In South Africa, the R&D Tax Incentive is a major form of government fiscal support for private-sector R&D. There is a range of direct funding programmes, such as the Support Programme for Industrial Innovation (SPII) and the Industrial Innovation Partnership Programme (IIP), and grants/loans and equity support provided through the Technology Innovation Agency (TIA), which target market-ready technology development and commercialisation.  The Technology for Human Resources in Industry Programme (THRIP) fosters R&D collaboration between private-sector companies and universities and science councils.

The Department of Science and Innovation (DSI) shares responsibilities for the delivery of the incentive with the South African Revenue Service (SARS) and the National Treasury. The incentive is part of a package of policy instruments to promote R&D and innovation in the country. 

For the company to be eligible, it must be engaged in eligible R&D activities within the Republic and its R&D activities must be approved by the Minister of Science and Technology. The approval is granted on the basis of the recommendation by the R&D Tax Incentive Adjudication and Monitoring Committee, which evaluates each application according to the definition of R&D in terms of section 11D of the Income Tax Act.

General requirements are that the R&D expenditure claimed by a company should be incurred (1) directly and solely for R&D undertaken in South Africa, and (2) in the production of income and the carrying on of any trade, and (3) incurred on or after the date on which the DSI received the application from the company. Prototypes and pilot plants created solely for purposes of the R&D are also eligible.

Where a company funds R&D that is undertaken by a third party, the company that can alter or control the methodology of the R&D is eligible to claim the deduction. In these situations, only one of the parties may claim the deduction, with the exception of unincorporated joint ventures. Companies that do not have internal capability to undertake R&D can use this provision to contract out their R&D work, to science councils, universities or another company, whilst still benefiting from the incentive.

Specific activities are excluded from the R&D Tax Incentive, because they –

  1. are not within the scope of eligible R&D as defined in section 11D(1) of the Income Tax Act (ITA);
  2. are excluded in terms of the Regulations as gazetted by National Treasury, issued in terms of sections 11D(1) of the ITA;
  3. constitute post-R&D activities;
  4. are conducted outside the Republic of South Africa, even if funded from within the country; or
  5. are excluded in the proviso of section 11D(1).

In terms of section 11D(1), expenditure incurred on the following activities are not eligible for the R&D tax incentive:

  1. Routine testing, analysis, collection of information and quality control in the normal course of business.
  2. Development of internal business processes, unless such processes are mainly intended for sale or for granting the use or right of use or permission to the use thereof to parties unconnected to the company undertaking the R&D.
  3. Market research, market testing or sales promotion.
  4. Social science research, including the arts and humanities.
  5. Oil and gas or mineral exploration or prospecting, except R&D that develops technology that is used for such exploration or prospecting.
  6. Creation or development of financial instruments or financial products.
  7. Creation or enhancement of trademarks or goodwill.
  8. Immovable property, machinery, plant, implements, utensils or articles (with the exception for pilot plants and prototypes used solely for R&D).
  9. Any expenditure contemplated in section 11(gB) or (gC).
  10. Administration, financing, compliance and similar overheads.

 

Exclusions in respect of deduction for R&D in terms of clinical trials:

  1. A phase IV clinical trial, as defined in Appendix F to the Guidelines other than a clinical trial conducted for the purpose of developing new indications, developing new methods of administration or developing new combinations of pharmaceutical products;
  2. Post-marketing research;
  3. Cost-effectiveness research;
  4. An activity undertaken solely for the purpose of compliance with regulatory requirements;
  5. A product familiarization program;
  6. Research carried on for statistical purposes (meta-analysis);
  7. Epidemiological research; or
  8. Research activities undertaken in preparation for the registration of a clinical trial.

Where a company is due to receive or has received any amount of funds from the government, public entity or a municipal entity towards R&D, an amount equal to such a grant will be excluded when the R&D tax deduction is calculated.

Deductions are excluded in respect of expenditure incurred in respect of immovable property, machinery, plant, implements, utensils or articles, excluding any prototype or pilot plant created solely for the purpose of the process of R&D and that prototype or pilot plant is not intended to be utilised or is not utilised for production purposes after that R&D is completed; and

Deductions are also excluded in respect of financing, administration, compliance and similar costs.

Refer to the R&D Tax Incentive Guidelines for Applicants for additional information.

The R&D tax incentive is available to companies of all sizes in any sector of the economy. To be eligible, a company must be an incorporated entity and recognised as a company under the Income Tax Act. Individuals, non-profit organisation and trusts are not eligible.

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

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 be able to finance its R&D and scale up or undertake its R&D activities sooner than otherwise. From government 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 that 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.