Theme heading insertRESEARCH AND DEVELOPMENT TAX INCENTIVE PROGRAMME

Briefing to the Portfolio Committee on Science and Technology

08 May 2013

1. Overview of the R&D tax incentive programme

2. 2011/12 report to Parliament on performance of the R&D tax

incentive programme:

– Uptake by companies

– Impact areas (R&D expenditure, IPAP sectors, R&D

personnel, additionality aspects)

3. Progress in implementing the new administrative processes

Presentation Content

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• 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.

• 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 overall investment in R&D

– Promote innovation, i.e. development of new products, processes and services

– Promote technological advancement and competitiveness

• 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

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• The 2011/12 report to Parliament on performance of the R&D tax incentive was tabled in Cabinet on

28 February 2013.

• The report is based on information submitted by 477 companies that have reported to the DST to

have claimed for the R&D tax incentive between November 2006 and February 2012. For that

period, a total of 1026 forms were received.

• Companies were required to submit claims every year, hence the repeat claims by some of the

companies.

• Rules that operated until September 2012 allowed companies to submit claims retrospectively.

Annual data on uptake, therefore, gets revised as new submissions (form) are received at the DST.

2011/12 report to Parliament

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• Between November 2006 and February 2012, a total of 477 companies reported to the DST that they claimed for the R&D tax incentive. These companies submitted 1 026 forms to the DST.

• Of these forms, 311 submissions (or forms) were received during the reference year 2011/12, with 130 pertaining to R&D expenditure in that same period.

• Small and medium enterprises (SMEs – turnover of R40 million and below) constituted 45.5% of the 477 companies that have benefitted from the programme between November 2006 and February 2012.

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Uptake by companies(as in the 2011/12 report)

• The total R&D expenditure reported for the period November 2006 to February 2012 is R12 billion, of which R10 billion is eligible for the R&D tax incentive.

• Large companies (turnover of above R40 million) were the most dominant participants in the programme, accounting for up to 85% of the total reported R&D expenditure.

• For the 2011/12 year, total R&D expenditure of R985 million was reported, R669 million of this was eligible expenditure.

• Additionality: Companies reported that they made additional R&D investment of R347 million, which they could not have invested if there was no incentive.

R&D expenditure supported (as in the 2011/12 report)

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Contribution to R&D in specific economic sectors

Economic sector Number of companies supported

R&D expenditure reported(in R 'million)

Agriculture, forestry and fishing 29 608

Mining and quarrying 19 783

Manufacturing 229 7 339

Electricity, gas, water supply, construction, wholesale and retail

14 563

Transport storage and communication 14 956

Financial and business services 167 1 733

Community and social services 5 40

Totals 477 12 021

• The manufacturing sector is dominant in terms of number of beneficiary companies and R&D expenditure, with 48% of all submissions and 61% of the R&D expenditure.

• This is followed by the business and financial services, with 35% of the submissions and 14% of the R&D expenditure.

• Just over R5 billion of the overall R&D expenditure supported through the incentive was in sectors prioritised in the Industrial Policy Action Plan (IPAP version 2010-2012).

• For the year 2011/12, 38 submission were received from the IPAP sectors, reporting R395 million in R&D expenditure.

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Contribution to R&D in specific economic sectors (continued)

• The number of R&D personnel involved in the supported R&D is estimated at 11 086 (Nov 2006 – Feb 2012).

• Dominant R&D personnel are technicians and engineers, with 21% and 23% respectively.

• The other technical staff represent 25% of the total R&D personnel

• Analyses of 23 companies that participated in the programme for five consecutive years shows that they had a net increase of 86 in their R&D personnel.

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R&D Personnel

• An analysis of the uptake up to February 2012 indicated that the incentive programme was accessed by a small number of companies compared to what it should have been supporting. To achieve a greater impact, the incentive should support more companies.

• Just more than R2 billion (or 17%) of the R&D reported were undertaken by foreign owned multinational companies, indicating that the incentive is able to attract R&D of foreign owned multinational companies.

• Qualitative information collected from companies indicate that the incentive also aided the improvement of manufacturing processes and introduction of new products, and that companies that benefitted plan R&D as part of their organisational strategy.

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Other observation on impact of the incentive

• New amendments to incentive that became effective in 01 October 2012 require companies to apply for pre-approval of their R&D projects in order to qualify for the tax deduction.

• The Adjudication and Monitoring Committee has been established and started evaluating applications in January 2013. Committee comprises DST, South African Revenue Service and the National Treasury.

• Between October 2012 and 31 March 2013, the DST received 235 applications from 221 companies.

• The incentive is now able to assist new participants: From the 221 companies that applied, 102 were first time applicants to the programme

Progress on the new Administrative process

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THANK YOU

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