Elizabeth Lombaard | Partner | Corporate Tax | KPMG South Africa | mail me |
South Africa has a dedicated research and development (R&D) tax incentive regime which sets it apart from other African countries and enables South Africa to compete with similar regimes in developed countries. However, the future of this incentive is at risk.
The R&D tax incentive enables qualifying taxpayers to claim a ‘super’ tax deduction equal to 150% of actual expenditure, for all qualifying R&D expenditure, in respect of R&D activities conducted in South Africa. This deduction translates to a cash saving of 14 cents for every R1 spent on R&D.
The purpose of the incentive
In order to qualify, a company must submit an application to the Department of Science and Innovation (DSI).
The application must contain a detailed explanation of the proposed R&D project, the systematic research methodology to be followed and, most notably, the technological or scientific uncertainty that the applicant is looking to resolve.
The main purpose of the incentive is to encourage increased investment in scientific and technological R&D in South Africa, with the objectives of promoting R&D-led innovation and enhancing the competitiveness of the country.
Per the latest DSI annual R&D report (2017/18), since the inception of the incentive in 2006, a total of 2,893 applications had been received, with an estimated R46 billion being spent on R&D. For the period 2018 – 2020, a total of 351 applications had been received and adjudicated. This level of innovation can only be good for the country!
The DSI report also noted that National Treasury had initiated an impact evaluation to determine whether the incentive was meeting its objectives. The results of the evaluation do not, however, appear to have been made public as of yet.
Why is this impact evaluation of relevance to business?
It is relevant because, based on current legislation, the R&D tax incentive comes to an end on 30 September 2022. This means that no super tax deduction may be claimed in respect of any qualifying R&D expenditure incurred after this date. And, to date, I have not been able to find confirmation of the Government’s intention regarding the future of this tax incentive past 30 September 2022.
The uncertainty is problematic. One must not forget that corporates have many options of where to house their R&D departments, with some regions offering more beneficial tax regimes than South Africa. And while I acknowledge that a beneficial tax regime is not the only consideration in such a decision, it certainly sweetens the deal and could tip the decision in South Africa’s favour. But legislation that allows for only a small window of opportunity is most definitely not going to entice any multinational to set up R&D shop here!
South Africa needs the scientists, innovators and researchers to stay, to harness the power of R&D for our collective future. And one way of doing this is to incentivise companies to employ the innovative minds in their South African businesses.
However, this will only happen if the incentive is extended far into the future and certainty given to business. I hope this happens soon.
