Refundable Investment Credit

With Pillar Two top-up taxes taking effect in home countries of MNEs, any benefit they may derive from tax incentives will be negated as taxes forgone in Singapore will be collected elsewhere.

To address the above, the Finance Minister has proposed enhancing Singapore’s investment toolkit with a new Refundable Investment Credit (RIC) scheme to enhance the many other factors that encourage companies to anchor substantive and high value economic activities in Singapore. The RIC is a tax credit with a refundable cash feature which may be used to offset corporate tax payable or be refunded in cash within four years from when the company satisfies the conditions for receiving the credit. The RIC is awarded on a case-by-case approval basis by the Economic Development Board of Singapore (EDB) and Enterprise Singapore. The quantum of the RIC will be up to 50% of the expenditure incurred on a qualifying activity during a qualifying period. The rate will depend on the merits of the qualifying activity for which the application is made. The introduction of the RIC will offer another avenue for Singapore to remain competitive and continue to attract quality investments.

Examples of activities qualifying for RIC include:

1. Investing in new productive capacity (e.g., new manufacturing plant, production of low-carbon energy)
2. Expanding or establishing the scope of activities in digital services, professional services, and supply chain management
3. Expanding or establishing headquarter activities, or centres of excellence
   
4. Setting up or expansion of activities by commodity trading firms
   
5. Carrying out research and development (R&D) and innovation activities
   
6. Implementing solutions with decarbonisation objectives.
   

Depending on project type, qualifying expenditure categories may include:

1. Capital expenditure (e.g. building, civil and structural works, plant and machinery, software)
2. Manpower costs
   
3. Training costs
   
4. Professional fees
   
5. Intangible asset costs
   
6. Fees for work outsourced in Singapore
   
7. Materials and consumables
   
8. Freight and logistics costs.
   

It is the current policy stance not to double-incentivise the same activity. Applying this principle, it is expected that the tax value of allowances or enhanced deductions will be adjusted accordingly to take the RIC into account. For example, if a portion of equipment cost is the subject of RIC, capital allowances are expected to be available only for the remainder of the equipment cost.

Evidently, the Government’s intention is for the RIC to fall within the framework of the OECD Pillar Two Model Rules to be treated as a qualified refundable tax credit (QRTC), given Singapore will implement the Pillar Two top-up taxes next year. A key consideration under the Pillar Two framework is the tax consequences of a QRTC and a non-qualifying tax credit as they are treated differently. While both tax credits reduce a company's effective tax rate (ETR), QRTCs reduce the ETR to a lesser extent as it increases the claimant’s income (the denominator of the ETR formula), while a non-qualifying tax credit reduces the covered taxes (the numerator). A simple example below illustrates the concept.

Although the introduction of the RIC is a welcomed move in expanding Singapore’s fiscal toolkit and aligning Singapore’s tax incentive landscape with Pillar Two, taxpayers should consider their profile and business requirements in assessing the relative merits of RIC as against existing tax incentives and grants when deciding on the optimal scheme for their investment.

Such refundable tax credits have been adopted by countries such as Ireland and Belgium for R&D activities. These countries have now adapted their schemes to come within the framework of the QRTC under the OECD Model Rules. The introduction of RIC is therefore timely as it puts Singapore on a level playing field and complements our existing grant schemes.

Finally, as RIC is a new concept to Singapore, care should be taken in its design to avoid it being inadvertently caught by the World Trade Organization Agreement on Subsidies and Countervailing Measures. PwC will work with our clients to help provide feedback on this and to navigate the potential undesirable customs consequences if any.

Further details will also be released by the EDB and Enterprise Singapore by the third quarter of 2024.