More than a tax deduction
Government has broader aims to stimulate growth
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