The tax incentive for research and development can help South African companies of all sizes to enhance their competitiveness by developing new products, processes and services.
Minister of Science and Technology, Naledi Pandor, points out that the objective of the tax incentive is to promote private-sector R&D investment in South Africa by helping to reduce the after-tax price of R&D and creating an incentive for companies to increase their investments.
By 28 February 2015, a total of 876 companies had applied for the incentive, she adds, with the 150% deduction on R&D expenditure equating to about R5-billion in tax revenue foregone by Treasury.
“R&D by its nature is aimed at generating new findings,” Pandor says. “It is based on original concepts and their interpretations. It is largely uncertain about its final outcome. That is why it has to be systematic in its approach and involve experimentation. An R&D activity may lead to a particular result or fail to achieve it.
“If successful, R&D must lead to the new knowledge that can be embodied in a new technology, or to enable significant improvements to be made, which can be diffused to support some form of socio-economic activity. These are some of the basic concepts included in the Frascati Manual, which is used worldwide as a standard for defining R&D.
“The tax incentive is aimed at encouraging R&D-led innovation. We hope to see domestic companies competing for global markets in important technology sectors and also improving ways in which they collaborate with international partners to discover new knowledge. Our aim is to improve the technology balance of payments.”
An example of successful R&D is a world-class scanner technology that was originally developed for the mining industry, Pandor points out. “Further R&D was conducted and now it has found an application in the health industry. International markets will now look to South Africa to supply such a technology.”
ICT has an unfortunate history of non-approvals for the R&D incentive, she adds, since not all ICT and software development activities can be regarded as R&D.
“To qualify under the R&D incentive, software activity must involve innovation,” Pandor explains. “It must comprise experimental research, development or invention to achieve scientific or technological advancement. It must also create new knowledge or make an appreciable improvement to the existing state of technology. This is a global standard.”