Almost everyone at Singapore PR consultancy Catherine Ong Associates has been issued an iPad. This was made possible by the country’s Productivity and Innovation Credit (PIC) tax programme, which allowed the company to offset part of the expenses against its tax liabilities. “It works out to about a third of the cost after accounting for the productivity incentive,” estimates CEO Catherine Ong.
Virtually every company in Singapore is eligible, including branches and subsidiaries of foreign corporations. “Basically, for every dollar you invest, the cash outlay that you have to put in is only 32 cents,” says Phua Cheng Boon, Financial Controller and Treasurer at S$33.4-million-a-year maritime rigging and safety systems company Teho International.
“Your total cost of ownership gets reduced,” adds Balasubramanian Suryanarayanan, Group CFO and Finance Director at global tyre maker Mindtrac. “Why wouldn’t anyone not look into that?”
Why not, indeed? And why wouldn’t other jurisdictions follow Singapore’s lead? Cost may be an issue for some countries – the Singapore government estimates that tax foregone for the first year of the five-year scheme came to S$650 million (US$509 million).
But the long-term pay-off may be worth it. One of the objectives is to enhance business productivity across the board by encouraging companies to adopt automation, enterprise software, cloud computing and other productivity tools. The PIC can also be applied to subsidise the cost of training.
In the past, some CFOs may have struggled to find the funds for productivity enhancement, including finance transformation, given the competing claims for company resources. With PIC, there is more room to make such investments.
The scheme can even be a source of cash. Starting July this year, companies can choose to convert up to S$100,000 in qualifying expenditure into a non-taxable cash payout (instead of a tax credit or deduction) equivalent to a maximum of 60%, payable quarterly.
That’s S$60,000 (US$47,000) a year – a useful windfall for a small start-up with cash flow issues. The percentage was previously set at 30% and the company could get access to the cash only at the end of its financial year.
400% Tax Benefit
“Any company, be it small or large, new economy or old, can take advantage of the scheme,” said Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam, when he delivered his budget address in February.
The PIC grants firms 400% tax benefits or deductions on up to S$400,000 spending per year on each of the following activities:
- Acquisition or leasing of PIC Automation Equipment, including image or graphics processing equipment, data processing and IT equipment (iPads fall under this category), and IT software such as ERP, CRM and accounting and assets management
- Training of employees
- Acquisition of Intellectual Property Rights
- Registration of patents, trademarks, designs and plant varieties
- Research and development activities
- Investment in approved design projects
In theory, a company can spend up to the maximum amount on every qualifying activity – a total of S$2.4 million (US$1.9 million) – and then claim S$9.6 million in tax deduction or allowance (400% of S$2.4 million). Over five years, the tax credit can add up to S$48 million (US$37.6 million).
It can also opt to convert S$100,000 of spending on training, say, into a non-taxable cash payout, set at 60% of the expenditure. The chart below illustrates the tax savings and cash payment from the scheme.
Click image to enlarge
Example of PIC tax benefits and cash payout
Source: Finance Minister's Budget Address, February 2012
What About Finance?
Productivity tools that are not explicitly stated as PIC-covered, for example a treasury management system, can still qualify on a case-to-case basis. The Inland Revenue Authority of Singapore promises to process the application within two months after submission of the completed
Application for Approval of Automation Equipment Form .
Surya, the Mindtrac CFO, says it is relatively easy to win approval. Savvy software vendors can also help the company make its case. The company will need to prove that the equipment will automate current work processes and enhance productivity as evidenced by reduced man-hours and/or improvement in existing work processes, and that the equipment is not a basic tool in the industry of the business, for example, washing machines in a dry-cleaning chain.
To accommodate multi-year projects, businesses may pool their expenditures over the years of assessment 2011 and 2012, subject to a cap of S$800,000 per activity (yielding a maximum of S$19.2 million in tax deduction or allowance), and over the years of assessment 2013, 2014 and 2015, subject to a cap of S$1.2 million (maximum tax deduction/allowance of S$28.8 million).
Any deduction/allowances granted under the PIC that cannot be fully utilised in any year of assessment will form part of the business’s
unutilised trade losses/allowances , which can be offset against other income of the business.
The unutilised trade losses/allowances can be:
- carried forward to offset against the business income of future years of assessment, subject to shareholding test and the business continuity test as provided by current tax rules
- transferred to and offset against the income of a related Singapore company under the group relief system or a spouse in the case of sole-proprietor or partner
Focus on the Cloud
Interestingly, the PIC also covers cloud computing services. Companies procuring infrastructure-as-a-service, platform-as-a-service and software-as-a-service qualify for the tax incentive. If the cloud services provider is a non-resident Singapore enterprise, however, the company is required to pay withholding tax of 15%-20% of the value of the payments.
Singapore-based cloud computing vendors themselves can avail of the PIC incentives for such things as the acquisition or lease of hardware to run their business and be able to deliver their services. Spending on developing the software that will be offered to customer is also covered. However, spending to acquire or lease the software that clients will subscribe to is not.
On-premise software and even shrink-wrapped software qualify for PIC incentives as well, along with expenses for upgrading software and costs for internally developed software for business use. Payments for maintenance of software, such as debugging and helpdesk support, are not covered, but Singapore has a separate scheme that allows tax deductions for such maintenance fees.
How is the PIC take-up coming along? “One in three small companies – those with turnover of S$10 million or less – have used the PIC,” Finance Minister Shanmugaratnam reported in February. “They will see their taxes come down by 40% on average. And they will also see their benefits quickly because 90% of all PIC claims are processed within three months.”
But nothing precludes bigger companies from partaking of the incentives. The paperwork does not appear to be onerous, the eligibility criteria are liberal and the payback comes relatively fast.
For CFOs embarking on finance transformation in Singapore, especially, the extra help from the government can stretch limited budgets to the point where the company should be able to get the best hardware, software, trainors and consultants.
As for CFOs elsewhere in Asia, it may not be a bad idea to lobby their government to extend similar business productivity incentives.
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation.
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