After Productivity and Innovation Credit's success, it's time to enhance the scheme so that more firms can benefit from it

'PRODUCTIVITY is the magic elixir of economic progress,' former US Federal Reserve chairman Alan Greenspan once said. And it is with this spirit that Singapore is embracing productivity.

It is no accident that productivity has emerged as a main theme in Singapore's past two fiscal budgets. This push to produce goods and services better, smarter and faster signifies a concerted effort to move Singapore up the innovation ladder and achieve sustained economic development.

In Budget 2010, the government announced its key goal to grow productivity by 2 per cent to 3 per cent a year over the next decade. With this in mind, a multitude of initiatives in the form of tax benefits, grants and training subsidies were introduced.

That saw the birth of the Productivity and Innovation Credit (PIC) scheme. Then, the PIC offered a 250 per cent tax deduction or allowance of up to $300,000 on qualifying spending invested in six categories of activities along the innovation value chain: research and development (R&D), registration of intellectual property (IP) rights, acquisition of IP rights, design activities, automation through technology or software, and training of employees. Companies could also tap a 150 per cent enhanced deduction for R&D spending should they exceed the $300,000 cap.

Although the PIC scheme is a broad-based incentive available to all companies, it was designed to be more attractive for small and medium-sized enterprises (SMEs).

In Budget 2011, significant enhancements were made to the PIC scheme:

The 250 per cent enhanced tax deduction or allowance was increased to 400 per cent

The cap of $300,000 per activity was increased to $400,000

PIC benefits were extended to R&D done abroad

The expenditure cap can be combined for years of assessment (YAs) 2011 and 2012 at $800,000 and 2013 to 2015 at $1.2 million

The cash conversion option was simplified and enhanced

Deferral of up to $100,000 of tax payable relating to PIC spending, to the following year to finance future spending.

Refinements from practical experience

Based on our recent experience in assisting clients with their tax returns for the YA 2011, the PIC has been a success in terms of awareness and reach. With Budget 2012 coming up, it would be an opportune time to enhance the PIC in the following ways, so that more companies can take advantage of the scheme:

Cash conversion option

Increase the quantum of cash payout for SMEs to provide additional aid for those in need of cash: Currently, the maximum cash payout is limited to $30,000. Increasing the cash payout would be relevant and timely in view of the potential economic crunch, which could limit the effectiveness of the tax deductions under the PIC.

Allow the full tax-deduction value to be encashed: The cash payout is currently converted based on 30 per cent of the maximum deduction quantum of $100,000. This is at a discount to the tax deduction value. We hope that the government can increase the current conversion rate of 30 per cent such that the full tax-deduction value can be converted to cash. This would effectively put cash back into the hands of SMEs to ensure that they continue to invest in productivity initiatives.

Training of employees

Broaden the qualifying in-house training expenditure to include internal training that need not be certified by Workforce Skills Qualification or Institute of Technical Education: Many internal training programmes to upgrade the knowledge, skills and productivity of employees are not accredited or approved. We hope the government will include such training programmes under the PIC scheme if the companies can furnish the objective and syllabus covered in the programmes to demonstrate the productivity element in the programmes.

Research and development

Broaden the scope of eligible expenditure to include overheads as well as equipment used to carry out the R&D: These types of expenditure have a direct nexus to the R&D work being carried out and should be included under the PIC enhanced tax deduction or allowance.

Remove restrictions for pure software projects: The current R&D definition excludes companies which develop software for internal use to qualify for the enhanced tax deductions. For example, a company which develops an internal software to automate and improve a manual backend process would not be able to claim the enhanced tax deduction on the costs incurred to develop this software. As the software development work is carried out to increase productivity through greater technology adoption, the costs incurred should qualify for the enhanced tax deductions so long as the other key attributes of the R&D definition are met.

Allow avenue for R&D service providers to avail of enhanced tax deductions: Currently, R&D service providers cannot tap the automatic enhanced tax deductions as they do not own the R&D results. In many situations, such delineation is not clear-cut. There may be significant time and costs investments in initial R&D activities before the service provider can secure a contract and such costs need not necessarily be borne by the customer. As many such R&D activities go towards meeting the objective of capability and knowledge development, there should be an avenue available to R&D service providers to obtain benefits of the enhanced tax deductions. We hope the government can consider an approval process to allow such companies to be considered on a case-by-case basis.

Other productivity boosts

The PIC is not the only tool used to boost productivity. Let's not forget the other initiatives that companies can tap:

Grants or subsidies on approved R&D projects which can help to defray costs such as manpower and materials

Grants or subsidies on training costs to support companies in upgrading the skills and knowledge of their employees

Non-financial assistance schemes such as free consultation services and toolkits furnished to companies, mainly SMEs, to help improve their operations and train their staff

Equity financing schemes and loans offered to companies to provide financial aid in R&D and innovation projects

Collaborations between public and private sectors where the public sector identifies cutting-edge technologies and undertake development risks to bring them to a stage that is easily commercialised by industry

On the road to productivity

Many analysts have studied the connection between spending for R&D and productivity growth and the consensus has formed around the view that R&D spending has a significantly positive effect on productivity growth.

Given the impending challenging economic environment, it is even more pertinent to be bold and aggressive in this space by encouraging productivity and R&D in a broad-based manner. This will avoid any back-sliding of efforts from the previous fiscal budgets. The government should take this window of opportunity to entrench Singapore firmly in the front seat of productivity.

Tan Bin Eng is director, Business Incentives Advisory, and Tracy Tham is manager, Business Incentives Advisory, at Ernst & Young Solutions LLP