In 2006, the South African Government introduced a tax-incentive scheme aimed at increasing scientific and technological research and development expenditure by businesses throughout all sectors in South Africa. This tax-incentive scheme is provided for in Section 11D of the South African Income Tax Act, commonly referred to as the Research and Development (R&D) Tax Incentive.
This R&D Tax Incentive, administered by the Department of Science and Technology (DST), along with the South African Revenue Service (SARS) and the National Treasury, remains ongoing until at least 2022, with an indication from the relevant Deputy Director at the DST that it will be extended past this initial date. Furthermore, a task team, established by the Minister of Science and Technology in 2015, addressed bottlenecks in the process, the result of which was an online system introducing a simplified application process, which saw 95% of valid applications received by the DST since October 2012 being adjudicated by February 2018. In this light, at least an introductory understanding of the incentive is important.
As a point of departure, take note that the primary aim of Section 11D is to allow a tax deduction equal to 150% of expenditure incurred directly and solely for R&D activity in South Africa. It is to be emphasised that this incentive is available to business of all sizes and in all sectors of the economy.
The R&D Tax Incentive, in boosting "... innovation by improving the capability for developing new products and processes and improving existing ones", provides this tax deduction for expenditure wherein the relevant project is aimed at systematic investigative or systematic experimental activities of which the result is uncertain, the purpose of which is:
- discovering non-obvious scientific or technological knowledge;
- creating or developing an invention as defined in the South African Patents Act;
- creating or developing a functional design as defined in the South African Designs Act;
- creating or developing a computer program as defined in the South African Copyright Act;
- creating or developing a multisource pharmaceutical product; or
- conducting a clinical trial as provided for in the Guidelines for good practice in the conduct of clinical trials with human participants in South Africa.
The deduction is not however limited to the above project aims, but also for projects for which the aim is a significant and innovative improvement to any of the above inventions, functional designs or computer programs. "Improvement" in this context being a new or improved function, improved performance, improved reliability, or improved quality.
Consequently, the R&D Tax Incentive should be a key consideration for any business, micro, small or large, going forward with their product research and development activities in South Africa.
From a practical point of view, it is important to take note that, for the purposes of determining taxable income in respect of any year of assessment, there shall be allowed the above deduction from income, only if the research and development expenditure is incurred in South Africa and: (a) the research and development project has been approved in terms of s11D; and (b) the expenditure is incurred on or after the date of receipt of an application in terms of s11D by the DST.
Therefore, should you as a business wish to make efficient use of the R&D Tax Incentive, this sets a very important deadline for the submission of R&D Tax Incentive applications to the DST, which deadline is before any expenses are incurred for a R&D project.
In conclusion, it is apparent that in order to effectively understand and utilise the R&D Tax Incentive, you must have a fundamental understanding of South African patent practice, designs, and software as defined in copyright. We at KISCH IP provide specialist Intellectual Property services, with patent, design and copyright specialists who can assist you in properly constructing and submitting your R&D Tax Incentive applications and subsequent progress reports.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.