4 July 2023

Since its announcement during the 2023 Budget Parliamentary Session, the much-anticipated Enterprise Innovation Scheme (EIS) by the Inland Revenue Authority of Singapore (IRAS) has finally unveiled its implementation details. 

This government incentive aims to provide enhanced support for companies looking to foster innovation. The scheme encompasses five categories of expenditure, which include qualifying R&D, IP registration, IP acquisition and licensing, training, and innovation projects conducted with esteemed partners like polytechnics and the Institute of Technical Education (ITE). 

In this article, we will delve into the additional elements disclosed by IRAS on June 30, 2023. 

Enterprise Innovation Scheme: Unlocking Growth Potential 

Let’s begin by revisiting the essential information shared last February. For each year from YA 2024 to YA 2028, the five eligible expenditure categories mentioned earlier will qualify for a tax deduction of 400% for the first S$400,000 annually. Notably, IRAS has now introduced an important update regarding this annual cap. The cap of S$400,000 will be determined on a per-activity basis. This means that if a business incurs qualifying expenditure across all five categories, it can claim enhanced deductions on a total of up to $1,650,000 [($400,000 x 4) + $50,000*] of qualifying expenditure incurred. 

Moreover, IRAS is proposing the Option to Convert Qualifying Expenditure into a Cash Payout. However, this conversion is limited to a maximum of $100,000 of total qualifying expenditure across all qualifying activities for each YA. The cash payout conversion rate stands at 20%, which implies a maximum cash payout of $20,000 per YA. 

*Please note that expenditure related to innovation projects carried out with polytechnics, the Institute of Technical Education (ITE), or other qualified partners will be capped at S$50,000 instead of S$400,000. 

Enhanced Tax Deduction for Qualifying R&D Activities Undertaken in Singapore: 

Arguably, the most eagerly awaited element pertains to the implementation of the scheme for R&D expenditure, particularly concerning the existing R&D Tax Measures regulations

As anticipated, eligible R&D expenditure will adhere to the same identification and computation rules as the 100% base deduction (provision 14C) and the 150% additional deduction (provision 14D). However, a new element has been introduced concerning the computation rules for companies subject to concessionary tax rates. 

In cases where a company, subjected to concessionary tax rates, undertakes R&D projects unrelated to its trade or business, a factor should be applied to its expenses to better reflect its investment effort.  

Let’s consider a maritime sector company enjoying a concessionary tax rate of 10% and undertaking a non-marine project costing $1 million (e.g., a digitization project). In this scenario, the total R&D tax deduction (under 14C, 14D, and EIS) would be multiplied by 17%/10% = 1.7, resulting in the following deductions: 

  • Provision 14C: 100% x S$1 million = S$1 million 
  • Provision 14D: 150% x S$1 million = S$1.5 million 
  • EIS: 150% x S$1 million = S$1.5 million 
  • Total = S$4 million x 1.7 = S$6.8 million tax deduction 

Analysis and opinion: 

The Enterprise Innovation Scheme (EIS) will certainly become an indispensable tool for companies seeking to embark on R&D and innovation projects within Singapore. This scheme showcases the government’s genuine commitment to support companies while preserving existing tax claiming and accounting practices. 

However, it is crucial to note that the scheme shares some limitations with the current R&D Tax Measures, such as the requirement for companies to be the beneficiaries of R&D projects to enjoy the scheme’s benefits. Consequently, this necessitates re-invoicing and IP regulations that may prove restrictive for international companies. 

If you are interested in learning more about the Enterprise Innovation Scheme and its benefits, we encourage you to reach out to our experts and request a free diagnostics session!