Building a conducive ecosystem for SMEs

SMALL and medium enterprises are important job creators in the Singapore economy and their resilience is essential to sustainable economic growth. The government has been driving a strong emphasis on the development of the SME sector. Singapore has the most SME-friendly government, according to the Global SME Performance Review for 2013/2014 conducted by the Association of Chartered Certified Accountants (ACCA) and Institute of Management Accountants (IMA). The country has also been chairing the Asean SME Working Group since June 2014 and will lead fellow Asean members into the realisation of the Asean Economic Community for SMEs in 2015.

Despite the government's focus on the SME sector, SMEs in Singapore continue to be challenged by manpower issues, increasing competition and high rental costs, according to the 2014 SME Development Survey. In fact, the SME1000 rankings published by DP Information Group in January show that the top 1,000 SMEs in Singapore have seen a year-on-year dip of 8.7 per cent and 0.8 per cent in combined sales, and combined profit, respectively.

To sustain growth and compete more effectively, SMEs need to restructure, revamp their business models and build up new capabilities. These include pursuing productivity improvements, strengthening technology, embracing innovation and expanding overseas.

However, many lack the resources, skills and funding to do so.

The Singapore government has made helping SMEs a priority in the past few Budgets with measures such as the Productivity and Innovation Credit Plus (PIC+) scheme, further tax deduction schemes and the angel investors scheme. SMEs also have various funding avenues such as government-backed cash grants and tax incentive schemes.

Apart from these, certain regulations are in place to alleviate the administrative burden on SMEs such as the audit exemption for exempt private companies and the introduction of the simplified tax filing (ie. Form C-S) for small companies. In 2014, an administrative concession was introduced to waive the requirement for companies to file an annual estimated chargeable income, subject to meeting certain conditions.

While these have certainly eased SMEs' financial and compliance burdens, perhaps it's time to place even more focus on SMEs from a policy point of view.

In 2008, the European Commission launched the Small Business Act (SBA) for Europe, a move that recognised the importance of SME-based policy-making. The SBA is a series of guidance measures centred on 10 SME-friendly principles, including the "Think Small First" principle, which places SMEs at the forefront of policy-making and helps ensure that new regulations do not add to the burden faced by businesses.

The "Think Small First" principle encompasses good practices such as systematically consulting SMEs on new proposals, for example, introducing a mandatory consultation period on proposed major legislation and maintaining a "small companies database" to gather feedback from SMEs.

REDUCING THE BURDEN ON SMES

There is also the application of a compulsory "SME Test" to check whether new European Union (EU) policies and laws will have an impact on small businesses. It identifies and assesses the impact of policies and whether mitigating measures such as simplified inspection, less frequent reporting and exemptions could be applied to SMEs.

It also subscribes to the "only once" principle, where information provided to one administration is not asked again by another administration, so as to reduce the paperwork for businesses.

The SBA in Europe offers many salient points that Singapore could consider in implementing a structured framework to guide its policy-making, taking into account the welfare and unique circumstances of SMEs.

Reducing administrative burden on SMEs is always welcomed. For example, the revised transfer pricing guidelines issued by the Inland Revenue Authority of Singapore (IRAS) on Jan 6, 2015 have set thresholds such that companies including SMEs, which falls below these thresholds, do not have to prepare contemporaneous transfer pricing documentation.

However, more can be done on other fronts. Schemes such as the PIC still entail a substantial amount of administrative work to support even the smallest of claims. While the intention to help SMEs is good, SMEs may still find it difficult to realise the benefits without straining their already lean resources.

It would be more beneficial for smaller businesses if the supporting documentation required for such schemes could be based on a materiality threshold. This would also speed up the overall administrative process and encourage genuine claimants to take advantage of the PIC scheme without fear of administrative burden.

Likewise, a different threshold could be applied to the application for tax incentives. Tax incentives such as the Pioneer Incentive as well as the Development and Expansion Incentive have been designed to attract multinationals to invest into Singapore. The quantitative criteria that companies are benchmarked against could put these incentives out of the reach of SMEs. Relaxing the criteria based on a lower threshold would enable more SMEs to enjoy the tax incentive benefits.

Alternatively, the government could establish separate tax incentives specifically for SMEs with a set of criteria that is more aligned with the performance of SMEs. Moving away from strict quantitative criteria to more qualitative criteria, such as the potential or ability to expand globally, would be more meaningful for SMEs.

For SMEs with the ambition to venture abroad, the government could consider providing financial aid in the form of cash subsidies for certain qualifying expenses for internationalisation, in addition to the existing tax measures like further tax deduction scheme for business development trips and trade fairs. This would more directly address the cash flow problem that SMEs may face.

Clearly, government policies and support are critical in creating a more conducive ecosystem that catalyses the growth of SMEs. A concerted shift to SME-based policymaking - looking at issues and solutions through a different lens and with a different mindset - will make a fundamental impact.

For more stories, analysis and infographics on Singapore Budget 2015, head to btd.sg/budget_15.