Can you get the s11D incentive if a project is controlled from RSA but the work is done overseas?
19 May 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: In terms of
section 11D relating to Research and Development costs, per section 11D(2) the
research and development has to be undertaken in South Africa.
"(2) (a) For the purposes of determining the taxable income of a
taxpayer that is a company in respect of any year of assessment there shall be
allowed as a deduction from the income of that taxpayer an amount equal to 150
per cent of so much of any expenditure actually incurred by that taxpayer
directly and solely in respect of the carrying on of research and development
in the Republic if….”
We are developing a computer program which would qualify for
the allowance however we are using offshore developers for a large part of the
research and development but it is controlled from SA. My query is, if we as a
South African entity are paying external consultants to do the development on
our behalf and all instructions etc. are from SA, would we qualify for the S11D
A: This is a
complex part of the law and you may well want to consult a specialist. We can also only give guidance.
The subsection requires that expenditure be actually
incurred by a taxpayer directly and solely on research and development undertaken
in the Republic is 150% deductible provided that-
these expenditures are incurred in the
production of income;
the expenditures are incurred in the carrying on
of a trade solely within the Republic of South Africa;
the research and development is approved in
terms of section 11D(9); and
the expenditure is incurred on or after receipt
of the approval by the Department of Science and Technology.
The fact that you "are using offshore developers for a large
part of the research and development but it is controlled from SA” implies to
us that the consultants will actually be doing the research outside the
Our reading of the words "undertaken in the Republic” is
that the actual research must be done in the RSA. The Act doesn’t actually describe what is
meant with "undertaken in” the RSA. If
the persons doing the research are not in the RSA it may well be seen by SARS
that the work is undertaken in the RSA.
We also submit that the fact that you will be controlling the research
and providing the instructions may well meet the requirement, but we suggest
you obtain an opinion in this regard. It
is not apparent from the Explanatory Memorandum, but one can assume the
intention is that the ownership and benefit of the research must be in the
As indicated, the Department must approve the research and they require detail of the way it is to be undertaken. It may be advisable to also approach them for an opinion in this regard.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.