Briefing on 2009/10 report on the R&D tax incentive programme

Briefing to the Portfolio Committee on Science and Technology

Department of Science and Technology19 October 2011

Contents

1. Background and introduction

2. Uptake of the R&D tax incentives by companies

3. Impact of the programme

4. Analysis of challenges

5. Conclusions

Background and Introduction

• In November 2006, an improved R&D Tax Incentive programme was introduced through Section 11D of the Income Tax Act 58 (1962):

– 150% of current expenditure deductible on scientific or technological R&D

– Accelerated depreciation of R&D assets over 3 years at rate of 50:30:20, from the year of bringing assets into use

• Programme has a key role to encourage higher private sector investment in R&D

• It is administered by the DST in conjunction with South African Revenue Services (SARS)

• Minister of Science and Technology is required by the Income Tax Act to report annually to Parliament on the direct impact of the incentive programme, in terms of:

– Aggregate of the R&D expenditure supported;

– Tax revenue foregone due to the incentive; and

– Direct effect to economic growth, employment and other broader government objectives.

Background and Introduction

• To be eligible :-– The activities must constitute scientific and/or technological R&D

– Undertaken within South Africa

– The R&D must be for the purpose of deriving income

• Companies apply retrospectively. Data gets revised as claims for previous years are received

• 1st report (2007/08) covered the period from November 2006 to September 2008 (total of 80 forms)

• 2009/10 report attempts to reconcile info for the first 4 years of the programme. The 2010/11 report is being processed at the DST.

Uptake by companies (as in the 2009/10 report)

Item Reported Figures

2006 (Starting 02 Nov)

2007 2008 2009 Overall

Number of forms received from all companies

4 127 165 116 412

Total R&D Expenditure (R’000)

27 578 2 260 104 2 704 505 1 238 470 6 230 657

Eligible R&D Expenditure (R’000)

8 679 1 450 555 2 029 308 1 207 214 4 695 756

Overall uptake by companies (as in the 2009/10 report)

Range of turnover (in R million)

Number of Companies

% to total Reported R&D Expenditure

(R’000)

% R&D Expenditu

re

Turnover not indicated 35 8,5 132 486 2,8

10 and below 103 25,0 168 731 3,6

Above 10 up to 15 28 6,8 77 504 1,7

Above 15 up to 20 9 2,2 30 089 0,6

Above 20 up to 30 21 5,1 67 770 1,4

Above 30 up to 40 9 2,2 32 069 0,7

Above 40 up to 50 9 2,2 22 579 0,5

Above 50 up to 100 39 9,5 411 158 8,8

100 and above 159 38,6 3 753 370 79,9

TOTAL 412 100,0 4 695 756 100,0

• About 80% of R&D expenditure comes from 38.6% of companies with annual

turnover of R100 million and above.

Tax revenue foregone

Year Estimated yearly tax revenue foregone

Cumulative totals

(R’ 000) (R' 000)

2005/06 183 000 183 000

2006/07 313 000 496 000

2007/08 286 000 782 000

2008/09 219 000 1 001 000

• The estimated overall tax revenue forgone due to the R&D incentive is R1

billion for the period 2005 – 2009 (National Treasury Budget Review 2011).

Key observations of early impact

• The number of forms submitted by companies has increased on a

quarterly basis for the first three years of the programme.

• Inquiries have increased substantially during 2009/10 as more

companies have become aware of the programme.

• About 51.9% of participating companies are from the manufacturing

sector, accounting for R2,7 billion (or 57%) of eligible R&D expenditure

• Of the total R&D expenditure reported, R2,8 billion (61%) is R&D

expenditure within the sectors prioritised in terms of the National

Industrial Policy Action Plan (IPAP)

Key observations of early impact

• The top 5 fields of R&D expenditure reported are: chemical sciences

(32%), industrial sciences (24%), metallurgical sciences (13%),

mathematical sciences (12%) and physical sciences (10%)

• The count of R&D personnel involved in the R&D activities reported

for that period in 13 792, comprising scientists, engineers,

technologists, technicians, managers and other employees directly

involved in R&D

• Incremental employment of R&D personnel is noted in companies

that are regular R&D performers, with rates of growth varying 1-49

employees.

Analysis of challenges

• Slower uptake by companies than expected

• Uncertainty by companies as regards approval and/or eligibility

• Wider challenges concerning companies investing in R&D

• Challenges of SMEs funding R&D

• Administrative processes between SARS and DST

Conclusions: Actions going forward

• Process underway for the amendment of Section 11D of the Income Tax Act to address:

– Uncertainty on approval– Streamlining roles of SARS and DST– Improve impact monitoring

• Measures to intensify awareness about the R&D incentive: – Simple language used in programme brochures– Engagements with industrial associations and targeted workshops– Meetings with large R&D performers– Collaboration with Department of Trade and Industry (DTI) and Technology

Innovation Agency (TIA) in promoting industrial support programmes

• Feasibility/need analysis is being undertaken to determine if a targeted programme to support SME R&D activities should be introduced

THANK YOU