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Tax Bill set to Disadvantage Local Research

Wednesday, 10 July 2013   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BusinessDay,

Proposed refinements to the current research and development incentive, contained in the latest draft of the Taxation Laws Amendment Bill published at the end of last week, hold grave implications for research in South Africa.

The refined definition will exclude all research and development that does not qualify as "world-beating", as opposed to research and development undertaken to maintain a degree of international competitiveness, tax experts have warned this week.

KPMG corporate tax director Mohammed Jada said the effect of the changes would be that a South African company would be rewarded if it invests in research and development to land a spacecraft on Mars, for example.

However, it would not qualify if it invests in developing South African "home-grown" technology to land a craft on the moon — simply because that has been done before.

Izak Swart, tax director in the research and development division of Deloitte, on Tuesday said a company wishing to do research on what could possibly replace the telephone would qualify for an incentive, but a manufacturing company that wanted to "reverse-engineer" new international technology to improve its efficiency, would not qualify.

In reality, most research and development in South Africa is reverse-engineering, Mr Swart said.

Mr Jada said: "In other words, the implication is that the government is not interested in helping South African companies that invest in local research and development in an effort to catch up with the rest of the world."

The Treasury said in the explanatory memorandum accompanying the draft legislation that the current definition contains wording that is "somewhat inconsistent and confusing". The definition confuses activities with end results, the Treasury contends.

"The revised definition essentially ensures that the research and development is intended for wider use than internal business use — by the taxpayer or those connected to taxpayer.

"The overall flavour of the definition is also shifted more towards a technical scientific and technological bias with an added emphasis on innovation," the Treasury said.

Mr Jada said the proposed changes appear to simultaneously limit qualifying criteria while at the same time offering special dispensation for selective sectors. "On the face of it, we caution against introducing legislation that has one set of rules for a particular industry sector and another set for other sectors.

"The very aim of the incentive is to encourage investment in research and development across all sectors of the South African economy," Mr Jada said.

Mr Swart said he suspects the changes are intentional, with the main aim of stopping abuses.

"However, the proposed changes will certainly set us back in terms of the targets set for spending on research and development."

A recent national survey showed South Africa spent just 0.87% of gross domestic product on research and development in 2009-10, down from 0.92% in 2008-09 and 0.93% in 2007-08.

This is way below the new target set by the Department of Science and Technology of 2% by 2018.



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