R&D incentive develops elastic properties
Treasury’s bold move opens door to ‘international double dipping’
THE 150% Research & Development tax incentive has recently been amended to attract multinational R&D activities to our shores. Through that stroke of the pen, National Treasury has clearly prioritised skills development within South Africa regarding the creation of a local body of intellectual property (IP). The original provision in the Income Tax Act ensured only one taxpayer could claim the 150% tax incentive.
Basically, where a taxpayer’s R&D expenditure is pre-funded or reimbursed in the same year, he doesn’t benefit from the 50% tax bonus until his R&D expenditure exceeds such receipts. If any expenditure is usually deductible at 100%, sections of the Act permit a 50% bonus, increasing that claim to 150%.
For example, Company A pays R100 000 to Company B to conduct R&D and Company B in turn spends R90 000 on researchers’ salaries. Company A may generally claim R150 000 (R100 000 x 150%) as an allowance, whereas Company B’s tax allowance is limited to R90 000 (the 50% bonus not being available, since total R&D expenditure hasn’t exceeded the R100 000 receipt), Therefore only Company A benefits from the 150% tax incentive.
The previous section even limited Company B’s access to the 150% tax incentive where Company A was excluded from benefiting under the R&D tax section – for example, when Company A was a foreigner or a tax exempt entity.
Now – in a bold move by Treasury, which has opened the door to “international double dipping” – Company A will be permitted to claim the 150% tax benefit where “that amount is not deductible by any other person in terms of this Act”. Despite that change it remains impossible for two South African taxpayers simultaneously to tap into the 50% tax bonus in respect of related R&D expenditure.
Let’s consider the following scenario: Company A is a British SME that qualified for 175% R&D tax incentive in Britain. If Company A pays Company B (an SA company/subsidiary) R1m for R&D, Company A could in some instances claim R1,75m as a tax deduction in Britain. On the other side, if Company B spends R0,9m on R&D (assuming it retains R0,1m as profits), Company B could theoretically claim R1,35m as a tax deduction in SA.
In addition, provided that Company B can show it’s charging a reasonable mark-up for its R&D services, any resultant IP may (subject to prior SA Reserve Bank approval) be assigned to Company A. Ultimately, the parties could potentially claim a total of R2,1m in tax deductions for each R1m spent on R&D.
In addition, where the R&D is performed on behalf of a foreign multinational, the resultant IP may be licensed back to SA without being caught by another addition to tax legislation. Take note: The original version of that section in the Act caught this payment, whereas the latest Bill (published a week or so ago) intends to allow such payments through the anti-avoidance net. The earlier report discussed the section as originally promulgated, which tackles royalty arbitrage.
However, the latest proposed changes will neutralise R&D tax structures whereby SA companies use foreign subsidiaries to fund SA R&D activities and license the resultant IP to its SA operating companies. That change to s11D and the recent proposed revisions to s23I clearly demonstrate Treasury’s continuing goodwill towards multinationals overseas.
Other amendments to the R&D tax section include a relaxation of rules relating to the acquisition of capital assets, including buildings (which are subject to accelerated allowance of 50% in year one, 30% in year two and 20% in year three). No longer does the owner of such assets require an intention to use the resultant IP in the production of income. Although that amendment may appear insignificant, the change makes the section far simpler to access and provides a significantly greater degree of flexibility in structuring the acquisition of capital assets used in R&D.
However, brace yourself for a few more changes to the R&D tax section. The recently published Revenue Laws Amendment Bill proposes to tighten the definition of “computer programs”. If the amendment is passed into law, in order to qualify for the 150% deduction computer programs developed will have to be: (1) novel, (2) inventive, (3) scientific and (4) technological.
In my opinion, the addition of “novel and inventive” will most likely prove superfluous. However, in a “worst case” scenario this amendment may require the computer software to exhibit a “technical effect” – a high, technical and confusing standard applied by the European and US patent offices.
Unfortunately, the Bill also proposes to simplify this section in a manner that erases the welcomed recent broadening amendment. However, that’s most probably due to an oversight that will hopefully be corrected before finding its way into the Act. Partner, Sibanda & Zantwijk Patent
Attracting R&D activities is key.