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Productivity and Innovation Credit

To foster productivity and innovation, government agencies in Singapore have been providing several assistance schemes to small medium enterprises (SMEs) to adopt new technology and achieve that ultimate objective. One of those schemes are the Productivity and Innovation Credit Scheme, that lets small businesses receive up to 400% tax benefits/deduction or receive up to 60% cash payout in the YA year, 2012 – 2015.

The 2013 budget that was introduced back in February gave opportunities for small businesses in Singapore to increase their productivity and efficiency with the use of technologies as well as to deal with small number of foreign workforce. So how can small and medium businesses make the most of all these schemes that are available for them?

Well, we got few tips from expert consultants on how three types of SMEs will benefit from PIC schemes.

Just take an example of a manufacturing firm like Rotating Offshore Solutions. The company is specializing in marine engineering and build customized modules particularly for clients that are involved in the oil and gas industry.

The firm was launched in 2004 and is one of the fastest developing companies in Singapore with revenue more than $35 million each year and its profits are around $5 million per year. In 2010, Rotating Offshore Solutions won an Enterprise 50 award. Like so many companies in Singapore operating in manufacturing sector, most of the firm’s workers are foreigners.

About half the firm’s hundred strong work force are foreign workers. This is mostly because of the fact that the company could not find enough Singaporeans to work for them.

“For now, we are focusing their efforts on increasing its market share as well as driving its business sales,” says Chia Kuan Wee, the executive director of Rotating Offshore, “Because of this, we don’t expend much on research and development activities in Singapore, but send our engineers to foreign countries for regular training.”

Mr. Chia says that sending their engineers overseas cost their company almost 5 percent of their total revenue. But for now, the company wants to expand their local operations but don’t have any immediate plans to enlarge their business overseas.

No matter what their plan is, most consultants agree that manufacturing companies like Rotating Offshore will greatly benefit from the Productivity and Innovation Credit, or PIC scheme.

The PIC scheme is specially aimed to encourage small and medium companies to be more innovating and productive by giving them up to 400% tax benefits/deductions and annual funding up to $400,000 on each of the six qualifying activities.

Harvey Koenig, a tax partner at KPMG, thinks that the Rotating Offshore need explore the PIC scheme because their main business of designing customized modules may be regarded as the R&D activity under the scheme.

Given the fact that the company annually spends $1.75 million each year for sending their engineers for overseas training, Mr. Koenig also thinks that Rotating Offshore can claim the tax benefits/deductions available through PIC for training.

If the company goes for the cash payout option, that could mean at least maximum $60,000 fund under the new improved scheme.

And if the firm also decide to replace its foreign workers by hiring older Singaporeans, Yong Jiunn Run, the CIMB head of commercial banking, says that the company could also save on salary costs, too. This could mean the company will save at least $14,400 in wage for every five foreigners it replaces because the government gives at least 8 percent wage subsidy.

Additionally, if the company decides to train their staff in-house, it can claim the training costs of almost $10,000 under the PIC training staff activity, which also equates to tax deductions worth up to $40,000.

Here’s the reaction from Mr. Chia!

Mr. Chia now agrees that this awesome PIC scheme could be useful boost for his company, however, also notices that the cash payout option really doesn’t help his company.

“Recently, we have applied for the PIC scheme and found it useful for the income tax deductions, which is more beneficial than the other option – the cash payout option,” says Mr. Chia.

He concludes that the overall budget program was neutral to them and their company were not quite affected by lowering the dependency ratio. Although he thinks it’s not great, but he still considers it’s a  good option for many other small businesses out there, particularly to those one who are starting out.