Productivity and Innovation Credit (PIC) Scheme: an update
Since the introduction of the PIC scheme in 2010, the Inland Revenue Authority of Singapore (IRAS) has made various refinements to the scheme, in particular with regard to the qualifying activity relating to the acquisition and leasing of prescribed automation equipment.
We summarise the key changes below.
PIC automation equipment
The PIC scheme currently provides for a 400% tax deduction or allowance for the first S$400,000 incurred on acquisition and leasing of prescribed automation equipment for the Year of Assessment (YA) 2011 to YA 2015.
Businesses that invest in automation equipment which are not in the prescribed list can now apply to the IRAS to have the equipment approved for PIC purposes on a case-by-case basis.
In general, the equipment must meet the following criteria:
- The equipment automates current core work processes of the business;
- The equipment enhances productivity of the principal trade of the business, such as reduced man-hours and/or improvement in existing work processes; and
- The equipment is not a basic tool used in the industry of the business. (A basic tool is one which is necessary for carrying out the trade or business, and is commonly used in the industry).
The IRAS will process the application within two months of the receipt of the application form.
The application should be submitted on a timely basis for the IRAS to process the approval so that the taxpayer could apply for the PIC cash payout1 or claim the PIC deduction/allowances in the tax return. Pending the IRAS' approval, no claim should be made for the PIC cash payout or deduction/allowances.
Expenditure on cloud computing services
Expenditure incurred on procuring cloud computing services2 now qualifies for PIC enhanced deduction purposes.
Disposal of the PIC automation equipment within one year
Businesses must own the prescribed automation equipment for a minimum period of one year. If otherwise, the enhanced allowance or cash payout will be clawed back or recovered.3
However, the claw-back/recovery provision may be waived in the following circumstances:
- Automatic waiver:
An automatic waiver will apply if, in the year of disposal, the cost of remaining qualifying equipment (excluding cost of the equipment disposed of) acquired in the same basis period as the equipment disposed of, is more than or equal to the expenditure cap applicable for the period. However, the disposal must be declared in the tax return.
- Waiver on a case-by-case basis:
In all other cases, businesses must apply to the IRAS for a waiver of the claw-back provisions and provide bona fide commercial reason(s) for the disposal. The application must be made on a prescribed form to be submitted with the tax return (if enhanced allowance was claimed previously) or within 30 days from the date of disposal (if cash payout was claimed). The approval for waiver is at the IRAS' discretion.
1 Eligible taxpayers have the option to convert their PIC qualifying expenditure of up to S$100,000 for YA 2011 to 2015 into a nontaxable cash grant, subject to conditions.
2 "Cloud computing" is defined in the Income Tax Act to mean a model for delivering information technology services under which shared services or software, or both, are provided to computers and other devices over a network such as the Internet, and "cloud computing service" refers to any information technology service delivered by means of cloud computing.
3 The enhanced allowances will be clawed back in the YA relating to the basis period during which the sale, transfer, assignment or lease of the equipment takes place. In the case of cash payout, the taxpayer has to notify the IRAS in writing within 30 days from the date of the sale, transfer, assignment or lease of the equipment. The IRAS will then issue a cash payout recovery notice requiring repayment of the cash payout within 30 days of the notice, failing which penalties will be imposed.
PIC automation equipment acquired on hire purchase (HP)
PIC automation equipment acquired under HP agreements signed during the basis period for YA 2012 to 20154 where the repayment schedule straddles two or more basis periods, will now be eligible for cash payout. The amount of cash payout for each YA will be computed based on the principal amount paid during the basis period for that YA (subject to conditions including expenditure cap).
In addition, from YA 2013 to 2015, the cash conversion rate will be increased from 30% to 60%5 for up to S$100,000 of qualifying expenditure, subject to conditions.
The increase in the cash payout rate brings the value of cash conversion from 7.5% to 15%6 of qualifying deduction/allowance, which makes it more attractive for businesses to opt for cash payout.
Businesses which acquire new automation equipment, currently not on the prescribed automation equipment list, may wish to consider if they should apply to the IRAS for their equipment to be approved for PIC enhanced deduction/allowance purposes.
In view of the higher cash payout rate, businesses which pay little or no income tax or have significant tax losses or enjoy concessionary tax rates lower than 15% should consider whether they should opt for the cash payout.
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