Research tax incentive may be resurrected

It can work if SA learns from jurisdictions successful in increasing

their research expenditure – Duane Newman.

Amanda Visser | 29 February 2016 14:00

An associate professor uses an Apple Inc. iPad tablet as he inspects 3-D digital images of brain tumor, cranial nerves and blood vessels of a brain scanned and created by a magnetic resonance imaging (MRI) during a demonstration in a laboratory at the University of Tokyo Hospital in Tokyo, Japan, on Thursday, Jan. 30, 2014. The University of Tokyo held a media tour for their latest neuroscience research. Photographer: Kiyoshi Ota/Bloomberg

The task team which was established to resurrect government’s flawed research and development tax incentive, has already drafted recommendations to fix the problems.

Finance Minister Pravin Gordhan referred to the team in his 2016 Budget Review, saying the proposals, which will most probably be presented to government next month, will be considered to enhance the incentive.

South Africa is lagging behind most global innovation indexes. Although it has set an ambitious research and development expenditure target of 1.5% of gross domestic product (GDP), actual expenditure remains around 0.76%.

The Department of Science and Technology (DST) published draft guidelines in October last year, but they were met with severe criticism from several stakeholders. This led to the establishment of the task team.

Darren Margo, patent attorney at Margo Attorneys, says the guidelines, despite being three years overdue, are “fatally flawed”.

He says the two sets of guidelines are in conflict with the Patents Act, Designs Act and Copyright Act. It seems the new guidelines will make the pre-approval process even more challenging.

Duane Newman, director of Cova Advisory, does not believe the guidelines are at fault. DST Minister Naledi Pandor has realised that the incentive is not working optimally.

“The main flaw in the process is the pre-approval requirement. This needs to be removed so actual research and development that is done, is assessed against the criteria. The current process of trying to assess future research and development is just unrealistic,” says Newman, who also heads the South African Institute of Tax Professional’s tax incentive committee.

Dov Paluch, MD of Catalyst Research Solutions and a member of the task team, is also of the view that the pre-approval system needs to be reconsidered. It simply adds to the administrative burden of both government and taxpayers.

He says the impressive policy intentions of the legislation are in danger of falling flat because of poor administration.

There are extremely long delays in getting a response from the department due to:

  • The large backlog in applications;
  • Taxpayers have been waiting for three years to get guidelines on the interpretation of the legislation;
  • And the pre-approval process is an administrative burden and a nightmare when a company is engaged in multiple projects through a year.

“There is also the perception that the incentive is too hard to get and not worth the effort,” says Paluch.

Margo says it is critical to have an appeal process. “The absence of a well-defined appeals process has already proven to be a mortal wound to the tax incentive, and if this aspect is not corrected immediately, we are of the view that the incentive should be scrapped entirely, with immediate effect. It would be pointless to continue otherwise.”

Newman says there is no reason why the incentive cannot work in South Africa. “We just need to acknowledge that we are a developing country and we need to be supporting research and development which is appropriate for our stage of development. We need to lower the bar. Simple.”

He adds that South Africa – as a developing country – should be a research and development follower, and not a leader in research in development.

“We need to accept this and support research and development that supports our following status.”

Paluch says approximately 70% of software applications have been rejected. “There are ground-breaking technologies being developed in South Africa that are being dismissed as minor and routine.”

He is also of the view that a country trying to significantly increase expenditure on research and development needs more than an “average incentive”.

The incentive offers a 150% deduction on expenditure, whilst other countries are offering up to 300% additional deductions.

Newman is confident that the incentive can work if South Africa can learn from other jurisdictions who were successful in increasing their research expenditure. South Africa does not have to reinvent the wheel – it needs to lower the innovation bar.

Paluch refers to Singapore, which only requires companies to conduct development on products that are a “first in Singapore” and not globally.

Margo pleads for the finalisation of all backlogs by no later than the end of April this year.