How does a company benefit ?

At Corporate Tax Rate of 28%, the incentive translates into 14 cents per Rand spent on R&D. The following is an illustration of how the section 11D deduction is estimated:

 

EXPENDITURE (R’000)

Item

Without R&D

With R&D Expenditure

Revenue

 1 000

 

1 000

Operating Expenditure (60%)

 600

600

R&D Expenditure

                                            -               

100

Operating Profit

 400

400

Tax Payable (28%)

 112

98

NPAT

 288

302

Total Saving

 

14

At the level of a firm, the tax deduction helps to reduce the after-tax price of R&D (“user cost of R&D”). With reduced cost of R&D, a firm can better able to finance its R&D; can also scale up or undertake its R&D activities sooner than otherwise. From goverment point of view, the incentive deduction represents a tax revenue forgone. Its benefits should be visible by encouraging new and larger number of companies to perform and upgrade their R&D in the country and should see the private sector increasing R&D and improving South Africa's innovation performance (new and improved products, services, processes, enterprise, etc.)

In terms of section 11D(4) & (5), a company funding R&D undertaken by another company can qualify for R&D tax deduction, provided the funded company does not claim. A company can also claim deduction of R&D it outsources to a South Africa university or  science council. Companies in joint ventures (JVs) can claim to the extent that they fund the R&D. These provisions not only serve to encourage various forms of R&D collaboration and partnerships, but also help in mitigating the R&D funding gaps given the high costs and levels of uncertainty associated with R&D.

Section 11D(7) acknowledges that a firm can receive other funding from government, public entity or municipality towards its R&D activities.  An amount equal to such a funding will be excluded when the R&D tax deduction is calculated. This is to ensure that only the R&D expenditure incurred by the company qualifies. A company does not claim for the R&D tax deduction of 150% for the amount of a government grant for the R&D expenses.

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