Section 11D of the South African Income Tax Act (the "Act"), makes provision for a tax incentive scheme, commonly referred to as the Research and Development (R&D) tax incentive. The R&D tax incentive is a very attractive tool for any business, as it offers businesses the opportunity to deduct R1.50 from its taxable income for every R1.00 spent on R&D.
Recent statistics regarding the incentive
The R&D tax incentive has provided over R50 billion of support to businesses since its inception in 2006. During the period November 2006 to February 2019, 1349 applications have been submitted to the Department of Science and Innovation (the "DSI"). 845 of these submitted applications have been approved, which equates to an approval rate of approximately 63%.
Which businesses should apply for the incentive?
A business will be eligible for a tax deduction equal to 150% of expenditure incurred, if such expenditure is incurred directly and solely for R&D activity in South Africa, and such expenditure is incurred after the date on which an application for approval of the R&D was submitted to the DSI. Therefore, any business which conducts R&D in South Africa (and which has not done so yet for current or future projects) should consider applying for the R&D tax incentive.
What qualifies as R&D?
In terms of the Act, R&D means systematic investigative or systematic experimental activities of which the result is uncertain, the purpose of which is any one of:
- 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 multi-source pharmaceutical product; and
- 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.
Further, the deduction is not 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.
Can R&D be outsourced?
The R&D tax incentive includes within its scope expenditure related to outsourced R&D, where such R&D is outsourced to:
- an institution, board or body that is exempt from normal tax under section 10 (1)(cA) of the Act (e.g. South African universities and science councils)?
- the Council for Scientific and Industrial Research?
- a company forming part of the same group of companies, and the company that carries on the R&D does not claim its R&D expenditure with the R&D tax incentive; or
- another company, provided that only the outsourcing company may determine or alter the methodology of the research.
This provides a practical alternative for businesses which consider conducting R&D, but which do not have the skills and/or facilities to conduct the desired R&D internally.
What about confidentiality of information?
Subsection (18) determines that all matters must be kept secret by all employees of the DSI. Therefore, confidentiality is maintained and there is no risk of competitors acquiring sensitive information or that the matter disclosed in an R&D tax incentive application can be used in an attack against registered IP, such as a patent.
Progress made in the processing of applications
In the last decade, applicants for the R&D tax incentive have experienced several issues with obtaining timeous approval for the stipulated supercharged tax deduction. The reasons for these issues mainly related to a shortage of skilled resources at the DSI capable of assessing the applications. This shortage created a significant backlog in the processing of applications and resulted in long and frustrating waiting periods for applicants before receiving a decision.
The good news is that, according to information available to us, the backlog has recently been substantially eradicated and applicants are receiving feedback much more promptly than before. The application process has recently also become more transparent, and one can enquire about the progression of one's application at any time. A last bit of good news is that, in the event that the DSI reaches a decision to deny an application, an applicant is provided an opportunity to respond to the DSI's decision to convince the DSI to approve the application.
Who has experience and can assist businesses with their R&D tax incentive applications?
KISCH IP has an excellent track record in assisting clients in successfully obtaining approval for R&D projects in terms of the R&D tax incentive. If your business conducts R&D in South Africa and has not yet applied for the section 11D R&D tax incentive, you are welcome to schedule a consultation with a professional at KISCH IP.
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.