Clarity on design of R&D tax incentive expected soon

/21 November 2016, 1:00pm

Amanda Visser

Johannesburg - A government review of the current pre-approval system for research and development projects will most probably only be completed by March next year.

The pre-approval system has been blamed for huge backlogs, with companies having to wait for up to three years for approval and a significant drop in new applications.

The Department of Science and Technology says it is, together with the National Treasury, still evaluating the options with a view to simplifying the procedures so that it becomes easy for research companies to access the incentive.

Godfrey Mashamba, chief director of science and technology investments at the department, says an increased level of private sector research and development is crucial for South Africa’s innovation capacity and competitiveness.

“The tax-based incentive for research and development is considered an appropriate instrument. It is growing in popularity globally and appears to be far easier for government to provide support for private sector research and development than other options,” says Mashamba.

The joint industry task team, appointed by the minister of science and technology, has recommended a more refined “retrospective” system. Its report was published around May this year.

Duane Newman, chair of the South African Institute of Tax Professionals’ incentives committee, says most other countries have a pre-registration process.

Companies register their projects and once the R&D is complete they can rely on the outcome to support their application for a tax deduction.

Mashamba says several steps have already been taken to improve the administrative process in order to speed up the assessment and approval of appeals.

A new, much simpler electronic application form has been placed on the department’s website. External experts are assisting the department in evaluating applications.

The turn-around target is around 90 days, however, it is not clear to what extend the target is being met.

Dov Paluch, Director of Global Innovation Incentives at Catalyst Solutions, earlier expressed concern that a faster turnaround time may be the result of less applications.

“We need a process that is robust enough to handle many more applications and not less applications,” he said in an earlier interview.

The department has received 92 applications for the research and development incentive up to September this year.

According to the task team report, there was a 70-percent reduction in tax deduction claims in 2012-2013, and 38 percent in the following year. The sharp decline requires “urgent attention” and is attributed to the administrative delays and backlogs associated with the pre-approval system, the report concluded.

Mashamba considers the current system a success. The government has foregone tax revenue of more than R6bn since its inception in 2006.

The department’s 2015-2016 annual report indicates that expected research and development expenditure is around R36bn and that close to 20 000 people have been directly involved in projects supported by the incentive.

However, Mashamba concedes that improvements are needed to make it more successful.

The task team’s recommendations relating to software development, the uptake from small and medium enterprises and the quantum of the incentive are still under consideration.

The department’s process is meant to identify specific (policy) gaps and the necessity to propose amendments for next year’s taxation laws amendment bill round.