your intellectual property portfolio: a vast source of cash savings

IP-Based Tax Incentives:A Source Of Savings

18 June 2009© 2009 Margo™ (Intellectual Property) All Rights Reserved

i. Agenda

1. General Overview & Objective

2. “Research & Development”: S11D

3. Other IP Deductions, Allowances

4. Legal Expenses

5. Limitations & Exclusions

6. Plan Of Attack

© 2009 Margo™ (Intellectual Property) All Rights Reserved

1. Overview & Objectives� Savings through tax deductions & allowances

� After-tax benefit: not budgeted for (bonus)

� Focus on the unusual, uncommon, little-known & technical

� Important, related aspect: risk mitigation

� Tax Neutral: Not Aggressive, No Structures & No Schemes

� NB: deductible in the hands of the taxpayer


2. Section 11D: R&D Deduction

Overview: Section 11D(1) – OpEx� Supercharged deduction of 150% (Op Ex)

� Additional benefit of 14% after tax

� Volume based tax regime & No cap

� Activities must be performed in SA, but IP need not reside in SA



Allowable Qualifying Activities� discovery of novel, practical, non-obvious

information� devising, developing or creation of any:

patentable invention – Patents Act

registerable design – Designs Act

computer program – Copyright Act

� knowledge essential to the use of the same� activities: scientific or technological in nature



Exclusions:� Exploration/prospecting� Management or internal business

processes� Trade marks� Social sciences/humanities� Market research, sales, marketing


2. Section 11D: R&D DeductionPotentially Qualifying Activities

� development of RFID tag and/or transceiver device for use with the tag

� development of new or improved touch-screen for OBC (measurable improvement)

� devise improved steel-composite brake and/or braking system for articulated locomotive (better traction / longer-wearing)

� achieving integration of discreet software solutions to obtain a technical result

� new design load-bearing axle (heavier load)


2. Section 11D: R&D DeductionUnlikely To Qualify

� assembling, carrying out routine activities;� standard redundancy upgrades;� implementing known technology in the usual

fashion; � pure maintenance, trouble-shooting

Risk Aspect: SARS Draft Guideline (Nov ’08)


MUST (aim to) resolve technological uncertaintyMUST seek advance in (underlying) technology

2. Section 11D: R&D DeductionTypes Of Qualifying Expenditure

� Salaries & Wages� total cost to company

� Overheads� water, electricity, rent, etc

� Materials� consumables, parts

� Third-party Payments� contractors; leased equipment



Overview: Section 11D(2) – CapEx� previous 40:20:20:20 depreciation allowance� §11D(2) provides 50:30:20 accelerated

allowance� no prior use & apportion use of assets� assets for use in conducting §11D(1) activities � includes costs of erecting, installing,

improving or adding to asset


2. Section 11D: R&D DeductionIllustrative Example: S11D(2) v S11(e)

Radio Communication Equipment – ZAR1m

812,988200,000200,000200,000200,000200,00011(e)

929,549––200,000300,000500,00011D(2)

NPV at Y0

Y4Y3Y2Y1Y0

% Saving (NPV): 14.34 %© 2009 Margo™ (Intellectual Property) All Rights Reserved

2. Section 11D: R&D DeductionThree Important Issues

1. Rate Of Deduction� Usually: Where R&D is funded – limit: 100%

2. Entitlement & Foreign Funding� §11D(7): “double dip” – 150%

3. Reporting Requirements� SARS (IT14), DST (Form)


Caution! “Tainted IP”

3. Other IP-Based Deductions

Creating IP

Creating IP

R&D SpendR&D

Spend

Renewal Fees

Renewal Fees

Regis’tionFees

Regis’tionFees

Acq’sitionFees

Acq’sitionFees

License Fees

License Fees

Deduction Allowed In

ZA

Deduction Allowed In

ZA

Instruments• patents• designs• trade marks• © software • know how

ZA & Abroad


3. Other IP-Based Deductions

Assess Risk, Legal

Req’ments

Optimise

Identify


3. Other IP-Based DeductionsSignificance

� Full picture: merely focusing on handful of deductions misses opportunities

� Often structured as alternatives (different requirements)

� Huge basket of benefits – reduces tax liability across full group (ZA & globally)

� Reduce provisional tax payments: immediate & substantial


4. Legal ExpenditureLegal expenditure incurred:

� on any claim, dispute or action � arising in course of / by reason of ordinary

operations� undertaken by carrying on trade� NB: not necessarily in any court or tribunal


Expenditure incurred in enforcing a registered design

4. Legal ExpenditureExamples From Decided Cases

� defending restraint of trade disputes � terminating agency agreements� terminating contract for purchase of goods� resisting municipal threats to remove your

machinery from site� dispute re: reverse-engineering of copyright-

protected products (engineering drawings)� recovering trade debts


5. Restrictions & LimitationsGeneral

� deductions available at different rates� deductible in different tax periods� different qualifying, reporting requirements� exclusions & limitations

Section 23I

connected party transactions� many recoupment provisions may apply

Section 11D

Section 8(4), 8(5)� frequent changes to the law


Benefit SummaryYoY-1

Finance Charges

Restraints

IP Royalty Deductions

IP Acquisitions

IP Renewal, Registration

Other CapEx Allowances

Disposal Allowances

11D: R&D

Yn…Y2Y1

Tax Deduction = �n

benefits© 2009 Margo™ (Intellectual Property)

6. Plan Of Attack� Gap Analysis: IT Deductions Generally

what is (not) being claimed? At what rate? [Optimise]

what has been overstated? [Mitigate risk]

responsibility: skilled expertise [Optimise / Risk]

� Business Management: Futurecapturing each deductible transaction upfront

developments & changes to law

responsibility: skilled expertise [Identify / Implement / Risk]


7. Questions.


Darren Margo�� 011 803 3222�� 082 377 1234

�� [email protected]


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