D. INVESTING IN INNOVATION AND INTERNATIONALISATION
D.1. Let me go on to the second major plank of this year’s Budget – Investing in Innovation and Internationalisation.
Economic Restructuring: Staying on Course, Focusing on Innovation
D.2. Our productivity level today is 13% higher than the start of our restructuring journey in early 2010. This is an average growth rate of 2.5% per year. All of this gain was achieved in 2010 (11.6%) and 2011 (2.3%) as we recovered from the recession, and growth has been negligible in the three years since then.
D.3. There is a stark difference between productivity growth in industries where our businesses compete internationally, and in those where businesses compete mainly in the domestic market, such as construction, retail and F&B. Over the past five years, our outward-oriented sectors saw productivity growth of over 5% per year on average, compared to less than 1% for our domestic-oriented sectors. Further, employment growth has been mainly in the domestic-oriented sectors. This is essentially why our overall productivity growth has lagged.
D.4. Every sector can achieve a lift in productivity, but it is especially important for our domestic sectors. It will only happen as firms rethink business strategies, seek to break the mould by finding new ways of growing their revenues, and take full advantage of Government incentives for upgrading. Our tight labour market itself will motivate businesses to do so.
D.5. We know that this major upgrading is possible in our domestic industries where productivity has lagged, because there are leaders internationally who have done it. Many of our businesses are already moving.
D.6. Samwoh in the construction industry is one example. They have used government grants to invest in R&D on recycling waste materials such as rubber tyres and rubble into new construction materials. Samwoh is doing this to make a mark for itself in sustainable construction.
D.7. They are developing their people. Like Lim Wee Fong, who joined them as a researcher while doing part-time Masters studies at NTU. He now manages Samwoh’s research lab which is looking at further innovations.
From Basic Solutions to Breakthroughs
D.8. Budget 2015 will sharpen support to businesses that are making significant effort to raise productivity, especially by innovating and internationalising.
D.9. We have seen good take-up of our productivity schemes so far. Most of our firms are now engaged in thinking about productivity, and many are already adopting basic solutions.
D.10. But we have to go beyond basic solutions, with a critical mass of businesses in each sector going for more significant breakthroughs in the way business is done. The business transformations that underpin a major shift in productivity will take time, and it also takes time for the market to restructure with adopters of new ideas and technologies gaining share at the expense of those who stand still. But we have to build momentum into the process now.
D.11. In our next phase of restructuring, we will therefore keep up our broad-based support for productivity but increase support for efforts to innovate, in all forms – new ways of reaching customers, devising a new design or brand; or creating value through major re-skilling of their people and a radical overhaul in the way work is done. Every form of innovation counts.
Phasing out the Transition Support Package
D.12. The Transition Support Package (TSP) has been an important source of support to businesses since it was launched in 2013. It has three components: the Wage Credit Scheme (WCS), Corporate Income Tax (CIT) Rebate, and Productivity and Innovation Credit Bonus (PIC Bonus).
D.13. In total, it is estimated to disburse $7.5 billion over three years, significantly higher than our original estimate of $5.3 billion.
D.14. We have received feedback from the business community to extend the Transition Support Package, which is due to expire this year. We recognise that firms may need more time to adjust to rising costs as they restructure. I will thus phase the transitional support out gradually by extending the WCS and CIT Rebate for two additional years, while letting the PIC Bonus expire.
Wage Credit Scheme
D.15. I will extend the Wage Credit Scheme for 2016 and 2017, to give employers more time to adjust to the tight labour market.
a. Over the next two years, the Government will co-fund 20% of wage increases given to Singaporean employees earning a gross monthly wage of $4,000 and below.
b. This co-funding will apply to wage increases given in 2016 and 2017, over the employee’s wage level in the preceding year.
c. In addition, if wage increases given in 2015 are sustained in 2016 and 2017, employers will continue to receive co-funding, at the new rate of 20%.
d. Reducing the level of co-funding from 40% currently, to 20% in 2016 and 2017, phases out the WCS gradually. The Scheme is intended to help businesses through this restructuring, and we will not retain it for the long term.
D.16. So the basic features of the scheme are the same. It will apply to workers within the same income levels, but we will step down the government support from 40% to 20% in 2016 and 2017. This extension of the WCS will cost about $1.8 billion over two years.
D.17. As firms continue to face cost pressures in this period of restructuring, I will extend the CIT rebate for Years of Assessment (YA) 2016 and 2017 at the same rate of 30% of tax payable, but up to a lower cap of $20,000 per YA. The reduced cap will ensure that more support is focused on SMEs.
D.18. The extension of the CIT rebate is expected to cost about $800 million over two years.
Productivity and Innovation Credit (PIC) Bonus
D.19. I introduced the PIC Bonus to encourage businesses to take advantage of the main PIC scheme, which offers substantial enhanced tax deductions or cash payouts on qualifying activities.11
D.20. The PIC Bonus was intended as a transitional measure and has been successful in spreading the culture of productivity amongst SMEs. Last year, I extended the main PIC scheme to YA 2018. I also introduced a higher level of support, the PIC+ scheme, to benefit SMEs undertaking more significant investments in productivity. As we now have good take-up of the PIC scheme, we will let the PIC Bonus expire in YA 2015. Further, we will introduce additional measures to support innovation and internationalisation, which I will speak about shortly.
Offsetting CPF Changes
D.21. Last year, we announced a one-year Temporary Employment Credit (TEC), which provides employers an offset of 0.5% of wages to help them adjust to the increase in Medisave contribution rates which took effect in January 2015.
D.22. This year, we will enhance the TEC in two ways.
D.23. First, we will raise the TEC to 1% of wages in 2015. This will provide additional support to firms for their labour costs, or an extra 0.5 percentage points on top of what I announced last year.
D.24. Second, I will extend the TEC by two years, to help employers adjust to the cost increases due to additional CPF changes which I will speak about later. These new changes will take effect from January 2016. I will give an additional TEC of 1% of wages in 2016 and 0.5% of wages in 2017. In essence, the extension of the TEC will offset two-thirds of the employers’ costs due to CPF changes in 2016, and one-third in 2017.
D.25. The enhancements to the TEC will cost an additional $1.4 billion over three years, on top of the $330 million from the 0.5% TEC that was announced last year.(Refer to Annex A-3.)
Recalibrating Foreign Worker Levies
D.26. Our foreign worker policies have been progressively and significantly tightened since 2010. They are succeeding in slowing down foreign workforce growth. Excluding Construction, the net inflow of foreign workers has slowed significantly from 60,000 in 2011 to just over 16,000 in 2014 (excluding foreign domestic workers). In the Construction sector, the growth was around 10,000 in 2014, far below that recorded in the previous two years.
D.27. The significant slowdown we have seen in the last year gives us space to adjust the pace of our tightening measures.
D.28. We will thus defer this year’s round of announced levy increases for S Pass and Work Permit Holders in every sector. This will give companies, especially our SMEs, more time to adapt to the new normal of a permanently tight labour market, where it is both difficult to find Singaporean employees, and foreign workers are no longer an easy solution.
D.29. However, to avoid any misunderstanding, let me affirm unequivocally that while we are adjusting the pace of our foreign worker measures, we are not changing direction. It remains crucial for Singapore that we restructure towards reducing our reliance on manpower, and find new and more innovative ways to do business.
D.30. We will also make further adjustments to the Manufacturing and Construction sector levies.
D.31. In the Manufacturing sector, there has been no increase in the number of Work Permit Holders over the past year. The sector is also making good progress on productivity. We will therefore keep the current levy rates unchanged for two more years – 2015 and 2016 – for Work Permit Holders in the Manufacturing sector. In other words, the 2014 rates will remain in place for another 2 years.
D.32. For the Construction sector we want to encourage firms to hire and retain more productive, higher skilled R1 workers. Therefore, in addition to deferring this year’s levy increases to next year, we will make two further adjustments to Work Permit Holder levies over 2015 - 2017. Details on these changes are in the Annex. (Refer to Annex A-5)
D.33. Our basic approach remains unchanged. We have to stay the course in reducing reliance on labour and especially unskilled foreign workers. However, we will continue to calibrate our foreign worker policies as informed by evidence on the pace of inflows, the quality of workers being employed, and the progress being made in raising productivity, sector by sector.
D.34. Through the incentives and grants that we provide businesses to help them upgrade and innovate, we will continue to flow back to businesses more resources than the additional foreign worker levies that we are collecting as a result of the tightening that began in 2010. Most of this support is targeted at our SMEs. This year alone, the amount that we will flow back to our SMEs is expected to be more than one-and-a-half times the additional foreign worker levies that they will pay. But some companies benefit far more than others, and these are the companies which innovate and take advantage of government schemes.
Strengthening our Support for Innovation and Internationalisation
D.35. Let me now explain how we will strengthen our support for innovation, internationalisation, as well as mergers & acquisitions.
D.36. We will strengthen grant support for every form of innovation. We will also help firms capture greater value from R&D and we will catalyse enterprise financing, which can be especially useful for small businesses attempting breakthroughs.
Strengthening Grant Support
D.37. We recognise that bringing about innovation involves a range of activities, from technology research to product development, process improvements, or creation of new brands and marketing efforts. For most SMEs, innovation will often not come in the form of major technological breakthroughs, but in other forms of innovations that are nonetheless significant. We have considered how to best lend support to these innovations, besides our existing PIC and R&D tax measures.
D.38. We will make it easier for SMEs who are engaging in innovation to apply to SPRING for Capability Development Grants (CDG). We will enhance the CDG, which supports a wide range of innovation activities from developing intellectual properties to new brands. It is a flexible and customisable grant which takes into consideration each SME’s unique circumstances and the scope of its project.
D.39. To make the CDG more accessible to companies, we will simplify the application process for projects below $30,000. We will also extend the enhanced funding support level, of up to 70% of costs, for three more years, to 31 March 2018.
D.40. The CDG already supports 1,200 projects a year and we want to grow this. We are not setting an upper limit on the number of projects to support, but estimate that the enhanced CDG will cost us approximately $600 million in total over the next three years.
D.41. We will also promote industry collaborations. We will expand SPRING’s Collaborative Industry Projects (CIP) which incentivises industry players and partners such as trade associations to work with SMEs to develop productive and innovative solutions that are scalable across the industry. We will also extend and enhance the PACT scheme (Partnerships for Capability Transformation) to foster collaboration between large companies and SMEs in their supply chain.
Creating and Capturing Greater Value from R&D
D.42. Next, we will support companies in creating and capturing greater value from R&D.
D.43. Local electronics manufacturer Dou Yee International is a good example. From a small trading business, it has transformed itself into a dominant player in the electrostatic materials industry with an annual turnover of $300 million. It did this through R&D and a longstanding partnership with A*STAR. Most recently, Dou Yee has worked with A*STAR to develop smart plastic packaging that extends the freshness and shelf-life of food.
D.44. Since 2011, our public investments have catalysed $8.6 billion of industry R&D, supported approximately 400 start-ups and generated 800 licenses. All this coming from public sector R&D.
D.45. In our next Research, Innovation and Enterprise five-year plan, we will step up efforts to help companies develop, test and commercialise new products and solutions. More details will be provided later in the year.
D.46. We must continue to invest in R&D to enhance the long term potential of our economy. To fund future efforts, I will top up the National Research Fund by $1 billion this year.
Catalysing Enterprise Financing
D.47. The third prong of our support for innovation is catalysing financing to ensure that good, promising companies have access to the capital that they need to grow.
D.48. First, we want to reduce early-stage funding gaps for start-ups. We will increase the co-investment cap for SPRING’s Startup Enterprise Development Scheme (SEEDS) and Business Angel Scheme (BAS), to catalyse more funds for start-ups with greater funding needs. We will also top up the BAS to partner more angel investors with experience in nurturing innovative start-ups.
D.49. Second, we will pilot a venture debt risk-sharing programme with selected financial institutions. This programme aims to provide high growth companies with an alternative to equity financing and traditional bank loans. Venture debt typically requires minimal collateral as lenders instead receive equity options to share in the company’s future growth. This new method of financing, in between equity financing and traditional bank financing, is worth trying. SPRING will provide 50% risk-sharing with selected financial institutions for such loans over an initial period of two years. Over this period, we aim to catalyse about 100 venture debt loans, totalling approximately $500 million.
Going beyond our Shores
D.50. Supporting our companies to internationalise is a key strategy to help them grow revenues.
D.51. First, we will raise the support level for SMEs for all activities under IE Singapore’s grant schemes from 50% to 70% for three years.12 We anticipate that this will benefit about 700 projects.
D.52. Second, I will enhance the Double Tax Deduction for Internationalisation scheme to cover salaries incurred for Singaporeans posted overseas. This will provide greater support to companies venturing overseas, by co-sharing their risks and initial costs of expanding overseas, as well as creating skilled jobs for Singaporeans.
D.53. Third, I will introduce a new tax incentive, the International Growth Scheme (IGS), to provide support to meet the needs of larger Singapore companies in their internationalisation efforts.13 Qualifying companies will enjoy a 10% concessionary tax rate on their incremental income from qualifying activities. It will encourage more Singapore companies to expand overseas, while anchoring their key business activities and HQ in Singapore.
D.54. In total, these three enhancements to our schemes for internationalisation are expected to cost $240 million.
D.55. Finally, we will help spur Mergers and Acquisitions (M&A). They are a useful strategy for many companies to acquire scale, attract talent, and compete effectively overseas.
D.56. First, I will increase the tax allowance for acquisition costs from the current 5% to 25% of the value of acquisition. Companies would be able to claim M&A benefits for acquisitions resulting in at least 20% shareholding in the target company, down from the current threshold of 50% shareholding. This will be especially helpful for SMEs, who may not be able to acquire large stakes in their expansion strategies. I will also extend the M&A scheme introduced in 2010 for another five years.14
D.57. Second, we will extend the scope of IE Singapore’s Internationalisation Finance Scheme (IFS) to support M&A that will aid a company’s overseas expansion.15
D.58. These enhancements will cost the Government over $100 million over five years.
D.59. The Minister for Trade and Industry will provide more details on the various enhancements we are making to our grant schemes and financing incentives at the Committee of Supply.(Refer to Annex A-4.)
Other Tax Changes
D.60. I will now highlight a few tax changes to preserve our competitiveness in the maritime and financial sectors. (Refer to Annex A-6).
D.61. I will extend the Maritime Sector Incentive which promotes the growth of Singapore as an International Maritime Centre.
D.62. To support the listing of REITs in Singapore, I will extend the income tax and GST concessions for five years, and enhance the GST concession to facilitate fundraising by special purpose vehicles set up by REITs.
D.63. However, the stamp duty concessions, which are mainly for the purchase of local properties, will be allowed to lapse after 31 March 2015. The concessions were intended to enable the industry to acquire a critical mass of local assets, as a base from which the REITs can expand abroad. This has been achieved.
D.64. Overall, Singapore’s tax regime for REITs continues to remain very competitive relative to those elsewhere in Asia, and will help anchor the sustainable growth of the S-REIT industry.
Last updated on 24 Feb 2015