Briefing on 2009/10 report on the R&D tax incentive programme Briefing to the Portfolio Committee on Science and Technology Department of Science and Technology 19 October 2011

Contents 1.Background and introduction 2.Uptake of the R&D tax incentives by companies 3.Impact of the programme 4.Analysis of challenges 5.Conclusions

Background and Introduction In November 2006, an improved R&D Tax Incentive programme was introduced through Section 11D of the Income Tax Act 58 (1962): –150% of current expenditure deductible on scientific or technological R&D –Accelerated depreciation of R&D assets over 3 years at rate of 50:30:20, from the year of bringing assets into use Programme has a key role to encourage higher private sector investment in R&D It is administered by the DST in conjunction with South African Revenue Services (SARS) Minister of Science and Technology is required by the Income Tax Act to report annually to Parliament on the direct impact of the incentive programme, in terms of: –Aggregate of the R&D expenditure supported; –Tax revenue foregone due to the incentive; and –Direct effect to economic growth, employment and other broader government objectives.

Background and Introduction To be eligible :- –The activities must constitute scientific and/or technological R&D –Undertaken within South Africa –The R&D must be for the purpose of deriving income Companies apply retrospectively. Data gets revised as claims for previous years are received 1 st report (2007/08) covered the period from November 2006 to September 2008 (total of 80 forms) 2009/10 report attempts to reconcile info for the first 4 years of the programme. The 2010/11 report is being processed at the DST.

Uptake by companies (as in the 2009/10 report) ItemReported Figures 2006 (Starting 02 Nov) Overall Number of forms received from all companies Total R&D Expenditure (R’000) Eligible R&D Expenditure (R’000)

Overall uptake by companies (as in the 2009/10 report) Range of turnover (in R million) Number of Companies % to totalReported R&D Expenditure (R’000) % R&D Expenditu re Turnover not indicated358, ,8 10 and below10325, ,6 Above 10 up to 15286, ,7 Above 15 up to 2092, ,6 Above 20 up to 30215, ,4 Above 30 up to 4092, ,7 Above 40 up to 5092, ,5 Above 50 up to , ,8 100 and above15938, ,9 TOTAL412100, ,0 About 80% of R&D expenditure comes from 38.6% of companies with annual turnover of R100 million and above.

Tax revenue foregone YearEstimated yearly tax revenue foregone Cumulative totals (R’ 000)(R' 000) 2005/ / / / The estimated overall tax revenue forgone due to the R&D incentive is R1 billion for the period 2005 – 2009 (National Treasury Budget Review 2011).

Key observations of early impact The number of forms submitted by companies has increased on a quarterly basis for the first three years of the programme. Inquiries have increased substantially during 2009/10 as more companies have become aware of the programme. About 51.9% of participating companies are from the manufacturing sector, accounting for R2,7 billion (or 57%) of eligible R&D expenditure Of the total R&D expenditure reported, R2,8 billion (61%) is R&D expenditure within the sectors prioritised in terms of the National Industrial Policy Action Plan (IPAP)

Key observations of early impact The top 5 fields of R&D expenditure reported are: chemical sciences (32%), industrial sciences (24%), metallurgical sciences (13%), mathematical sciences (12%) and physical sciences (10%) The count of R&D personnel involved in the R&D activities reported for that period in , comprising scientists, engineers, technologists, technicians, managers and other employees directly involved in R&D Incremental employment of R&D personnel is noted in companies that are regular R&D performers, with rates of growth varying 1-49 employees.

Analysis of challenges Slower uptake by companies than expected Uncertainty by companies as regards approval and/or eligibility Wider challenges concerning companies investing in R&D Challenges of SMEs funding R&D Administrative processes between SARS and DST

Conclusions: Actions going forward Process underway for the amendment of Section 11D of the Income Tax Act to address: –Uncertainty on approval –Streamlining roles of SARS and DST –Improve impact monitoring Measures to intensify awareness about the R&D incentive: –Simple language used in programme brochures –Engagements with industrial associations and targeted workshops –Meetings with large R&D performers –Collaboration with Department of Trade and Industry (DTI) and Technology Innovation Agency (TIA) in promoting industrial support programmes Feasibility/need analysis is being undertaken to determine if a targeted programme to support SME R&D activities should be introduced

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