Investing in R&D to tackle crisis

This article was contributed and first published in The Business Times on 30 December 2008.

The current global credit crunch could adversely affect investment in research and development (R&D), and seriously delay the discovery of new products, processes or solutions. In fact, if the global financial crisis drags on, businesses may consider investing in R&D activity to be a risky proposition.

To continue investing in R&D
While the R&D investment rate of Singapore-based businesses has grown over the years, it could be seriously affected by the current economic downturn. It would be unfortunate if the focus shifts towards layoffs and closing down research units.

Even though the global credit crunch has clouded Singapore’s economic outlook, investment in R&D and innovation is more important now than ever. Continued investment in innovation will not only help businesses to emerge stronger and faster from the recession, but can also help to jumpstart the overall economy. Research dollars should not be curtailed because major challenges of the modern society, such as security of energy supply, food safety and climate change, will remain long after the resolution of this current crisis.

Over the past few years, government’s efforts to spur R&D and intellectual property (IP) management activities in Singapore have resulted in the development of a supportive fiscal and legal regime, building world-class infrastructure capabilities, attracting scientists and engineers from across the globe and nurturing highly scalable IP business models like franchising and merchandising. Instead of slowing down, the pace of R&D and IP developmental efforts in the public and private sectors in Singapore should be continued or even stepped up during the current economic crisis. In fact, to encourage more R&D investment, the Singapore government introduced a slew of R&D tax measures in the 2008 Budget. Prime Minister Lee Hsien Loong has also recently reiterated the government’s full commitment to investing in R&D to develop a key capability to keep the economy competitive. The government has taken the lead and it is up to businesses to react.

With Budget 2009 round the corner, what more can the Singapore government do to boost innovation amid the current economic gloom?

Liberalisation of tax deductions for R&D outsourced overseas
Under the current tax regime, new businesses can now get tax deductions for expenditure on R&D performed in-house and outsourced to an R&D organisation, with the possibility of qualifying for further deductions (ranging between 130 percent and 150 percent), if the R&D is carried out in Singapore. However, no tax deductions are available at all for expenditure incurred for R&D outsourced overseas in relation to a new business. This seems to go against the grain of the government’s efforts to promote entrepreneurship and pervasive R&D. With Singapore’s R&D and IP industry still in its infancy, it is difficult to understand why the government should penalise Singapore enterprises if they outsource their R&D overseas, especially when the IP rights are owned and exploited from Singapore. Perhaps there is a need to level the playing field and allow taxpayers to claim tax deductions for at least 100% of these expenses if Singapore is to continue to grow its entrepreneurship R&D development in Singapore.

Introduction of additional tax concessions to encourage IP exploitation
The government’s vision is to build Singapore as a compelling hub for businesses to create, protect and commercialise their IP assets. Over the past few years, it has focused very much on creating a conducive tax environment for IP creation and protection. For example, tax concessions were introduced to encourage IP creation, IP acquisition and patent registration. However, there are limited tax concessions to specifically encourage IP exploitation, which involves harnessing IP rights to develop and market goods or services, or earn royalties and franchise fees. In this regard, the following two suggestions may be worth exploring.

First, a specific tax incentive programme should be introduced that offers a concessionary tax rate for income arising from specified IP management activities. Due to the inherent portability of IP, it is important to have a more competitive tax regime to attract and retain IP rights and related business activities in Singapore. Otherwise, the government’s R&D and IP developmental efforts may go to waste if IP assets created here are ultimately shifted out of Singapore and exploited from elsewhere.

Second, to complement the proposed IP tax incentive, the current foreign tax credit regime could be liberalised to introduce the concept of pooling and carry forward of foreign tax credits, which arise on account of foreign withholding tax suffered on royalties received from overseas. Currently, claims for foreign tax credits are restricted to the lower of the foreign tax paid or Singapore tax payable on the net foreign-sourced royalty income. This significant disadvantage could be alleviated by pooling these foreign tax credits and offsetting them against tax payable on other sources of income, as well as allowing the excess foreign tax credits to be carried forward.

Conclusion
Singapore could differentiate itself by introducing further innovative measures to nurture an innovative economy. This will help the country to emerge as a stronger nation at the end of the present financial turmoil. Budget 2009 will hopefully provide an opportunity to introduce additional fiscal policies to encourage IP exploitation and bolster the government’s vision and long-term commitment to support R&D and IP management activities in Singapore.