Section 11D in its new format goes further than its previous incarnation and now usefully provides for the deductibility of expenditure incurred, not merely in creating anew, but in improving any such invention, design or computer program if the expenditure relates to a new or improved function, improved performance, improved reliability or improvement of quality in that invention, design, computer program or knowledge.
In order to be deductible, the expenditure in question must be –
•by the taxpayer;
•directly and solely in respect of research and development undertaken in the Republic.
The words ‘directly’ and ‘solely’ are, it seems, intended to exclude administrative expenses such as the salary of staff who are not themselves engaged in research and development.
In The Production of Income and in the Carrying of any Trade
In addition to satisfying the aforegoing requirements, qualifying expenditure must be incurred –
•in the production of income; and
•in the carrying on of any trade.
These are, of course, also key requirements for the deductibility of expenditure under the general deduction provisions of s 11(a), but it is noteworthy that, unlike s 11(a), expenditure is not disqualified from deduction under s 11D merely because it was of a capital nature. Thus, capital expenditure that satisfies the criteria for deductibility in s 11D will also be deductible.Conversely, noncapital research and development expenditure that fails to satisfy the criteria in s 11D may be deductible under s 11(a) – but of course,the incentive for a taxpayer to bring his expenditure under s 11D is the prospect of a 150% deduction.
The Establishment and Functions of the Statutory Committee
Apart from the statutory criteria, outlined above, that must be satisfied for the expenditure on research and development to qualify for the 150% deduction, there is another significant hurdle to be cleared by the taxpayer. The amended s 11D provides for the establishment of a statutory committee which will be required to evaluate taxpayers’ applications.
Now, it could indeed make sense to have a technical committee to determine whether the taxpayer’s application for approval of research that may qualify for the 150% deduction satisfies the criteria set out in s 11D(1)(a) and (b), namely that it is research directed to discovering new scientific or technological knowledge or creating a patentable invention, a registrable design or a computer program.But the difficulty is that s 11D(9) says that –"The Minister of Science and Technology … must approve any research and development being carried on or funded for the purposes of [the additional 50% deduction provided for in s 11D(3)] having regard to –
(a) the innovative nature of the research and development;
(b) the extent to which carrying on that research and development requires specialised skills; and
(c) such other criteria as the Minister of Science and Technology in consultation with the Minister of Finance may prescribe by regulation.
These are additional criteria, distinct from and now – at the tail-end of s11D – superimposed upon those laid down at the outset in s 11D(1)(a) and (b). It is presumably at this stage that the taxpayer who proposes to engage in R & D to develop a new and improved bird seed will find that his application for approval is turned down.But why, he will no doubt protest – a new, improved bird seed will be patentable and will therefore satisfy the criteria in s 11D(1)(a) and (b)? To which the committee’s answer, via the minister (and as foreshadowed in s11D(9), quoted above) will no doubt be, "yes, but it’s not innovative enough.” In short, the criteria set out in s 11D(9) are not objective criteria, but involve subjective views of committee members as to the degree of innovation involved in the proposed research and the level of specialised skills that it involves.
Consequently, the opening words of s 11D(9) that the minister must approve – thereby connoting an obligation and apparently heralding criteria which, if fulfilled, will give the applicant an absolute right to approval of the application – are wholly misleading.The criteria in this sub-section are so rubbery and subjective that an adverse decision will be very difficult to challenge by way of judicial review.Section 11D(9) thus seems to contemplate that the minister can decline to approve an R & D application - even though it fulfils the earlier criteria laid down in s 11D(1)(a) and (b), namely that it was aimed at creating a patentable invention, registrable design or a computer program.
It is, however, significant that s 11D(16) explicitly provides that the minister must provide written reasons for any decision to grant or deny any application for approval of an R & D project.This clearly foreshadows that an adverse decision can be taken on judicial review by an unsuccessful applicant.
Expenditure on research and development is, inherently, an expensive gamble, with no guarantee of worthwhile results.Without a strong fiscal incentive, the business sector may be disinclined to divert resources to research and development, or may choose to outsource it to countries where it can be done more cheaply.It remains to be seen how strong an incentive the revised s 11D turns out to be.It also remains to be seen whether judicial review of a ministerial decision to decline an application for research that will qualify for the 150% tax deduction turns out to be an effective remedy for aggrieved applicants.