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Minister Naledi Pandor On Research and Development Tax Incentive

Wednesday, 26 August 2015   (0 Comments)
Posted by: Author: All Africa
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Author: All Africa

Statement by the Minister of Science and Technology, Naledi Pandor MP, on the R&D tax incentive, Innovation Hub, Pretoria

This breakfast is part of a series of activities aimed at enhancing communication between the government and the private sector about the science and technology research and development (R&D) tax incentive.

The objective of the tax incentive is to promote private-sector R&D investment in South Africa. The tax incentive is available to companies of any size in all industries. It helps to reduce the after-tax price of R&D, creating an incentive for a company to increase its R&D. Through undertaking R&D, domestic companies can enhance their competitiveness by developing new products, processes and services. By 28 February 2015, a total of 876 companies had applied for the incentive.

The tax incentive, a deduction of 150% on R&D expenditure, represents government revenue forgone. Over the period 2005 to 2012 about R5 billion in tax revenue was forgone, according to National Treasury's Budget Review (February 2015).

R&D by its nature is aimed at generating new findings. It is based on original concepts and their interpretations. It is largely uncertain about its final outcome. That is why it has to be systematic in its approach and involve experimentation. An R&D activity may lead to a particular result or fail to achieve it.

If successful, R&D must lead to the new knowledge that can be embodied in a new technology, or to enable significant improvements to be made, which can be diffused to support some form of socio-economic activity. These are some of the basic concepts included in the Frascati Manual, which is used worldwide as a standard for defining R&D.

The tax incentive is aimed at encouraging R&D-led innovation. We hope to see domestic companies competing for global markets in important technology sectors and also improving ways in which they collaborate with international partners to discover new knowledge. Our aim is to improve the technology balance of payments.

An interesting example that illustrates this point is a world-class scanner technology that was originally developed for the mining industry. Further R&D was conducted and now it has found an application in the health industry. International markets will now look to South Africa to supply such a technology.

There is a high rate of non-approvals on applications involving ICT related activities. Not all ICT and software development activities can be regarded as R&D. To qualify under the R&D incentive, software activity must involve innovation. It must comprise experimental research, development or invention to achieve scientific or technological advancement. It must also create new knowledge or make an appreciable improvement to the existing state of technology. This is a global standard.

I have asked the department to host a session with industry in the next few months to clarify the R&D tax incentive for ICT related activities including software development.

Annually, I'm required by the Income Tax Act to report to Parliament about the benefits of the R&D tax incentive. In administering this incentive, there is a certain level of information which we will also require to assess the impact of the incentive. I hope you will cooperate with the department in doing this.

I'm looking forward to the presentations by two companies that have volunteered to share their experiences with the incentive. I hope that their presentations will highlight specific issues that government officials can take into account in improving the application process.

It's important for the department to work closely with the private sector in order to increase overall R&D investment in the country, not only on the R&D incentive but in a range of other areas where different forms of partnerships and interactions are required between government and industry.

Over the last few years, two major concerns have been raised.

First, timeliness and the backlog. The length of time taken for a decision to be communicated to companies regarding their application is still too long. Good progress is being made in clearing the backlog and to get to targeted turnaround time of 90 days.

Second, too many changes in the legislation. Stakeholders have raised concerns about the frequency of amendments to Section 11D of the Income Tax Act ("the Act"), under which the R&D tax incentive is administered.

As background, Section 11D was introduced in 2006 to repeal section 11B of the Act, which offered a basic deduction of 100%. Major amendments to section 11D were only made 6 years later in October 2012, to introduce the pre-approval procedure to replace the previous approach that relied solely on SARS' discretion regarding what activities should qualify for the R&D deductions.

The amendments that came into effect in January 2013, January 2014 and January 2015 are refinements and technical corrections, largely responding to concerns raised by the private sector. The current incentive design principles match global practices and should be allowed to mature. No amendments to Section 11D are planned during the current round of the Taxation Laws Amendment Bill.

Department of Science and Technology

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