R&D incentives in South Africa: a sense check of policy implementation

Presentation by Mohammed Jada to SCOF27 August 2014

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Agenda:

DTLAB 2014: impact on South African R&D investment

Problematic proposed amendments – factors discouraging companies to invest in R&D

Conclusion and recommendation

Overview – where SA stands compared to rest of the world

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Global Scale R&D Incentives

Numerous countries offer R&D incentives to attract foreign business and help drive their economy forward

Australia

Brazil

Canada

China

India

Russia

South Africa

South KoreaJapanUSA

Mexico

SingaporeMalaysia

Israel

ArgentinaChile

Colombia

Cyprus

European Union (EU)

Hong Kong

New Zealand

PhilippinesPuerto RicoThailand

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Concerning downward trend of R&D in South Africa…

R&D as % of GDP 2007 2008 2009 2010 2011

Australia .. 2.26 .. 2.20 (c) ..Canada 1.96 1.92 1.94 1.85 1.74 (p)France 2.08 2.12 2.27 2.24 2.25Germany 2.53 2.69 2.82 2.80 2.84 (c)Ireland 1.29 1.46 1.76 (c) 1.71 (c) 1.72 (c,p)Japan 3.46 3.47 3.36 3.26 ..Korea 3.21 3.36 3.56 3.74 ..Spain 1.27 1.35 1.39 1.39 1.33Sweden 3.40 3.70 (c) 3.60 3.39 (c) 3.37 (c)United Kingdom 1.77 1.78 (c) 1.84 (c) 1.80 (c) 1.77 (p)

United States 2.72 2.86 2.91 2.83 2.77 (p)

South Africa 0.95 0.93 0.92 N/A N/A (0.67)*OECD Total 2.29 2.36 2.41 2.38 2.30Source: OECD Science, Technology and R&D Statistics (last updated 27 May 2013)

*Per DST information session June 2014

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World of R&D 2011

South Africa

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Government Competition for Investment in R&D

• Industry policy

– Incentivise investment in R&D, attract MNC’s, retain R&D ‘in country’

– Benchmark regional/global ‘best in class’

• Level of incentive – inducement factor?

Incentivise - Relax rules, higher rates of benefit

OR

Protection - Tighter rules, lower rates of benefit

• Revenue perspective

– Compliance framework – Tax versus Science / engineering approach

– Compliance cost versus Ease of claiming

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Proposed amendments – problematic, subjective and prejudicial

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Proposed Amendments – recommend recourse mechanism is inserted into legislation

No recourse for applicants

Applicants have received rejection letters (more than 18 months later) – - No detailed reasons provided for rejection - Complaint of insufficient interaction with regulatory authorities - Complaint that rules have changed - Draft guidelines only released in July 2014

Unlike other sections of tax legislation, there is NO objection and appeal process

built into Section 11D of the Tax Act

Submitting new applications - prior expenditure to date of lodgment is LOST

Applicants only recourse is to take decision on appeal to the High Court– contrary to PAJA, Constitution?

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Proposed Amendments – recommend revisiting of Parliament’s intention for incentivising R&D

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Proposed Amendments – constitution of adjudication committee members to be restricted to DST and NT

Questionable composition of committee members

DST acknowledged as appropriate verification regulatory authority

Role of SARS:

to administer tax system versus pronouncing on eligibility?

Adjudication committee should be restricted to DST and NT members

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Summary – where we stand as SA...

Increasing competition for outsourcing R&D functions to R&D attractive regimes - focus on investments into R&D to drive economic growth

R&D remains a priority for many governments worldwide (India and Singapore implemented new incentives, Australia/NZ proposing cash back for start-up companies in loss making positions, UK regime has two tier system for large entities and SME’s and has a patent box regime)

Subjective application of ‘innovative’ threshold together with lack of recourse (objection and appeal) process are KEY factors discouraging both SA based companies and MNE’s

Policy direction of Parliament needs to be reaffirmed to help encourage more SA investment in R&D in South Africa

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Questions

Presentation by:

Mohammed Jada

Partner

KPMG South Africa