Every year, in either January or February, businessmen and other taxpayers eagerly anticipate and sometimes speculate on what “goodies” might be in store for them with the announcement of the annual Singapore Budget. Sometimes, there is a slightly bitter pill but oftentimes, there is good news of reduced tax rates, concessions, reliefs and incentives.
This article focuses on one such incentive, possibly the most signifi cant incentive scheme in the 2010 Singapore Budget – the Productivity and Innovation Credit (“PIC”).
Following the Budget announcement in February 2010, detailed guidelines were published in an IRAS e-Tax guide on 29 June 2010. Details have also been included in the draft Income Tax (Amendment) Bill 2010. This ar ticle discusses selected aspects of the PIC, details of which may be found in the related IRAS e-Tax guide.
Period of availability and quantum available
This scheme is a new broad based tax scheme to encourage businesses to invest in productivity and innovation. It enhances existing tax measures and consolidates them into a single scheme. The PIC is available for Year of Assessment (“YA”) 2011 to YA 2015 (“qualifying YAs”). The basis period for each YA generally refers to the fi nancial year ending in the prior calendar year.
The PIC scheme grants businesses which invest in cer tain productivity and innovation activities, enhanced tax deductions and/or allowances (“enhanced deductions”) in addition to the deductions and/or allowances currently available. With the enhanced deductions, businesses may deduct up to a total of 250% of expenditure for each category of qualifying activity, as follows:-
For YA 2011 and YA 2012 - a total cap of S$600,000 of expenditure for each activity for both YAs combined, giving businesses more time to phase in their investments; and
For YA 2013 to YA 2015 - a cap of S$300,000 of expenditure for each activity for each YA.
Under this scheme, the prior deduction cap of 100% or 150% applicable to various types of expenditures is increased to 250% for qualifying expenditure. Using the current corporate tax rate of 17%, for every S$1,000 of qualifying expenditure, applying the 250% tax deduction is wor th a tax saving of S$425 (17% of S$1,000 x 2.5), and the net after-tax expenditure is only S$575.
Expenditure beyond the S$300,000 annual cap will continue to enjoy a 100% base deduction allowed under the existing provisions of the Income Tax Act.
Where the qualifying expenditure on a qualifying activity is funded or subsidised, fully or par tially, by the Government, only the amount of expenditure net of the grant or subsidy is eligible for enhanced deductions under the PIC.
For a business whose income is taxable at the prevailing rate as well as at one or more concessionary rates, enhanced deductions are fi rst granted on qualifying expenditure incurred in relation to normal income, and then to concessionary income that is subject to tax at the highest rate fi rst, followed by the next highest rate and so on, until the expenditure cap is reached.
This enables businesses to maximise the tax benefit from the PIC.
Enhanced deductions that cannot be fully offset against the income of a business are treated no differently from unutilised trade losses or allowances and are allowed for carryforward or carryback or transfer under the group relief system, or between spouses (for individuals), subject to the same relevant provisions of the Income Tax Act.
Activities eligible under the PIC
Enhanced deductions under the PIC comprise the following:
(1) enhanced capital allowances or deduction for acquisition or leasing of prescribed automation equipment;
(2) enhanced writing-down allowance for acquisition of intellectual proper ty rights (“IPRs”);
(3) enhanced deduction of costs for registering cer tain IPRs;
(4) enhanced deduction of qualifying research and development expenditure;
(5) enhanced deduction of qualifying training expenditure; and
(6) enhanced deduction of qualifying design expenditure.
The annual expenditure cap of S$300,000 for each of the six activities is set to focus the benefi ts of the PIC on small and medium sized businesses.
Cash conversion option
During the fi rst three qualifying YAs of the PIC (i.e. YA 2011 to YA 2013), cer tain business entities may also, subject to cer tain conditions, opt to conver t their enhanced and current deductions or allowances (collectively, “qualifying deductions” or “qualifying allowances”) of up to S$300,000 (but not less than S$1,500) for each qualifying YA, into cash at the rate of 7%, i.e. a cash payout of up to S$21,000. The conversion cap is S$300,000 for all the qualifying activities taken together. Cash payouts received from such conversion are not taxable.
This option suppor ts small but growing businesses with low taxable income that need cash to fund their investments in technology or upgrade their operations.
Consistent with the intent to enable businesses to enjoy maximum benefi ts under the PIC, an eligible business is given the fl exibility of conver ting up to S$600,000 of its qualifying deductions into cash (i.e. up to S$42,000) for YA 2011 and YA 2012 (combined) only.
Review of rules applicable to expenditure on automation equipment and training
Continual upgrade and enhancement of technology and equipment and of skills of employees are key objectives for most businesses regardless of the specifi c industry. Hence, perhaps the two types of activities relevant to most businesses are those applicable to expenditure on acquisition or leasing of prescribed automation equipment and training expenditure (refer (1) and (5) above). This ar ticle thus discusses briefl y these two categories.
Enhanced capital allowance and deduction for qualifying equipment
Under section 19A (2) of the Income Tax Act, businesses can currently claim one-year accelerated capital allowances on 100% of capital expenditure incurred on the acquisition of prescribed automation equipment, as listed in the Income Tax (Automation Equipment) Rules 2004, which will continue to apply until a revised list is enacted. Under the PIC scheme, an enhanced allowance of 150% is granted on the fi rst S$300,000 of capital expenditure incurred on the acquisition of prescribed automation equipment in each basis period.
For lessees that lease qualifying equipment for productive use instead of acquiring the equipment, the enhanced deduction of 150% on the fi rst S$300,000 of the leasing expenditure on each basis period is granted, subject to cer tain conditions. The enhanced deduction is not applicable to leasing charges for software, unless the software is installed in the qualifying equipment leased and both are leased as a single item of equipment, without separate pricing for either component. The total amount of expenditure incurred on the acquisition and/or leasing of qualifying equipment eligible for enhanced deduction in a YA is subject to a cap of S$300,000.
For qualifying equipment acquired on hire purchase, the enhanced allowance is determined based on the cost of the equipment for the purpose of applying the annual expenditure cap. Enhanced allowance is allowed to the business concerned based only on the principal repayment during the year.
Regarding the cash conversion option, businesses must conver t the full amount of base and enhanced allowances relating to an item of qualifying equipment into cash, subject to the overall cap. As qualifying allowances related to an item of qualifying equipment cannot be par tially conver ted into cash, the option is not available to any qualifying equipment acquired on hire purchase with repayment schedule straddling two or more
basis periods. Where the qualifying allowances related to an item of qualifying equipment are in excess of the conversion cap of S$300,000, the excess is forfeited upon making the option and will no longer be available for deduction against income of the business concerned.
Businesses must own the qualifying equipment for a minimum period of one year. If the oneyear ownership period is not met, the enhanced deduction or cash payout made will be clawed back or recovered.
Where the qualifying equipment is approved under incentive schemes such as the Investment Allowance or the Integrated Industrial Capital Allowance, separate rules exist to prevent double claims under the respective incentive scheme and the PIC scheme.
Enhanced tax deduction for qualifying training expenditure
For training conducted in-house by employees of a business, enhanced deduction is restricted to qualifying expenditure incurred in relation to the provision of the cer tain training programmes – accredited Workforce Skills Qualifi cation (“WSQ”) training courses by a WSQ in-house training provider, structured Institute of Technical Education courses by an Approved Training Centre, on-the-job training by a Cer tifi ed Onthe- job Training Centre, and any other in-house training courses that may be prescribed by the Minister for Finance by regulation.
Qualifying training expenditure comprises the following:
(1) salary and remuneration of in-house trainers for the delivery of the training courses (i.e., based on hours spent in delivering the courses), excluding directors fees, but not for their time spent in the preparation of course content and training materials. It also excludes salary and other remuneration related to employees who provide administrative suppor t to the training depar tment and employees attending the training courses;
(2) rental of external training premises, but excludes overheads like other rentals and utilities;
(3) costs of meals and refreshments provided during the courses, but not accommodation, travelling and transpor t expenditure; and
(4) costs of training materials and stationery.
For training provided through an external training provider, enhanced deduction is available for qualifying training expenditure, training fees payable to the external training service provider, registration or enrolment fees, examination fees, tuition fees and aptitude test fees.
For purposes of the PIC, an external training service provider means a training provider who conducts training programmes for another person in return for a fee, whether they are related to each other or not. For related par ty transactions, businesses must ensure that such fees are charged on an arm’s-length basis.
As businesses seek to grow and upgrade their skills and operations and invest in productivity and innovation, they should examine the PIC in closer detail to determine what benefi ts are in store for them. The IRAS e-Tax guide (and legislation when enacted) should be referred to for more details, and professional advice sought as necessary.