As a business-friendly country, Singapore is known for its variety of schemes that are easily accessible to businesses, with each sector likely to have its own unique schemes. While money is often the lifeblood of any business, why exactly do businesses need funding and schemes such as the enterprise innovation scheme (EIS)?
Apart from the fact that such schemes serve many purposes, they are also essential for companies to have enough working capital. This ensures that they can keep their operations running, pay their employees on time and remain competitive. By reassessing and redesigning their workflow, enterprises can discover new ways of increasing efficiency and improving sustainable performance by optimizing the usage of resources.
During a speech held on 14 February 2023, the Deputy Prime Minister and Minister for Finance, Lawrence Wong, unveiled the 2023 Singapore National Budget. It was during this speech that Wong stated that the only way to beat the major challenges of an uncertain year ahead is by ensuring business resiliency, workforce productivity and competitiveness. The business community of Singapore reacted to his statement largely in a positive way and embraced the “Moving Forward in a New Era” theme of the budget. Deloitte CEO Cheung Pui Yuen stated in a press conference that the budget resembled a “Valentine’s Day bundle of incentives and schemes”, which displays the very important fact that enterprises continue to remain the “heart of the Singapore economy”.
Furthermore, Lim Ming Yan, Chairman of the Singapore Business Federation, welcomed the 2023 budget and the measures put in place for enterprise growth and development. He believed it signalled a direct, transparent focus provided by the government to detract from handouts and instead invest in assisting businesses pursue innovation and building capabilities. President of the Association of Small and Medium Enterprises (ASME), Kurt Wee, stated that companies will need to remain concentrated on innovation and using technology to become more efficient and productive.
What is Enterprise Innovation Scheme (EIS)?
The Enterprise Innovation Scheme will assist businesses in developing high-value and substantive economic activities in Singapore. Businesses are encouraged to upgrade their capabilities or expand the scope of their business operations, making them highly competitive and thriving in what can be a very hostile global environment.
The EIS is available for YA 2024 to YA2028, and the scheme is geared to benefit businesses in Singapore with enhanced/new tax deductions and/or allowances on qualifying expenditures incurred on the following activities:
1) Qualifying Research and Development Undertaken in Singapore
Businesses that invest in R&D can get a 100% tax deduction on R&D expenditure (Section 14C) plus an additional 150% tax deduction on qualifying R&D expenditure (i.e., staff costs and consumables) (Section 14D) before YA 2024. From YA 2024 to YA 2028, they will be provided with an additional 300% tax deduction on the first $400,000 and an additional 150% tax deduction on expenditures in excess of $400,000.
What is very helpful and important to note is that there is now a relaxation on the “related to trade” condition. What this effectively means is that under Section 14C of the Income Tax Act (ITA), the taxpayer is not limited to only accumulating R&D expenses within their current or existing trade or business but also outside of their scope of trade or industry as long as the activity occurs within Singapore. This relaxation is effective until YA 2025.
2) Registration of Intellectual Property (IP)
Companies that register their innovation as an IP before YA 2024 will be eligible for a 200% tax deduction on the first $100,000 of qualifying IP registration costs (Section 14A) as well as a 100% tax deduction on the balance of qualifying IP registration costs in excess of $100,000 (Section 14A). The tax deduction on the first $400,000 of qualifying IP registration costs will be increased to 400% from YA 2024 to YA 2028 and 100% on the balance in excess of $400,000.
3) Acquisition and Licensing of IP Rights (IPR)
Before YA 2024, firms would 100% WDA on qualifying IPR acquisition costs (Section 19B) for acquiring IPRs, whereas they would be eligible for a 100% tax deduction on qualifying IPR licensing expenditure (Section 14 or 14C) along with an additional 100% tax deduction on first $100,000 of qualifying IPR licensing expenditure (Section 14U) for Licensing of IPRs.
From YA 2024 to YA 2028, businesses would be eligible for 400% allowances and/or tax deduction on the first $400,000 (combined cap) of qualifying IPR acquisition costs and/or qualifying IPR licensing expenditure. In addition, there will be 100% WDA on the balance of qualifying IPR acquisition costs in excess of a claim for enhanced allowances, plus a 100% tax deduction on qualifying IPR licensing expenditure in excess of a claim for an enhanced tax deduction.
From YA 2024 to YA 2028, companies can get a 400% tax deduction on the first $400,000 qualifying training expenditures plus a 100% tax deduction on the balance of qualifying training expenditures in excess of $400,000 and all other training expenditures. But before YA 2024, they are eligible only for a 100% tax deduction on training expenditure (Sections 14 and 15).
The EIS encourages employers to continually invest in enterprise training and enhancing the capabilities of their employees. Course fees paid by the employers to an SSG-funded course provider, including certification and assessment fees, all qualify under the training expenditure and enhanced tax deduction. This is calculated based on the amount of qualifying training expenditure incurred by a business net of any government grant or subsidy received by the business in respect of the course.
5) Innovation projects carried out with polytechnics, the Institute of Technical Education or other qualified partners
Currently, expenses incurred on innovation projects carried out with polytechnics, the ITE or other qualified partners are not allowable as a deduction under Section 14 or Section 14C of the ITA on the basis that they are capital in nature and do not meet the definition of R&D under Section 2 of the ITA. But from YA 2024 to YA 2028, businesses can get a 400% tax deduction on the first $50,000 of qualifying innovation expenditure.
In order for a business to qualify for this tax deduction, it is imperative that the business is a beneficiary of the qualifying innovation project. Qualifying innovation projects refer to projects that predominantly involve one or more of the following innovation activities defined within the Oslo Manual 2018:
- Research and experimental development activities;
- engineering, design and other creative work activities;
- IP-related activities; and
- software development and database activities.
This scheme will be administered by the partner institutions, who will validate the project as a qualifying innovation project and issue the innovation project invoice. Expenditure incurred outside of the collaboration with the partner institutions will not qualify for this tax deduction.
Know More About the Option to Convert Qualifying Expenditure into a Cash Payout
Furthermore, businesses are given the opportunity to convert qualifying expenditures into a cash payout as a way to assist small and growing businesses finance the costs of their innovation activities. In lieu of tax deductions and/ or allowances, eligible businesses may elect to convert up to $100,000 of the total qualifying expenditure across all of the above-mentioned qualifying activities for each YA into cash at a conversion rate of 20%. The cash payout is capped at $20,000 per YA and is not taxable.
It is imperative to note that once the cash conversion has been chosen and completed, the same amount is no longer available for tax deductions and/or allowances and therefore, the decision to convert qualifying expenditure into cash is irreversible once complete and is only available on an annual basis. The decision to convert the qualifying expenditure into a cash payout must be made by submitting the prescribed election form along with the income tax return. The cash payout will only be assigned, allocated and paid after the Inland Revenue Authority of Singapore (IRAS) has assessed the submission and verified the request.
So, now you may ask, who or what is an eligible business? In simple terms, this means any company, partnership, sole-proprietorship or registered business trust that has at least three full-time local employees (i.e Singapore Citizens or Permanent Residents with CPF contributions) in its employment for six months or more in the basis period of the relevant YA. The local employees must each be earning at least $1,400 in gross monthly wages.
In summary, Singapore’s new Enterprise Innovation Scheme (EIS) has been praised for being a bold, brave and clear-cut move which will assist local businesses to continue investing in innovation, especially at a time when many will have been tempted by limiting or reducing expenditure significantly. The EIS will give businesses the boost they need to stay innovative and competitive in a very testing and difficult global environment.
Want to know more about EIS or other government grants through which you can save your taxes, engage a reliable tax consultant today. As they would always be up to date with all the grants and schemes that you are eligible for, you will never miss the opportunity to take advantage of them.