. Recalibrating foreign worker levies

The Government will defer this year's round of announced levy increases for S Pass and Work Permit Holders in every sector.

Except in the construction sector, the net inflow of foreign workers has slowed significantly from 60,000 in 2011 to just over 16,000 last year (excluding foreign domestic workers), Mr Tharman noted. In the construction sector, the growth was around 10,000 last year, far below that recorded in the previous two years.

"The significant slowdown we have seen in the last year gives us space to adjust the pace of our tightening measures," he said.

In the manufacturing sector, there has been no increase in the number of work permit holders over the past year. The sector is also making good progress on productivity, Mr Tharman said.

The Government will therefore keep the current levy rates unchanged for two more years - this year and next - for work permit holders in the manufacturing sector.

4. Strengthening support for innovation

The Government will strengthen grant support for every form of innovation and help firms capture greater value from research and development (R&D). It also aims to catalyse enterprise financing, which can be especially useful for small businesses attempting breakthroughs.

To begin with, the Government will make it easier for SMEs who are engaging in innovation to apply to Spring Singapore for the Capability Development Grant (CDG), which supports a wide range of innovation activities from developing intellectual properties to new brands.

It will simplify the application process for projects below $30,000. It will also extend the enhanced funding support level, of up to 70 per cent of costs, for three more years, to 31 March 2018.

The Government will also expand Spring's Collaborative Industry Projects (CIP) which incentivises industry players and partners such as trade associations to work with SMEs to develop productive and innovative solutions that are scalable across the industry.

It will also extend and enhance the Pact scheme (Partnerships for Capability Transformation) to foster collaboration between large companies and SMEs in their supply chain.

As part of efforts to continue to invest in R&D and fund future efforts, the Government will top up the National Research Fund by $1 billion this year.

5. Catalysing Enterprise Financing

First, the Government aims to reduce early-stage funding gaps for start-ups. It will increase the co-investment cap for Spring's Startup Enterprise Development Scheme (Seeds) and Business Angel Scheme (BAS), to catalyse more funds for start-ups with greater funding needs.

The Government will also top up the BAS to partner more angel investors with experience in nurturing innovative start-ups.

Second, the Government will pilot a venture debt risk-sharing programme with selected financial institutions. This programme aims to provide high-growth companies with an alternative to equity financing and traditional bank loans.

Venture debt typically requires minimal collateral as lenders instead receive equity options to share in the company's future growth. Spring will provide 50 per cent risk sharing with selected financial institutions for such loans over an initial period of two years.

Over this period, the Government aims to catalyse about 100 venture debt loans, totalling approximately $500 million.

6. Going beyond our shores

To support companies' internationalisation efforts, the Government will first raise the support level for SMEs for all activities under IE Singapore's grant schemes from 50 per cent to 70 per cent for three years.

Second, it will enhance the Double Tax Deduction for Internationalisation scheme to cover salaries incurred for Singaporeans posted overseas. This will provide greater support to companies venturing overseas, by co-sharing their risks and initial costs of expanding overseas, as well as creating skilled jobs for Singaporeans.

Third, the Government will introduce a new tax incentive, the International Growth Scheme (IGS), to provide support to meet the needs of larger Singapore companies in their internationalisation efforts.

Qualifying companies will enjoy a 10 per cent concessionary tax rate on their incremental income from qualifying activities.

It will encourage more Singapore companies to expand overseas, while anchoring their key business activities and headquarters in Singapore, Mr Tharman said.

7. Encouraging scale

Finally, the Government will help spur Mergers and Acquisitions (M&A). This is a useful strategy for many companies to acquire scale, attract talent, and compete effectively overseas, Mr Tharman noted.

First, the Government will increase the tax allowance for acquisition costs from the current 5 per cent to 25 per cent of the value of acquisition. Companies would be able to claim M&A benefits for acquisitions resulting in at least 20 per cent shareholding in the target company, down from the current threshold of 50 per cent shareholding.

"This will be especially helpful for SMEs, who may not be able to acquire large stakes in their expansion strategies," Mr Tharman said.

The Government will also extend the M&A scheme introduced in 2010 for another five years.

Second, it will extend the scope of IE Singapore's Internationalisation Finance Scheme (IFS) to support M&A that will aid a company's overseas expansion.