Extension of research and development tax incentive widely welcomed

Several positive changes have been made to the research and development tax incentive that is currently the only policy instrument aimed at promoting innovation-led growth in South Africa. The incentive will also be extended for another 10 years beyond December 2023.

Although the refinements and extension are certainly welcomed, industry players believe there is still room for improvements that will bring SA closer in line with other countries that offer more attractive incentives.

National Treasury recently published the proposed refinements and allowed for further comments and workshops with industry players. These comments will be considered before a final proposal is included in the draft Taxation Laws Amendment Bill next year.

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More coherent definition

Strini Perumal, senior manager for global investments and innovation incentives at Deloitte South Africa, welcomes the clearer and more coherent definition of research and development (R&D).

It is based on a global standard from the Organisation for Economic Cooperation and Development’s Frascati Manual.

The Frascati Manual is described as an essential tool for statisticians and science and innovation policymakers worldwide.

The incentive is also moving away from an “end-result” approach to recognise the reality that R&D involves uncertainty and risk. In its statement on the refinements the treasury says it is not practical to expect taxpayers to have detailed knowledge of how their envisaged R&D activities will unfold at the time they are applying for the incentive.

Grace period a ‘major’ refinement

Dov Paluch, research director at Catalyst Solutions, says the offering of a six-month grace period for receipt of pre-approval applications is a major refinement.

“Applicants can now backdate claims for six months prior to the date the application was submitted.

“This is good for small businesses and R&D businesses in general.”

Paluch says they do feel it could be extended to 12 months or to prior financial years.

However, it certainly is a positive step to allow for a grace period to get things together before the company applies without having to be “in such a hurry” without knowing what their R&D activities will be.

Still too rigid?

Although the application has been moved online, it remains a pre-approval process with a panel comprising officials from Treasury, the Department of Science and Innovation and the South African Revenue Service (Sars) evaluating all applications beforehand.

Given the diverse set of views from these decision-makers, some industry players believe they have tried to build all their check boxes into a system.

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Perumal says he has done similar incentive consultations in countries like Israel, Singapore and the UK, where the government institutions incentivise companies for the research they have done.

These countries do not audit each project but pick the riskiest taxpayers for an audit and leave the rest to self-regulate.

“This allows for a leaner administration because you do not need an army of administrators to look at every single project,” he adds.

Incentive still ‘average’

The current incentive allows for a 150% tax deduction on R&D expenses. A company that spends R1 million on research will be able to claim R1.5 million, which translates into a 13.5% tax deduction.

Paluch says in terms of a global perspective this is still an “average” incentive.

There is scope to increase it to make it more competitive and to encourage more businesses to do research in SA.

He hopes this will be addressed during another round of changes to encourage more companies to apply for the incentive.

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In addition, countries such as Australia and the UK also offer a cash-back benefit for companies that incur R&D expenses but are not yet in a tax-paying position.

With no such feature in SA, companies that are not in a tax-paying position do not benefit from the incentive.

And there remain concerns about the incentive being inaccessible to small and startup companies.

“If we cannot get humble modest instruments like the R&D tax incentive to work more efficiently it leads to companies leaving our shores,” says one commentator.

SA has set itself a target of 1.5% as a percentage of GDP on R&D spend. However, statistics from the World Bank indicate that we are far from meeting this target.

Source: World Bank

Paluch says it is quite encouraging that the incentive will be extended for another 10 years. This demonstrates that government is excited about R&D and wants to increase R&D into Africa.