The R&D tax incentive – issues and recommendations
19 November 2015
Posted by: Author: Dov Paluch
Paluch (Catalyst Solutions)
article is an adaptation of a speech given at a recent session held by the
Minister of Science and Technology discussing the R&D Tax Incentive.
hear of people criticizing our government, but the R&D Tax Incentive is an
example of our government implementing a far-sighted policy in line with many
other countries around the world. We need to applaud our government for its
policy intentions around this incentive and showing an interest in making it
work. The incentive will however succeed or fail based on how it is
implemented. And upfront, we must acknowledge that all of us, government,
practitioners and taxpayers are united in trying to make this incentive work
for the betterment of South Africa.
Minister of Science and Technology (Minister Pandor) has pointed out, this is a
great time to think about the purpose of the incentive and whether it is
achieving its goals. In this article, I hope to present to you the strengths
and the weaknesses that we have observed during our time working with the
incentive. I will also propose some recommendations.
In order to
do that, it is important to take stock of where we have come from with the
incentive and where we want to go through studying two elements of the
incentive: policy – type of incentive, rate of the benefit and qualifying
criteria; and administration – how is the incentive implemented?
ago, the R&D incentive landscape was extremely uncertain. SARS were
responsible for administering the incentive and seemed to be conducting
technical reviews on R&D claims many years after submission.
R&D was being rejected and all software R&D was being classified as
relating to Internal Business Processes and therefore excluded from the
important to note that while the policy of the incentive was unclear, the
incentive was administratively easy to access for taxpayers.
move forward to today where the tax incentive is now three years into its
revised format. With the DST taking over
the responsibility of the technical elements of the incentive, the policy
intent behind the legislation seems to be coming through in a stronger way.
The rate of
the benefit has remained the same, but the qualifying criteria have been
clarified somewhat. While certain "harsher” innovation criteria have been
added, there seems to be an acknowledgement from a policy perspective that the
government wants to incentivise more genuine R&D taking place in South
R&D is a great example of this. After a three year struggle, the
legislation has finally clarified the intention of the incentive.
impressive policy intentions of the legislation are in danger of falling flat as
a result of the administration of the incentive. While we acknowledge the Department’s efforts
to improve, these issues can no longer be seen as teething problems relating to
a new type of incentive. These are systemic issues that need to be dealt with.
This is not
a laundry list of complaints about the incentive, but it is important to
discuss its current shortcomings which I feel can be broadly categorised into
two main areas: factual and perceived.
We are all
aware of the main factual issues (and the Ministry will acknowledge these):
are extremely long waiting periods for a response from the Department due to
large backlogs of applications. This means that companies are unable to plan to
receive the incentive.
application form and process are cumbersome and repetitive.
is no appeal process which taxpayers feel is procedurally unfair. This is
especially relevant as taxpayers are receiving rejections so long after
are no guidelines on the interpretation of the legislation. Taxpayers have been
waiting for official guidelines since 2012.
is very little benefit to SME’s – many of whom are in a tax loss situation.
– taxpayers are complaining about the administrative burden associated with
pre-approval. For companies conducting multiple projects throughout the year
this process becomes a nightmare taking them away from their real jobs. Not to mention the progress reports that need
to be completed as well.
the factual issues, but it is also important to look at the general perceptions
of taxpayers about the incentive.
There are a
lot of ‘horror stories’ in industry about the R&D Tax Incentive. Many companies that we speak with that are
undertaking genuine R&D are reluctant to apply for the incentive because
they have heard of others who have been badly burnt. There is a perception that the incentive is
too hard to get and not worth the effort. Here is why.
It is felt
that the interpretation of the legislation is being looked at too narrowly; or
in fact, that the legislation itself is too narrow. A well-known frustration is
within the software industry – how is it possible that approximately 70 per
cent or more of software applications are being rejected? If Whatsapp, Facebook
or Meerkat would be presented to the committee today, would they be seen as
routine developments? There are groundbreaking technologies being developed in
SA that are being dismissed as minor and routine.
taxpayers feel like they are not able to maximise the incentive. They can only
claim on larger projects, while smaller, more immediate projects cannot be
claimed as there is not enough time to pre-approve them and the administrative
burden outweighs the financial gain.
importantly, there is a general perception in the industry of not knowing what
is taking place behind the closed doors of the adjudication committee. This is problematic
for a number of reasons.
are feeling like they are not being heard and are unsure if their entire
application is being looked at. This leads to a perception of an inconsistent
application of the law where there can be similar projects with different adjudication
policy discussions and interpretations would be shared with the public, it
would enable them to bring applications more in line with the intended policy rather
than clogging up Department’s time with applications that should not be there.
The DST has
gone some way to fixing the issues and there are companies that have received
encouraging to see that when discussing the incentive with our successful clients,
it appears that when they eventually do receive the benefits what they are able
to do with them match the goals of the incentive. They can afford to market and
advertise more – bringing more money into the country – leading to them to hire
new staff in SA. They also reinvest the
tax savings into undertaking even more R&D.
improvement front, the letters coming from the Minister are now more detailed,
the department seems to be doing better with communication and although it
takes a long time to finally receive approval, the department are very
approachable and willing to take on feedback – all of this needs to continue.
if the DST were to get through the backlog and have a quicker turnaround time,
I fear that this is only as a result of fewer applications coming in. We need to design a system that is robust
enough to cater for the fact that many more companies (not less) should be
applying for and receiving this incentive.
us to a discussion on where we want the incentive to go.
thinking strategically, we need to look at why we have the incentive. We are
lagging behind on most global innovation indexes (whether it is the Bloomberg
Innovation Index, or the OECD Competitiveness Index, South Africa is not where
it should be). In addition, South Africa is trying to increase Expenditure as a
percentage of the GDP from 0.76 to 1.5 per cent. This metric has not changed
for three years. This is a very
ambitious goal. We can only achieve these goals through an improvement in the
incentive from both a policy and an administrative perspective.
benchmarked globally, the additional 50 per cent deduction sits somewhere in
the middle of what other countries are offering. But for a country trying to significantly
increase expenditure on R&D, perhaps being an average incentive is not good
We need to
provide a significant reason for R&D to be done here in SA rather than
overseas, and perhaps a 14 per cent after tax benefit that needs to be
pre-approved is not enough of an incentive to achieve the government’s lofty
So here are six
points on how to improve it (and these are by no means exhaustive)
- Increase the rate of the benefit – we
need to provide more of a carrot for companies to conduct R&D in SA – we
are in a globally competitive market and other countries are offering up to 300
per cent additional deductions.
(and perhaps relax) the qualifying criteria – either from an interpretation of
the legislation or the actual legislation itself. It is important for the
public to understand what type of R&D the government is trying to
incentive. Looking at global incentives, Singapore only requires companies to
conduct development on products that are a "first in Singapore” and not
globally. We need guidelines and it is
important to implement some form of an appeals process.
the incentive more meaningful for smaller companies. These are companies that are hugely important
to innovation in our economy. Many countries provide for a refund for smaller
companies. We need to follow suit.
- As recommended by the OECD, it is
important to balance cash and tax incentives. At the moment, the cash incentives on
offer for innovation (like SPII) are falling flat.
- Make the incentive easier to
administer and easier to access - we need to seriously reconsider the Pre-approval
system – South Africa is globally unique in instituting a pre-approval system.
Most would agree that there is a need for a change to either a retrospective
system or a combination of the two. A
pre-approval system seems to simply add to the administrative burden of both
the government and taxpayers. Why not have companies submit an annual R&D
application to the DST (as is done in Australia – as an eg. - for the
incomplete 2013/14 period , AusIndustry has received over 13,000 company
registrations worth over $18 billion. Our numbers pale in comparison). and
- Finally - Open additional lines of
communication – The government needs to open continual communication channels
for interaction with the public. They need to send out regular updates with
statistics and guidance on the incentive.
summarise, both the policy and the administration need a revamp.
important recommendation however is the following: We strongly suggest setting
up a joint task team (made up of Government and industry) to review the
incentive and all suggestions, and to report back to the Minister on how to develop
a sustainable solution.
recently posed the question when discussing Energy Innovation, "Why should
governments fund research?”. He answered by saying, "For the same reasons that
companies tend not to: because it is a public good. The benefits to society are
far greater than the amount the inventor can capture.”
So we must once
again applaud the government for its efforts thus far in incentivising private
sector innovation. But there is still a
lot of improvement required to take this country to where we all know it could
be. Given that so many other countries
are providing incentives for R&D, we need to make sure that we are not only
attracting foreign companies to setup their R&D operations here, but that
we aren’t also losing local innovators to foreign markets. The incentive is an essential part of the SA
R&D Landscape and it is imperative that we get it right.
I commend the
Minister and her team on engaging with the public. Many companies have global
experience that could assist the Ministry on its path to achieving its goals of
increasing R&D and innovation in South Africa.
incentivising private sector R&D in SA has come a long way, there is still
more that can, and should, be done.
Let’s create a positive discussion on how we can take this much needed
incentive forward in South Africa.
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This article first appeared on the November/December 2015 edition on Tax Talk.