A report published in 2018 on business incentives in South Africa made a number of key observations some particularly related to the Research and Development tax incentive. These have been supported by studies commissioned by the World Bank and the Department of Science and Technology. The main observation that of particular interest given the structure and state of our economy is that large businesses in particular in the manufacturing sector are the largest beneficiaries of the R&D tax incentive.
What is the tax incentive?
The incentive is a tax deduction from income of 150% of the expenditure incurred in relation to eligible R&D activities. The term R&D is defined in the Income Tax Act and any activity that meets the definition of R&D is eligible in terms of the R&D tax incentive.
Who qualifies?
A company that is a tax resident in South Africa that carries out eligible R&D activities qualifies for the tax incentive. Foreign companies may qualify if they meet the definition of permanent establishment.
A company whose R&D activities have been approved is required to submit annual progress reports to the DSI.
How do you apply for it?
To apply for the R&D tax incentive, a company must complete and submit the application form to the Department of Science and Innovation ("DSI") via email. Once the application is assessed by the DSI, the DSI will make a recommendation to the Minister of Science and Technology who will make the final decision on whether the application is approved or declined.
Will the R&D tax incentive be extended beyond September 2022?
The National Advisory Council on Innovation recommended that the DSI not relinquish the R&D tax incentive, but rather to work much harder to improve the impact of the incentive over the next period. We believe that the R&D tax incentive will be extended beyond October 2022.
How does the Discussion Paper propose to address poor uptake of the incentive by Smaller Companies?
The discussion paper notes that globally smaller companies are more responsive to R&D incentive which is in contrast with the South African data as indicated in the introduction above. It is also noted that the R&D incentive in the said global economies does offer preferential treatment to smaller companies. The paper makes no tangible recommendations to address this anomaly. It considers use of refundable tax credits which are rejected.
We are of the view that research looking at the best policy position to ensure that SMEs invest in R&D covering all various areas from funding, reporting, monitoring and overall environment required from ideation to registration of an IP should be commissioned by government. The current discussion paper does not deny the importance of R&D to drive growth in new and existing industries in young companies. It is therefore not enough to only note challenges faced by young companies implementable solutions should be sought and implemented.
Administrative proposals regarding the pre-approval system and review process
The DSI intends to invest in a fully functional online application system and improve on the current evaluation and monitoring processes. The DSI is also working on improving supporting documentation, providing better reasons where applications are declined and ensuring good communication with applicants. The Discussion Paper and all other relevant documentation is available on www.treasury.gov.za
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