Towards innovation and productivity

In this year of the Tiger, the Singapore Government has chosen not to be a leaping Tiger in an attacking mode but a crouching Tiger, strategizing and positioning for the bigger prize of sustained, long-term economic growth.

The 2010 Budget is very much about transforming our SMEs and certain industries, and encouraging them to improve productivity and to innovate. To this end, the new productivity and innovation credit (PIC), which has far-reaching impact on companies, was introduced. This new tax concession runs for 5 years and applies to companies which invest in the areas of:
• Research and development
• Investment in new product and industrial designs
• Acquisition of intellectual property rights
• Registration of intellectual property rights
• Investment in automation through technology or software
• Training of employees

For each of the identified areas, companies will be given tax deductions of 250% of the amount expended for the first $300,000 of qualifying expenditure. This could work out better than a corporate tax rate reduction.

Take for example, an SME company with annual profits of $1,000,000. If the company spends $100,000 to automate some of its processes, the 250% allowance would reduce its effective tax rate:

Click here to see the table.

Given the $300,000 cap, this may not result in attractive or material tax savings for large corporations. However, this is definitely a targeted scheme that can help the local SMEs to upgrade their capabilities and productivity to prosper in this increasingly competitive economic landscape.

The Government will be announcing the details of the PIC in June 2010, and it is hoped that this will be a simple scheme with minimal administrative burden on the companies. In the meantime, companies should take a look at their current plans and assess how they can capitalize on the PIC to ride the next wave of growth.

The writer is Soh Pui Ming, Tax Services Partner, Ernst & Young Solutions LLP. To read more about our analysis of the Budget, please visit www.ey.com/sg/budget