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Proposals on research tax incentive ready to be presented to government

Monday, 29 February 2016   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (BDlive)

A task team established to resurrect the government’s flawed research and development tax incentive has already drafted recommendations to fix the problems.

Finance Minister Pravin Gordhan referred to the team in his 2016 budget review, saying the proposals, which would probably be presented to government next month, would be considered to enhance the incentive.

SA is lagging behind in most global innovation indices. Although it has set an ambitious research and development expenditure target of 1.5% of gross domestic product (GDP), actual expenditure remains at 0.76%.

The Department of Science and Technology published draft guidelines in October last year, but these were met with severe criticism from several stakeholders. This led to the establishment of the task team.

Margo Attorneys patent attorney Darren Margo said the guidelines, despite being three years overdue, were "fatally flawed". The two sets of guidelines were in conflict with the Patents Act, Designs Act and Copyright Act, he said. It seemed the new guidelines would make the pre-approval process even more challenging.

Duane Newman, director of Cova Advisory, did not believe the guidelines were at fault. The Department of Science and Technology and its minister, Naledi Pandor, had realised the incentive was not working optimally.

"The main flaw in the process is the pre-approval requirement. This needs to be removed so actual research and development that is done, is assessed against the criteria. The current process of trying to assess future research and development is just unrealistic," said Mr Newman, who also heads the tax incentive committee of the South African Institute of Tax Professionals.

Dov Paluch, MD of Catalyst Research Solutions and a member of the task team, was also of the view that the pre-approval system needed to be reconsidered. It simply added to the administrative burden of both the government and taxpayers, he said.

Mr Paluch said the impressive policy intentions of the legislation were in danger of falling flat because of poor administration.

There were extremely long delays in getting a response from the department because of the large backlog in applications, taxpayers had been waiting for three years to get guidelines on the interpretation of the legislation, and the pre-approval process was an administrative burden when a company was engaged in multiple projects.

"There is also the perception that the incentive is too hard to get and not worth the effort," said Mr Paluch.

Mr Margo said it was critical to have an appeals process. "The absence of a well-defined appeals process has already proven to be a mortal wound to the tax incentive, and if this aspect is not corrected immediately, we are of the view that the incentive should be scrapped entirely, with immediate effect. It would be pointless to continue otherwise."

Mr Newman said there was no reason the incentive could not work in SA. "We just need to acknowledge that we are a developing country and we need to be supporting research and development appropriate for our stage of development. We need to lower the bar. Simple."

He said SA, as a developing country, should be a research and development follower, not a leader. "We need to accept this and support research and development that supports our following status."

Mr Paluch said approximately 70% of software applications had been rejected. "There are groundbreaking technologies being developed in SA that are being dismissed as minor and routine."

He said a country trying to significantly increase expenditure on research and development needed more than an "average incentive".

The incentive offers a 150% deduction on expenditure, while other countries are offering up to a 300% additional deduction.

Mr Newman was confident the incentive could work if SA learnt from other jurisdictions that succeeded in increasing their research expenditure. SA did not have to reinvent the wheel, and it needed to lower the innovation bar, he said.

Mr Paluch referred to Singapore, which required only that companies conduct development on products that were a "first in Singapore", and not globally.

Mr Margo urged the finalisation of all backlogs by the end of April.

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