R&D in­cen­tive de­vel­ops elas­tic prop­er­ties

Trea­sury’s bold move opens door to ‘in­ter­na­tional dou­ble dip­ping’

Finweek English Edition - - Creating Wealth - AN­THONY VAN ZANTWIJK

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

At­tor­neys

At­tract­ing R&D ac­tiv­i­ties is key.

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