Accounting firms KPMG and Ernst & Young have called for favourable policies to encourage innovation and attract intellectual property to the country in their wish lists for Singapore’s 2017 budget which is set to be revealed in February.

 

Among items on the firms’ wish lists is the introduction of a patent box regime that reduces tax rates on IP-related income, and is tied to the performance of research and development activities and commercialisation of their output.

 

“The Organization for Economic Co-operation and Development has confirmed that patent box regimes, which require real and substantial activity to obtain benefits, are not harmful tax practices and can be useful in supporting growth and innovation in a country,” said Chester Wee, a partner at EY’s international tax services.

 

“It will also complement existing tax incentives that promote R&D and improve the country’s overall attractiveness as a destination to conduct R&D and commercialise the resulting IP,” said Bin Eng Tan, another partner at the firm.

 

According to KPMG’s pre-budget report, attracting IP to Singapore is key to creating innovation and valueadded activities in the economy. It will also enhance Singapore’s ability to generate new ideas and develop new capabilities.

 

“Innovation is not nurtured in a vacuum, but needs to be cultivated in a broad ecosystem of small and large businesses, academic institutions and research institutes,” Wu Hong Chiu, KPMG’s head of tax in Singapore, said. “Ensuring that there are good incentives to keep a strong pipeline of R&D activities is an important part of helping Singapore firms embrace innovation.”

 

KPMG proposes a new Innovation Tax Credit scheme or more targeted support to encourage pervasive innovation as Singapore businesses need to continuously reinvent their business in the face of disruption.

 

Another key recommendation by the two accounting firms is to extend the Productivity and Innovation Credit (PIC) Scheme beyond its year of assessment in 2018.

 

The scheme was first introduced in 2010 to encourage businesses to invest in productivity by offering them 400 percent tax deductions or allowances for expenditure incurred in qualified activities such as acquisition and licensing of IP rights, registration of IP and R&D activities.

 

Eligible companies can also convert expenditures of up to S$100,000 (US$70,400) for each year into cash at a conversion rate of 40 percent, which has been reduced from 60 percent since last August.

 

KPMG reported that many companies the firm has spoken to hope that the government will not withdraw the scheme after its expiry as many say it is generous, easy to apply for and it has helped many SMEs upgrade their technological capabilities.

 

The government should also relax the writing down allowance for acquisition of IP rights, they say. Currently, such costs can be eligible for the allowance only if the company acquires both economic and legal rights to the IP, while for companies that create IP in Singapore, such costs can only be deductible if they fall within the R&D criteria.

 

“The definition of IP can be broadened and at the same time, the government may wish to consider whether there continues to be a need to require both legal and economic ownership of IP rights before writing down allowance can be made available,” said Ching Khee Tan, a partner at EY.

 

“Perhaps the government can consider granting writing down allowance automatically even when taxpayers have only economic ownership of the IP, says Tan.

 

Speaking to Asia IP, Chiu further hints that current policies risk an exodus of IP from Singapore, especially losing home-grown brands to foreign buyers.

 

“Singapore’s tax system inadvertently encourages the sale of IPs rather than continued development of the IPs such as brands,” he said. “The development of a brand often involves a combination of ideas, strategic direction and market presence built up over time through the efforts of the owners of the businesses, which do not receive any business or tax incentives.”

 

Chiu believes that it is strategically important for Made-By-Singapore brands to continue to grow and be anchored locally even as they expand overseas. They also provide inspiration for smaller businesses to build sustainable competitive advantages which are difficult to be replicated.

“The Singapore government should make it a priority to support companies in their internationalisation plans. There should therefore be strong incentives such as writing down allowances for internally generated brands. This is crucial to Singapore’s future growth,” Chiu added.