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Can you get the s11D incentive if a project is controlled from RSA but the work is done overseas?

19 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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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 allowance?

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-

(i)                  these expenditures are incurred in the production of income;

(ii)                the expenditures are incurred in the carrying on of a trade solely within the Republic of South Africa;

(iii)               the research and development is approved in terms of section 11D(9); and

(iv)              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 RSA. 

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 RSA. 

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.


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