Debate on Income Tax (Amendment) Bill – NCMP Yee Jenn Jong

By Non-Constituency MP, Yee Jenn Jong
[Delivered in Parliament on 3 Nov 2014]

Madam Speaker, I wish to declare that I own and operate businesses which are subjected to the corporate components of the Income Tax Bill.

This Bill covers a large number of changes. I will focus on some aspects related to the Productivity and Improvement Credits (PIC) Scheme and also to propose an item for the government to consider in future amendments to the Income Tax Bill.

First, on PIC.

A survey of local companies released by PwC Singapore[1] last month reported that only 6.3% of those surveyed intend to tap on the Research and Development (R&D) tax benefits offered in the PIC Scheme. The report suggested a mismatch in defining R&D for business and tax purposes. The report concluded that “what is clear from the results is that respondents are seeking more engagement via a two-way dialogue with IRAS in the R&D claims progress.”

Madam, I had spoken previously in this House about the extremely low utilisation of R&D support under the PIC scheme. The report is consistent with my own observations about the experiences of technology companies, especially the smaller companies that have found difficulties in claiming cash payout under the PIC Scheme for R&D. It seems IRAS applies a very strict definition of what will qualify as R&D activities which makes it difficult for smaller companies to tap on PIC to help them in what they may consider as their necessary R&D activities.

It will be unfortunate if companies hold back on investing in R&D because of the difficulties in securing government support as I believe that such expenditures are needed to make quantum leaps in productivity, as new technologies, systems and methods could drastically change business models to great advantages. This is especially essential if Singapore is to move into the next lap of having innovative companies that are competitive on the global stage.

Compared to other categories of allowable claims in PIC, R&D expenditure does appear more difficult to claim for under the cash payout. Companies may be tempted to take a more convoluted method if they really want to try very hard to claim PIC support, say for original software development. For example, a company could place out their staff with another software company and get the software company to build the application and then sell back the completed system with all Intellectual Property (IP) rights to it and then hired back the staff involved in the development, or perhaps have the system charged as website development by a friendly third party developer if the product is a web-based system. This may qualify for claims under IP or website capital expenditure. I do not think this is a scenario IRAS wants to encourage. Nevertheless, with the seemingly difficult experiences that some companies may have with qualifying under R&D support for PIC cash payout, some may try creative ways to claim research and development work though another aspect of PIC that is more lax.

While I appreciate that the government wants to tighten against abusive PIC claims, I hope that in its regular review of the PIC Scheme, the ministry can look into how R&D activities can be broadened in the PIC definition so that companies that genuinely wish to commit their staff towards building essential systems to support innovative new business processes can benefit from this scheme.

Next, under the changes proposed to tighten PIC claims to prevent abuse in Section 37I, I wish to seek clarification on what the ministry would consider as PIC automation equipment to be “in use” so that it can qualify for cash payout. This is because sometimes businesses may invest in spare capacity for, say disaster recovery use or for future anticipated use. Perhaps it would be useful to clarify if situations such as these could qualify for PIC cash payouts.

Lastly, for future amendments to the Income Tax Bill, I like to suggest that the ministry look into more relevant packages to encourage more merger and acquisition activities amongst our local companies, especially the smaller ones. I had spoken about this before in this House. Even as we try to encourage productivity amongst our companies, my concern is that we have many companies that are very small in size. Even with government support for automation and other productivity improvements, it is often very difficult to extract significant increases in productivity if the scale of the business is small. Hence, merger and acquisition is a way to encourage the amalgamation of businesses to provide the scale for automation and changes to business processes that could see our companies become more competitive on the global scale.

The current M&A tax incentives are due to expire in March next year. My reservations over the existing M&A tax incentives are that they are structured in manner that makes it unattractive or not very meaningful for smaller companies to tap on the schemes for M&A. Hence, utilisation of this scheme appears to be very low. Since I had already given my suggestions previously in this House on proposed changes to the M&A scheme, I shall not elaborate on these today. I hope that these suggestions can be incorporated into the design of new M&A tax schemes in the near future.

Madam Speaker, I support the Bill. Thank you.