How tax can help anchor Singapore as the startup hub of choice
Introducing R&D tax credits as an alternative can be of benefit since these tax credits can supplement R&D budgets, regardless of the companies' tax-paying status.
IN RECENT years, the Singapore government has made concerted efforts to develop the country into a leading startup hub in Asia by building a robust startup ecosystem. Singapore ranks 16th globally in Startupblink's Startup Ecosystem Rankings 2020 report, and is third in the Asia-Pacific, after Australia and China.
By 2019, there were 3,600 technology-enabled startups based in Singapore, and the country has seen proven success in cultivating the deep-tech startup sectors, such as medtech, fintech, advanced manufacturing, precision engineering, foodtech and agritech.
Much of the progress can be attributed to the country's business-friendly environment, political stability and strong intellectual property (IP) protection regime. Nonetheless, the Singapore government has been continually seeking innovation and recalibrating existing initiatives to ensure that it maintains its edge.
To further enhance its appeal, Enterprise Singapore has introduced numerous financial and non-financial programmes aimed at attracting and nurturing companies in their startup phase. A notable initiative is Startup SG that enables startups and ecosystem partners like investors, incubators and accelerators to access various avenues of support in the areas of talent, funding and infrastructure.
Clearly, there is no room for complacency as many countries are racing to develop their own startup hubs, recognising the potential economic spin-offs, such as foreign direct investment inflows and job creation.
For example, Thailand's Smart Visa project is designed to attract highly skilled investors or talent to work and invest in select targeted industries, where successful applicants enjoy privileges such as permission to enter the country for up to four years. In Vietnam, a new programme was launched in October 2020 to encourage startups to use the country as a base by providing free lease of land for 50 years and preferential interest rates, among other perks.
PROPOSED ENHANCEMENTS TO TAX REGIME
Having an appropriate tax programme is a key element of a competitive startup ecosystem. A 2020 survey by CorporateServices.com found that a beneficial tax regime is one of eight key reasons that startups select Singapore as a base. Singapore is known for its relatively simple and investor-friendly tax regime, ideal for startups with limited tax resources.
The challenge for Singapore is to maintain an attractive tax regime while remaining competitive vis-a-vis traditional startup hubs such as the US, Israel, Australia and China as well as up-and-coming hubs like Indonesia, Thailand and Vietnam.
Currently, Singapore does not have a tax programme specifically focused on startups, except for Section 13H, which is targeted at attracting investors to invest into startups, and the (more generic) tax exemption scheme for new startup companies. Can more be considered from a tax perspective to cement Singapore's position as a startup hub?
Startups typically require significant funding and incur large cash burn at the start of their business cycle. Many startups operate in fragmented market segments that are experiencing ongoing consolidation. This may trigger changes to business models, particularly where existing economic rents are eroded by new market entrants.
Startups' cash burn is typically in the area of marketing, as well as online platforms and infrastructure costs, which run for several years prior to monetisation occurring. Startups are often challenged by tax authorities on whether expenses incurred are for the "production of income" as the nexus to revenue may not be apparent, particularly where initial paths to profitability have changed due to industry trends and opportunities.
In addition, if research and development (R&D) is housed in one entity but exploitation is in another for commercial reasons, the startup may face a timing as well as entity mismatch of loss incurred versus income generated. Allowing non-current year loss utilisation by group companies may be a move that will be welcomed.
Also, startups may expend significant resources in R&D activities as they develop their unique offerings. While Singapore has enhanced R&D tax deductions, such measures do not result in liquidity if the startup is not yet in a tax-paying position.
Introducing R&D tax credits as an alternative can benefit cash-constrained start-ups since these tax credits can supplement R&D budgets, regardless of their tax-paying status.
The variety and ease of application for incentives can also be reviewed. Given the fierce competition for funds and consumers, startups seek to internationalise to drive growth. An increase on the cap for double tax deduction (DTD) as well as expansion of the type of costs qualifying for DTD will be welcomed.
Attracting and retaining tech talent is also a key focus of many start-ups. Implementing preferential individual income tax regimes such as tax exemptions or reduced tax rates for top tech talent may be a sweetener for them to relocate to Singapore. From an administration point of view, such regimes can tie in with existing programmes like Tech.Pass.
Lastly, changes to the tax regime that target potential investors of startups will be useful. It is timely to consider expanding the list of IP qualifying for writing down allowances.
The current qualifying list may be rather narrow in scope, given the pace of technological advancement. Such a move can encourage product and services innovation. Further, special merger and acquisition allowances can be considered for investments into Singapore-based tech startups.
Singapore already enjoys a long-standing reputation for its pro-business environment and friendly startup ecosystem, giving entrepreneurs strong reasons to establish their startups in the country.
Should the tax regime be further enhanced with the specific needs of startups in mind, it will go a long way in anchoring the country as the startup hub of choice.
- The writers are partners, International Tax and Transaction Services, at Ernst & Young Solutions LLP. The views are the writers' and do not necessarily reflect the views of the global EY organisation or its member firms.
Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.