Should the Income Tax Act be amended to boost value creation?

In its 2018 budget proposal, PwC believes that the 150% tax deduction for R&D expenditure is hardly competitive.

As intellectual regimes gain more value in driving innovation and enterprise, the government may want to consider amending the Income Tax Act (ITA) to extend writing down allowances to the IP’s economic owner even without prior approval from the Economic Development Board, according to PwC 2018 budget proposal.

This comes as PwC notes that multinational companies potentially face the dilemma of transferring full ownership of their IP to Singapore amidst existing legal and commercial constraints.

Amending Section 19B of the ITA to extend writing down allowances to the economic owner would be consistent with international standards in IP amortisation as witnessed in countries with strong IP frameworks around the world such as the Australia and United Kingdom where there is no distinction between the economic and legal owner of the IP.

PwC similarly recommends an amendment for section 14DA of the ITA to qualify overseas R&D activities for enhanced deduction as the Productivity and Innovation Credit (PIC) scheme expires after YA 2018.

“Section 14DA of the ITA should therefore be amended to include qualifying R&D activities conducted overseas so long as the activities have a nexus to the Singapore business, e.g. the majority of the IP developmental activities will be carried out in Singapore or the IP developed out of the R&D will be owned by a Singapore resident enterprise,” PwC said in its report.

As the PIC scheme lapses this year, qualifying R&D expenditure would only be allowed 150% tax deduction which PwC deems as non-competitive by international standards as the United Kingdom provides as much as 225% deduction for qualifying R&D expenditure for SMEs and Ireland provides as much as 300% deduction.

PwC thus recommends that to maintain an attractive fiscal regime that will support businesses, there should at least be a 200% tax deduction in place to promote innovation and enterprise within the city-state.

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