Fostering a better R&D environment in Singapore

Since the formation of A*STAR in 1991, Singapore has been working relentlessly to develop an economy backed by a robust research and development (R&D) environment. The objective is to develop, own and exploit new ideas and innovations, and to nurture the future generation of knowledge workers in an ecosystem conducive to R&D.

The gains so far are clear: By building up the needed infrastructure, committing billions of dollars to R&D over time, wooing overseas Singaporean scientists home and ensuring a strong intellectual property (IP) regime, Singapore has successfully attracted a number of multinational companies to set up their R&D laboratories here.

Many have entered into R&D partnerships with local researchers at public research institutes and universities, and work in wide-ranging areas such as value engineering and product development.

However, more can be done. There are currently several initiatives for start-ups to get funding, particularly at the early stages of business development. This is important because — with their lack of a track record and inherent risk — traditional avenues of funding, such as regular bank loans, are not open to them.

Even where successful R&D results in the creation of valuable IP, capital is required to exploit and commercialise such IP.

While the IP financing scheme — which allows smaller companies to use IP as collateral against bank loans — has been around since 2014, banks have been cautious in embracing the scheme with IP as the only available collateral.

If Singapore truly wants to be a global IP hub, changes in national policies to address the concerns of financial institutions are necessary, such as helping banks underwrite losses due to IP-backed loans.

Likewise, there is a need to align relevant tax policies to encourage the further development of the R&D environment in Singapore.

For example, the take-up rate for making a claim under R&D within the productivity and innovation credit (PIC) scheme, is comparatively low — less than 3 per cent of total PIC claims. (The PIC scheme is targeted at promoting productivity and innovation through support to businesses that make investments to improve productivity.)

Although the total number of active businesses in Singapore that made PIC claims increased over 2012-2013, the R&D category continues to have a low take-up-rate.

In contrast, business expenditure on R&D increased from S$4.4 billion in 2012 to S$4.5 billion in 2013. In addition, an R&D survey conducted by A*STAR in 2013 revealed that there was an increase of 1,100 private sector research scientist and engineering jobs. This goes to show that the R&D sector in Singapore is, indeed, growing.

One possible reason for this divergence could be due to differences in what government agencies regard as an R&D project. R&D tax claims often involve lengthy discussions with tax authorities over technical aspects to determine eligibility.

A project that is viewed by one agency as worthy of Government support may not be considered a qualifying R&D project for tax purposes if it does not meet the definition of R&D under the tax code.

It may be worthwhile to align the two initiatives by getting R&D projects pre-approved by an economic agency (that works with the industry segment most closely and which is most familiar with the subject matter) to provide more upfront certainty on R&D tax claims.

Alternatively, self-assessment of R&D projects can continue, but taxpayers should have the right to present their case before an independent panel of experts in the relevant field who will rule on the technical merits of the claim, in the event of a disagreement.

In cases where there is a time lag between conceptualisation and commercialisation of the products, some expenses (such as those relating to R&D) incurred before the company starts seeing profit may be deducted, but other operating expenses could be lost. As these young companies are often cash-strapped, liberalising regulations to allow these expenses to be carried forward for offset against future profits could really help them.

This would encourage our local businesses to develop new ideas and processes, help kick-start new businesses and remain relevant in today’s changing business world.

In addition, this will help companies in industries that encounter long gestation periods (for example, technology, pharmaceuticals and healthcare) before they are able to commercialise their operations.

Further, it is not uncommon for these companies to bring in new investors at different stages. Currently, companies are subject to a continuity of shareholdings test, which prohibits companies that undergo a change of over 50 per cent of shareholdings from carrying forward unutilised tax losses for deduction in the next tax year. It is possible to seek a waiver, but losses preserved by such an avenue are also subject to what is commonly known as the same business test.

The same business test and continuity of shareholdings test were introduced as anti-abuse measures; however, they inhibit innovation and are counterproductive to our nation’s push for growth in R&D development and creation of IP.

A change in the tax policy to address these issues will help to align the tax rules to support the Government’s drive to promote a better R&D environment in Singapore, which in turn will lead to an economy based on knowledge and value-creation.

ABOUT THE AUTHORS:

The writers are with PwC Singapore, where Abhijit Ghosh,is Partner and India Desk Leader; Tan Ching Ne is Partner and Kalpana Srivastava is Tax Manager.