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Tax incentive for R&D on the cards

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The development of a simplified, streamlined process for accessing the R&D Tax Incentive by companies is one of the key recommendations of the government-industry task team established by the Minister of Science and Technology to recommend possible improvements to the Research and Development (R&D) Tax Incentive.

The review undertaken by this task team was mentioned in the National Treasury Budget Review statement issued with the Budget Speech in February 2016.

The final task team report was formally submitted to Minister Naledi Pandor in the first week of May 2016. The Department of Science and Technology (DST) has started processing the recommendations.

The 17-member task team, headed by Professor Anastassios Pouris, comprised representatives of R&D-performing companies from various sectors, consulting firms, industry associations, relevant government departments and agencies, academics and the policy research community.

The task team report notes that the rationale for government support for private sector R&D through the tax-based incentive is still as relevant today as it was when the 150% R&D tax deduction was introduced in 2006. Business-sector R&D investment needs to increase if South Africa is to enhance its competitiveness and growth potential.

The R&D Tax Incentive is one of a portfolio of policy instruments to help achieve this objective. The other instruments include the Support Programme for Industrial Innovation (SPII) and the Industrial Innovation Partnership (IIP), as well as the grants/loans and equity support provided through the Technology Innovation Agency.

These funding mechanisms target market-ready technology development and commercialisation, while the R&D Tax Incentive promotes systematic investigative and experimental activities meant to discover and advance scientific and technological knowledge to develop and improve products and processes. This type of support from government is necessary, given the high costs and levels of uncertainty associated with R&D.

According to the Minister, the government-industry task team report will be used as a basis for the consideration of improvements that will help reposition the R&D Tax Incentive as a key instrument for stimulating private-sector R&D investment.

The report identified several challenges experienced by companies with regard to the current preapproval system for accessing the incentive. The task team is of the view that a more refined retrospective method, which will allow companies to submit detailed information of the R&D undertaken at year-end, would significantly improve the accessibility of the incentive.

The DST has initiated consultations with National Treasury to assess the feasibility of this recommendation. In principle, the two departments agree on the need for changes in order to improve efficiency. However, the changes proposed by the government-industry task team will require further consideration and refinement, as well as several amendments to section 11D of the Income Tax Act.

The DST has started to develop a detailed proposal that will be used for further consultations within government and with taxpayers on how to take the matter forward. Unfortunately, there is insufficient time to include amendments to section 11D in the 2016 Tax Laws Amendment Bill.

The report also highlights the impact of administrative delays and backlogs on the R&D tax deduction claims at SARS as a matter requiring urgent attention by government. It notes that the amount of revenue forgone by government owing to expenditure approved for tax deduction under the R&D Tax Incentive dropped 70% in 2012/13, from a peak of just over R1,2-billion in 2010/11.

As an initial immediate solution, government proposes to relax the prescription rules enforced by SARS and allow taxpayers to reopen assessments and claim approved R&D expenditure that they incurred during that year. This revision will be included in the 2016 Draft Tax Laws Amendment Bill (and accompanying Draft Explanatory Memorandum) to be released for public comment on National Treasury’s website in July 2016.

Furthermore, the report looks at how the R&D Tax Incentive can be used to encourage investment in R&D and innovation by small and medium enterprises (SMEs) and start-up firms, as these are key contributors to employment. It notes that most of the applications received by the DST from SMEs concern the adoption and adaptation of technologies, particularly in relation to information and communication technology (ICT).

To address the report’s recommendations relating to ICT and SMEs, the DST is considering establishing a dedicated team to work with relevant departments and agencies to review existing government support for ICT activities (a critical aspect of innovation) to see what policy improvements can be introduced, and to assess the feasibility of specific measures to promote R&D and innovation by SMEs.

The collaboration arrangements that the DST has negotiated with the Department of Small Business Development and the Department of Trade and Industry will facilitate such initiatives, which involve policy imperatives that cut across the mandates of various departments.

Consideration was also given to how competitive the South African R&D Tax Incentive is in attracting R&D from abroad. Key observations were that the design principles match most of the dominant practices in countries that have similar incentives for R&D. While best practice comparisons are often made across policy areas, it is crucial to take into account the unique characteristics of the South African economy, domestic R&D capacity and policy aims, and citizens’ needs.