The article is published in Today Online on 06 February 2015.
This year marks the fifth anniversary of the Productivity and Innovation Credit (PIC) scheme. The scheme, extended and enhanced over the past five years, has offered a slew of incentives from tax deductions to cash payouts to encourage greater productivity in the economy.
However, while take-up rates have gone up, the scheme’s impact on productivity has been muted.
In his New Year message this year, Prime Minister Lee Hsien Loong described Singapore’s productivity performance as disappointing; the country’s productivity shrank 0.5 per cent in the first three quarters of last year.
Against this backdrop, questions about the effectiveness of the PIC, arguably Singapore’s most well-known and publicised scheme to address productivity, have surfaced.
As the city-state embarks on what Mr Lee termed as the next phase of its productivity drive, we have to ask if there is still a role for the PIC scheme to play.
ONE SIZE CANNOT FIT ALL
The PIC scheme covers six categories of activities: Acquisition and leasing of IT and automation equipment, employee training, acquisition and in-licensing of intellectual property rights, registration of patents and trademarks, R&D activities, as well as design projects approved by the DesignSingapore Council.
A recent KPMG 2015 Pre-Budget Poll of 203 Singapore-based companies found that 30 per cent of respondents said their companies used the PIC scheme to defray operating expenses, without any direct impact on productivity. Among the 55 small and medium-sized enterprises (SMEs) surveyed, the figure stands at 40 per cent.
What the findings suggest is that the PIC appears only to catch the lowest-hanging fruit — the first two categories of technology and training — but perhaps not much more.
Could the PIC scheme have all the right intentions but is limited in its effectiveness due to its one-size-fits-all format?
Perhaps a more finely-customised scheme addressing the different needs businesses have at different stages of development may help more companies embrace greater productivity, going beyond seeing the scheme as a government-sponsored aid for new technological hardware.
The PIC scheme can be tiered based on a “3+5” framework. For the first three years on application, the scheme’s focus should be on encouraging businesses to increase productivity. Businesses should enjoy the flexibility of combining PIC caps across productivity-driven activities such as IT and automation equipment as well as training. Higher cash payout limits for initial years can also be considered, as start-ups may not have much taxable income.
As the company matures, the focus must shift to the “I” in the PIC. For the next five years, the scheme should motivate companies to pursue innovation by offering them the flexibility to combine PIC caps across innovation-driven activities such as R&D, design and intellectual property registration.
The PIC scheme can also be extended to help companies internationalise and remain competitive.
An additional category of internationalisation activities, such as market feasibility studies, brand development, overseas setting-up costs and employee relocation costs, can be included in the PIC.
Productivity is equally about “heart-ware”: A company’s people and the processes put in place. No amount of training or hardware upgrades can push workers to excel if they are resistant to change.
That productivity goes beyond hardware — computers and automation equipment to save time and bring greater convenience — cannot be overstated. If the management does not set the right tone, encourage positive behaviour and set up productive workflows, achieving productivity growth will be a tall order. Therefore, productivity incentives should be tweaked so the scale is not tipped in favour of hardware.
The PIC scheme can be extended to cover activities such as engaging consultants to help companies adopt industry best practices, transform business models and revolutionise processes to adapt to market developments.
INNOVATION: MORE THAN JUST SCIENTIFIC BREAKTHROUGH
About two-thirds of respondents to the KPMG poll said they hoped to see the scope for currently available innovation incentives, such as the R&D tax incentive, broadened. Based on the Inland Revenue Authority of Singapore’s latest guidelines, the PIC does not recognise innovation unless it comprises a “revolutionary” or “breakthrough” scientific or technological discovery.
However, innovation is not only about lofty scientific breakthroughs such as editing genomes and brain-mapping. Novel measures to retain staff or a complete redesign of processes so customers can enjoy shorter queue times, for example, are also demonstrations of innovation at work.
This is particularly true for SMEs that cannot qualify for the existing innovation incentives simply because the threshold is too high. They may not be able to invent complex robots, but may be able to come up with refreshing ways to engage their staff.
Therefore, broadening the R&D incentive to include transformational projects, such as the development of new business models, and to cover areas such as social media can help to encourage more pervasive innovation activities. A sub-category of innovation, with less-stringent requirements, may also be created under the PIC scheme to cater to SMEs.
Singapore aims to achieve a 2 to 3 per cent annual productivity growth, leading to a 30 per cent increase in wages by 2020. However, external developments, such as an uncertain global economic landscape, technological advancements and the formation of the ASEAN Economic Community this year, will present both challenges and opportunities for Singapore as it continues to promote greater productivity.
For the country to achieve its target, schemes such as the PIC must be recalibrated to help our enterprises rethink how they do things and bring about real transformation.
The article is contributed by Tay Hong Beng , Head of Tax at KPMG in Singapore. The views expressed are his own.