Theme heading insertRESEARCH AND DEVELOPMENT TAX INCENTIVE PROGRAMME

Briefing to the Portfolio Committee on Science and Technology

27 August 2014

Godfrey MashambaChief Director

1. Overview of the R&D tax incentive programme

2. Uptake by companies

3. Impact areas:– R&D expenditure– Contribution to industry sectors, SMEs and industrial

policy focus areas– Results of R&D supported through the incentive

(including new products)

4. Process of tabling the 2013/14 annual report on the R&D tax incentive to Parliament

Presentation content

2

• Companies undertaking R&D in South Africa qualify for a tax deduction 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 economic growth, enhance competitiveness and other broader objectives.

• 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 and retain R&D workforce.

• South Africa is amongst the countries in the world that offers generous R&D tax incentives, offering up to 150% in tax deductions.

Overview of the R&D tax incentive programme

3

• To be eligible for the incentive, a company’s activities must be approved by the Minister of Science and Technology (applicable from 1 October 2012).

• A company must:

– Be an incorporated entity and recognised under the Companies Act, (Act 71 of 2008). Individuals, non-profit organisation and trusts are not eligible.

– Be engaged in eligible R&D activities within the Republic.

– Incur R&D expenditure on or after the date of receipt of the application by DST, and such R&D expenditure must be incurred in the production of income.

Overview of the R&D tax incentive programme (2)

4

Theme heading insert

5

• Companies can claim the tax deduction on a retrospective basis for R&D expenditure of prior 1 October 2012.

• Since 1 October 2012 taxpayers require approval from the Minister of Science and Technology for R&D activities before claiming the deduction .

• The adjudication committee brings together crucial capacities from DST, NT and SARS to implement this incentive.

• The 2012 amendments have attracted new participants to the R&D tax incentive (refer to slide 8).

Application submitted to DST by company

Application submitted to DST by company

DST Evaluates Application and makes

recommendation

DST Evaluates Application and makes

recommendation

Adjudication committee makes recommendation

to Minister

Adjudication committee makes recommendation

to Minister

Minister ‘s Final Decision

Minister ‘s Final Decision

Submit recommendation to Minister of Science and

Technology

Submit recommendation to Minister of Science and

Technology

Letter sent to company

Letter sent to company

yes

no

no

no

yes

Overview of the R&D tax incentive programme (3)

yes

yes

Why does the government support private sector R&D?

6

• The 2002 National Research and Development Strategy identified declining and weak business R&D investment as a key constraint to the country’s economic growth and development.

• Generally, the rationale is based on a market failure argument, that private sector is likely to under-invest in R&D, because of:• Challenges of inappropriability of the results of R&D.• Long term nature of tangible benefits from R&D.• High risk associated with R&D creates a funding gap

within the firms.• Inability to attract external funding due to information

asymmetries.

Why does the government support private sector R&D? (2)

7

• Positive externalities:• Knowledge developed from R&D, the human capital as

well as learning and technology adoption and usage by other companies create greater societal returns.

• Long-term returns from R&D far outweigh the tax expenditure that the government foregoes in the short term.

• Counterarguments exist, however, that R&D tax incentives create unnecessary distortions to economic efficiency and tax equity, and also create an additional burden with respect to tax administration.

Theme heading insert

8

• Between November 2006 and February 2014, a total of 820 companies have taken part in the

incentive.• The number of participating companies has increased gradually since 2007, peaking at 414 in

2012/13. Legislative changes in October 2012 meant that companies could access the incentive

either as retrospective claims for R&D undertaken prior to 1 October 2012 or apply for pre-approval of

R&D planned for after that date.

Uptake: Yearly number of companies taking part in the incentive (Nov 2006 to Feb

2014)

Theme heading insert

• The incentive is accessed by companies from all the industry sectors. More than 80% of the participating companies come from the two sectors, namely the manufacturing and the financial intermediation, real estate & business services (i.e. software development).

• These patterns have remained the same over the years and resemble the country’s business R&D situation as reported by the national R&D survey. 9

Uptake: Participation per industry sector

Industry sector Number of companies

% to total

Agriculture, hunting, forestry and fishing 45 5.5 Mining and quarrying 50 6.2Manufacturing 363 44.3Electricity, gas & water supply 24 2.9Construction 7 0.8Wholesale & retail trade 10 1.2Transport, storage & communication 30 3.7Financial intermediation, real estate & business services 285 34.7Community, Social and Personal Services 6 0.8TOTALS 820 100

Theme heading insert

10

• Small and Medium Enterprises (SMEs) make up 46.7% (383) of the total number of participating companies., the same proportion as large companies. The remaining 6.6% (54) of companies are undisclosed in terms of turnover size.

• The percentage of SMEs applying for the incentive has increased in the past 2 years, following the October 2012 amendments.

Uptake: Participation by size of company (using latest year turnover declared by company)

Annual turnover range (in R million) Number of companies % to totalUndisclosed Turnover not indicated 54 6.6%

SMEs 10 and below 214 26.1%10 > 15 50 6.1%15 > 20 42 5.1%20 > 30 50 6.1%30 > 40 27 3.3%

Large firms 40 > 50 24 2.9%50 > 100 85 10.4%100 and above 274 33.4%Total 820 100%

Theme heading insert

11

Amount of R&D investment leveraged by the incentive (Nov 2006 to Feb 2014)

Theme heading insert

• Only the amounts retrospective claims of pre-October 2012 are reported above. • The bulk (68%) of the R&D expenditure supported is in the manufacturing sector, followed

by 12% in the financial intermediation, real estate & business services (i.e. software development). 12

Reported R&D expenditure per industry sector

Industry sector R&D expenditure amounts reported by companies (Nov 2006 to Oct 2012) (in R’000)

% to total

Agriculture, hunting, forestry and fishing 1 052 402 4.1Mining and quarrying 1 371 892 5.4Manufacturing 17 414 714 68.8Electricity, gas & water supply 924 829 3.6Construction 76 264 0.3Wholesale & retail trade 84 062 0.3Transport, storage & communication 1 140 872 4.5Financial intermediation, real estate & business services

3 240 93212.6

Community, social and personal services 71 785 0.3TOTALS 25 377 690 100

Theme heading insert

13

• The incentive shows a strong orientation in leveraging R&D that supports the priority focus areas of the current National Industrial Policy Action Plan (IPAP), with about 74.5% of participating companies in those areas, accounting for R19.6 billion (or 55.8%) of the reported R&D expenditure.

• The top four of the IPAP sectors in terms of supported R&D spending are:- upstream oil and gas, with R4.6 billion. - chemical, cosmetics, pharmaceuticals and plastics, with R3.9

billion.- electrotechnical and ICT, with R3.8 billion. - Automotives, components, medium and heavy commercial

vehicles, with R3.3 billion.

Reported R&D expenditure in terms of contribution to industrial policy priorities

Theme heading insert

• Most (80%) of the R&D expenditure is reported by companies with turnover of R100 million and above. SMEs (turnover of R40 million and below) have reported less than 10% of the R&D expenditure. The DST continues to monitor the uptake by SMEs closely to determine if any changes are needed. 14

Reported R&D expenditure in terms of company size

Annual turnover range (in R million) R&D expenditure amounts reported by companies (Nov 2006 to Oct 2012) (in R’000)

% to total

Undisclosed Turnover not indicated 1081 388 4.3

SMEs 10 and below 745 642 2.9

10 > 15 437 012 1.7

15 > 20 227 602 0.9

20 > 30 393 265 1.5

30 > 40 468 052 1.8

Large firms 40 > 50 200 252 0.8

50 > 100 1369 882 5.4

100 and above 20454 595 80.6

Total 25 377 690 100

Theme heading insert

15

Results derived from the R&D supported by the incentive

• The results of R&D indicated in the previous slide are a simplified aggregation administrative data available at the DST, as reported by companies. They are in no way showing a complete picture of the effect or impact of the incentive. This is so because some of the results of R&D take several years to materialise.

• Further work is necessary to appropriately quantify the impact of the incentive. To begin this process, the data between the DST and SARS need to be reconciled (to address timing differences and stages of data points), e.g. number of beneficiary companies, R&D expenditure and the actual deduction allowed by SARS.

16

Results derived from the R&D supported by the incentive (2)

• Appropriate methodologies can then be applied in estimating the impact at different levels, i.e.:

– Additional/incremental R&D induced by the incentive.

– The 2nd order effects – in terms of creating new knowledge, patents, propensity to come up with innovative new products, etc.

– 3rd order effects – economic performance of beneficiary companies in term of revenues from new products, productivity, profitability, etc. and attracting new R&D performers and international R&D.

17

Results derived from the R&D supported by the incentive (2)

• 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.

• The 2013/14 report is being finalised within the DST and will be submitted for tabling to Parliament upon approval.

Process for tabling the 2013/14 annual report on R&D tax incentive to Parliament

18

19

THANK YOU

www.dst.gov.za