More than a tax de­duc­tion

Gov­ern­ment has broader aims to stim­u­late growth

Finweek English Edition - - Business strategy - SHAUN HAR­RIS

COM­PARED WITH ear­lier tax re­lief for re­search & de­vel­op­ment (R&D) ex­pen­di­ture by com­pa­nies and in­sti­tu­tions, the new regime in­tro­duced in sec­tion 11 D of the In­come Tax Act (of 1962) pro­vides in­cen­tives that tax ex­perts say are com­pa­ra­ble with the best in the world.

And that’s a large part of Gov­ern­ment’s in­ten­tion. In draw­ing up the new R&D tax pro­pos­als, signed off in Fe­bru­ary and ef­fec­tive from 2 Novem­ber 2006, tax au­thor­i­ties here took an ex­ten­sive look at tax regimes around the world, says Duane New­man, di­rec­tor of tax at Deloitte.

With­out get­ting into the nu­ances any new tax law en­tails, sec­tion 11 D pro­vides for “su­per­charged” de­duc­tions of 150% (pre­vi­ously 100%) on R&D ex­pen­di­ture, and cap­i­tal al­lowances for build­ings, ma­chin­ery and equip­ment re­lated to the R&D pro­gramme.

Ba­si­cally, it works out to re­lief of 14,5% af­ter tax on qual­i­fy­ing R&D pro­grammes. The def­i­ni­tions for R&D, fo­cus­ing on sci­en­tific and tech­no­log­i­cal re­search, are fairly broad by world stan­dards.

To qual­ify, an R&D pro­gramme must be con­ducted in South Africa, but the in­tel­lec­tual prop­erty holder does not need to re­side in the coun­try. Only the com­pany fund­ing the R&D project can claim the tax re­bates, but it’s quite fea­si­ble that a large multi­na­tional could elect to have spe­cific R&D work done in South Africa and fund it through a lo­cal sub­sidiary.

That has the knock-on ef­fect of job cre­ation and boost­ing eco­nomic de­vel­op­ment, the over­all aims of the new tax.

New­man says R&D spend­ing in South Africa is fairly low com­pared with other coun­tries – 0,87% of GDP, com­pared with 1,76% in Aus­tralia, 2,68% in the US and over 3% in some Scan­di­na­vian coun­tries. Some of the large au­tomak­ers in the US spend more on R&D a year than the to­tal of about R12bn spent in South Africa.

But it’s not just about at­tract­ing R&D projects from abroad. New­man says R&D makes an econ­omy more com­pet­i­tive and will help stim­u­late the econ­omy to try and reach the GDP growth tar­get of 6%. The new tax there­fore aims to in­cen­tivise com­pa­nies to in­vest in ef­fec­tive R&D pro­grammes and to keep on in­vest­ing.

“It might re­quire a change in com­pany be­hav­iour. Some com­pa­nies might just treat it as a tax de­duc­tion at first. But fol­low­ing in­ter­na­tional prece­dents, this should evolve into more ac­tive in­vest­ment in R&D as com­pa­nies re­alise they can do some­thing that makes a dif­fer­ence and build it into the pro­gramme,” New­man says.

Change in com­pany be­hav­iour. Duane New­man

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