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Tax Proposals on Research, Development Face MPs’ Criticism

Wednesday, 21 August 2013   (0 Comments)
Posted by: Author: Linda Ensor
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Author: Linda Ensor (BusinessDay)

The government’s far-reaching tax proposals on research and development came under a barrage of criticism in Parliament yesterday amid concerns they would act as a disincentive for much-needed research and development in South Africa.

The proposed amendment would require companies to show that the research and development for which they wanted a tax incentive was world-beating. This hurdle was "unrealistic and impractical", KPMG tax partner Mohammed Jada said.

The proposed retrospective application of several provisions of the draft Taxation Laws Amendment Bill was also a source of complaint by those who made submissions to the public hearings organised by Parliament’s standing committee of finance.

The Banking Association of South Africa was sharply critical of retrospective legislative changes, saying taxpayers took commercial decisions on the law prevailing at the time. It said the practice created regulatory uncertainty and undermined legitimate tax planning.

Mr Jada said the "draconian" tax proposals would substantially change the nature of the regime and discourage companies to undertake it. "It was very unlikely that any company would qualify because to win approval for the incentive a research and development project would have to be innovative and a world first.

"Applying restrictive innovative criteria as part of the pre-approval process, so as to limit research and development to projects that are only ‘world beating’ (as opposed to those undertaken to maintain a degree of competitiveness), is likely to deter companies from participating ."

South African firms would not be rewarded for investing in projects that would allow them to at least compete on an even footing with foreign companies.

The Treasury has proposed that the amendment be applied retrospectively to October 1 last year, but Mr Jada said this would place a burden on applicants for the incentive who had already submitted pre-approval applications as they would have to resubmit them.

Democratic Alliance finance spokesman Tim Harris said he supported the objections against the proposals. "We are well below our own national target of spending 2% of gross domestic product on research and development. This is not the time to restrict the tax benefits for companies undertaking legitimate research and development."

PricewaterhouseCoopers tax partner Prof Osman Mollagee bemoaned the lack of consultation by the Treasury on the bill’s far-reaching proposals and the insufficient amount of time allowed to comment on its complex provisions. He said among the unintended consequences of the lack of consultation were errors and anomalies in the law which had to be rectified later but which in the meantime caused uncertainty for taxpayers. "This uncertainty is a deterrent to investment and economic activity in general."

PricewaterhouseCoopers welcomed the revised tax regime for retirement fund contributions but was concerned at the proposed monetary cap on deductible contributions. It also questioned the ability of the South African Revenue Service to enforce compliance with the proposal to impose VAT on e-commerce transactions conducted by nonresident suppliers because they were not physically present in South Africa.

However, the MIH Group — which operates online retailer — welcomed the Treasury’s bid to level the VAT playing fields, but wanted the effective date for the measure to be brought forward to November rather than the proposed January 2014 as about 25% of annual book sales took place in the last nine weeks of the year.



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