1. BRIEFING ON RESEARCH AND DEVELOPMENT TAX INCENTIVE PROGRAMME
Presentation to the Portfolio Committee on Science and Technology
Dr. Phil Mjwara, Director-General
07 June 2017

2. Presentation outline Purpose of the presentation
Overview of the R&D tax incentive
Measures implemented to improve efficiency
Status update (May 2017)
Summary from the 2015/16 annual report to Parliament on the R&D tax incentive
Recommendations

3. Purpose of the presentation
The purpose of this presentation is to brief the Portfolio Committee on Science and Technology on the following:
The status update of the R&D Tax Incentive Programme.
The 2015/16 annual report to Parliament in terms of Section 11D(17) of the Income Tax Act.

4. Overview of the R&D tax incentive
Companies undertaking R&D in South Africa qualify for a 150% tax deduction on their R&D expenditure in terms of Section 11D of the Income Tax Act (1962), as amended.
The incentive is part of a package of policy instruments to promote innovation, enhance competitiveness, thus supporting economic growth.
Through this incentive, the government wants to encourage increased R&D in the business sector, by firms of any size or industry. This is important in order to:
Increase the overall investment in R&D.
Promote innovation, i.e. development of new products, processes and services.
Promote technological advancement and competitiveness.
Secure innovation spillovers, expand and retain the R&D workforce.
The Department of Science and Technology (DST) shares responsibilities for the delivery of the incentive with the South African Revenue Service (SARS) and the National Treasury.

5. The application process
Taxpayer submits application
Taxpayer submits an application form to the DST.
The DST acknowledges receipt of application.
The applications is assessed.
Adjudication
The assessment report and application form are presented to the Committee for adjudication.
The Committee makes recommendations to the Minister of Science and Technology.
Decision letter
The Minister’s decisions letter on whether the R&D activities have been approved or not is sent to the company.
This letter serves as proof to SARS that the company‘s R&D activities have been approved when claiming the tax deduction.
Progress reporting
Companies whose R&D activities have been approved must submit progress report to the DST, annually, coinciding with their financial year end reporting.
Companies should maintain record that support tax expenditure claims and progress of R&D.

6. Status update (as at 18 May 2017)

7. Status update in processing applications (October 2012 to 18 May 2017)
As of 18 May 2017, the status indicate progress as 88% of applications having now been adjudicated, with only 1% of applications in backlog (received between Oct and Dec. 2015).
DST is working towards eradicating the backlog of adjudicated applications en-route for Minister’s final decision.

8. Measures implemented to improve efficiency
Working with National Treasury and SARS, the DST has implemented most of the recommendations of the joint government-industry task team that the Minister established in November 2015 to look into possible improvements to the design and implementation of the R&D tax incentive. The activities are listed under 4 headings:
Simplifying processes and improve turnaround times (90 days targeted):
Improved guidance for applicants through the publication of new guidelines addressing the concerns raised, updated website information on the R&D tax incentive.
DST officials are readily available to meet with business (individually or in groups) to raise awareness and explain how the incentive works.
The rollout of the online system of submitting applications. In 2017/18, specific focus is on optimising the online system of applications to ensure that by March 2018, all applications are received online and turnaround times are significantly reduced.
The continued use of external experts to supplement DST capacity in evaluating applications.

9. Measures implemented to improve efficiency
Amendments to enable companies catch up on their claims
Amendment implemented by the National Treasury, effective January 2017.
Review of the pre-approval procedure
DST and National Treasury examined the concerns raised and the various alternatives to understand the implications and risks; as well as the design and implementation approaches of various countries. Work in this area is still underway and a decisions can be reached in 2017 on this matter.
Analysis show that the design of R&D tax incentive in South Africa is consistent with best practice globally. While the pre-approval procedure appear uncommon, some countries are looking at introducing it.

10. Measures implemented to improve efficiency
Actions on policy related matters that have arisen
NT and DST consultations resolved not to prioritise increasing the 150% rate.
The new guidelines have provided clarity on various issues raised, namely eligibility of software development, R&D collaborations and small medium enterprises (SMME), etc.
The DST and NT continue to monitor the feedback and experiences in order to identify possible improvements; and areas that require technical clarification in law to remove ambiguity; policy changes/adjustments; or legislative amendments. The National Treasury and DST communicate on these issues when there are new developments.

11. Submission of the 2015/16 annual report on the R&D tax incentive programme

12. Submission of annual report on the R&D tax incentive programme
Section 11D(17) of the Income Tax Act requires the Minister of Science and Technology to report to Parliament, annually, on the direct benefits of the R&D activities encouraged by the incentive programme in contributing to economic growth, employment and other broader government objectives.
On 15 February 2017, Cabinet approved the 2015/16 annual report on R&D Tax Incentive for tabling to Parliament.
The report tracks activities of the incentive, based on identified performance indicators, e.g.:
the uptake and profile of participating companies.
R&D personnel involved in the supported R&D.
amounts of R&D expenditure supported.
the tax revenue foregone.
contribution to IPAP priority areas.
Where appropriate, the abovementioned indicators are presented as cumulative estimates since October 2012 (when the preapproval system was introduced), and in certain instances including the retrospective claims since November 2006 (when the 150% tax deduction was introduced).

13. Summary of 2015/16 performance
189
Applications received
147
Companies applying 86
Companies applying for the 1st time
R3.9 billion
Estimated R&D expenditure on 2015/16 applications
In the period from March 2015 to February 2016, the DST received 189 R&D tax incentive applications containing 953 projects from 147 companies, of which 86 were first-time applicants.
The applications had an estimated R3.9 billion in R&D expenditure.

14. Cumulative contribution since November 2006 when the 150% deduction was introduced
962
1013
Pre-approval
749
Adjudicated
367 Applications approved
292 Companies granted approval
382 Applications not approved
307 Companies not granted approval
241
Remaining*
1575
Retrospective
N/A
PARTICIPATING COMPANIES
TYPE OF APPLICATIONS
ADJUDICATION STATUS
FINAL DECISION
The 2015/16 performance adds to the cumulative contribution of the incentive since its inception in November Two periods are distinguished: November 2006 to September 2012 – retrospective claims; and October 2012 onwards – preapproval system.
By the end of the reporting period, 749 (73,9%) of the 1 013 pre-approval applications received since October 2012 were adjudicated. A total of 367 (49%) applications were approved, covering 292 companies that would access the incentive.

16. Approvals and non-approvals per company turnover size
(Oct to Feb. 2016)
Total of 749 adjudicated applications as at February 2016

17. Approvals and non-approvals per company turnover size
(Oct to Feb. 2016)
Larger companies have higher rates of approval than SMEs and are dominant in terms of the number of applications received and the estimated amount of R&D expenditure.
Partly, this indicates that SMEs need support in terms of the preparation of applications and understanding the eligibility criteria of the incentive.
Furthermore, it indicates a gap in incentives support. The content of applications shows that many SMEs are involved with innovation activities, e.g. acquisition of off-the-shelf technology, integration of technology, etc. without necessarily engaging in R&D as defined under Section 11D of the Act.

18. Proportions of approvals and non-approvals per industry sector (Oct 2012 – Feb 2016)

19. Approvals and non-approvals per company turnover size
(Oct to Feb. 2016)
A higher percentage of applications from the Agriculture, Hunting, Forestry and Fishing sector, as well as the Electricity, Gas and Communication sector is approved to access the R&D Tax Incentive.
This is in contrast to the applications received from the Financial and Business Services sector, in which the percentage of applications that have received approval is less than that of non-approved applications.

20. Estimates of R&D expenditure supported
Overall, about R36.1 billion in R&D expenditure is estimated to be supported by the incentive.
This amount comprises R10.7 billion in estimated R&D expenditure indicated on approved applications (under the pre-approval system) and R25.4 billion reported under the retrospective system. The data gets revised annually to record claims processed at SARS.
R10.7 billion
Estimated R&D on pre-approvals
R25.4 billion
Retrospective claims
R36.1 billion
Estimated R&D expenditure supported
(Nov to Feb. 2016)

21. R&D personnel per industry sector
R&D personnel involved in total applications supported (Nov to Feb. 2016)
4152 Engineers
(21%)
1658 Scientists
(9%)
2389 Technologists
(12%)
4195 Technicians
(22%)
1886 Managers
(10%)
5165 Other technical staff (26%)
19445 was reported as R&D personnel involved in the R&D supported by the incentive.
These estimates are an undercount of the potential employment impact of the supported R&D, as Further employment can arise from successful R&D; knowledge gained contributing to human capital stock; and spillovers in the system of innovation.

22. Contribution to IPAP priority areas
The incentive shows a strong orientation of supporting the priority focus areas of the Industrial Policy Action Plan (IPAP), with about 59,7% (219) of the approved applications addressing those areas, accounting for about 57% (R6,1 billion) of the approved R&D expenditure.
The top five IPAP sectors in terms of supported R&D spending are:
Electro-technical and ICT.
Upstream Oil and Gas.
Chemicals, Cosmetics, Pharmaceuticals and Plastics.
Metal Fabrication and Capital Equipment.
Forestry, Pulp and Furniture.

23. Recommendation
It is recommended that Portfolio Committee on Science and Technology notes the 2015/16 Report on Performance of the R&D Tax Incentive Programme; and the status update presented.

24. THANK YOU Contact details for further information: Godfrey Mashamba
Department of Science and Technology
Tel :
Cell:
Website: