R&D incentives in South Africa:.does policy align with implementation? Presentation by Mohammed Jada to SCOF 16 September 2015

Transcription

1 R&D incentives in South Africa:.does policy align with implementation? Presentation by Mohammed Jada to SCOF 16 September 2015

2 Agenda: DTLAB 2015: impact on South African R&D investment Overview where SA stands compared to rest of the world are we losing ground to other countries and why? Policy versus Implementation reasons why we are going backwards Summary of key recommended changes 1

3 South African R&D regime are we losing ground to other countries and why? 2

4 Introduction 2013/2014 target of 1.5% R&D spend to GDP BY /2014: Increased investment in R&D must be encouraged in order to reap the benefits of our geographic advantages as well as to increase our competitiveness in a challenging global environment. Over the next five years we will continue to encourage significantly increased private and public sector investment in R&D... MRS G N M PANDOR. MP MINISTER OF SCIENCE AND TECHNOLOGY [Source, Department of Science and Technology, Report on R&D Tax Incentive Programme 2013/14 Annual Report to Parliament ] South Africa 3

5 Concerning downward trend of R&D in South Africa R&D as % of GDP Australia (c).. Canada (p) France Germany (c) Ireland (c) 1.71 (c) 1.72 (c,p) Japan Korea Spain Sweden (c) (c) 3.37 (c) United Kingdom (c) 1.84 (c) 1.80 (c) 1.77 (p) United States (p) South Africa N/A N/A (0.67)* OECD Total Source: OECD Science, Technology and R&D Statistics (last updated 27 May 2013) *Per DST information session June

6 World of R&D 2011 South Africa South Africa : 0.76% R&D spend to GDP for last 3 years (OECD average 2.4%) 5

7 Global competition to attract R&D functions Globally, R&D tax regimes have been shown to be effective at encouraging research, which is key to boosting economic growth. We are witnessing increasing GLOBAL competition for outsourcing of R&D to R&D attractive regimes Singapore has deductions for start-ups UK has patent-box regime + SME R&D regime Aus/NZ has cash back for start-ups USA & Canada has dedicated R&D regimes France has PAYE rebates 6

8 Policy versus Implementation 3 reasons why we are going backwards 7

9 1.When can taxpayers claim? Let us not score an own goal! Taxpayers can claim deduction only from date of submitting forms - Prior expenditure to date of lodgment is LOST Companies prejudiced because of administrative delay - Almost 3 years and no answer as yet loss of faith in the SA R&D regime - What about new projects started during the past 3 years (in limbo?) Any approved application should apply to R&D expenditure with effect from 1 Oct 2012 and not be limited to the date that a form is submitted FACT is that R&D projects do not start only when a form is submitted - Incentive should apply as from 1 Oct 2012 (regardless of date of application) - DST will still retain authority to pre-approve the project - DST target of 1.5% will be helped by making this amendment 8

10 2. Why is there NO recourse mechanism built in to 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 very subjective interpretation rules are applied Unlike other sections of tax legislation, there is NO objection and appeal process built into Section 11D of the Tax Act Applicants only recourse is to take decision on appeal to the High Court contrary to PAJA, Doctrine of Legitimate Expectation & Constitution? 9

11 3. Confirm intent of legislature/parliament for incentivising R&D World-beating requirement removed from 2013 proposed amendments BUT still being applied subjectively by committee members Problematic wording: no definition of the term innovative Higher threshold applied: new to the world requirement in South Africa?? Countries like Singapore and Australia apply a lower threshold of the R&D being unique to the country as opposed to unique to rest of world Parliament policy intent needs to be confirmed... 10

12 Reminder intention of R&D (section 11D(12) of the Act) The purpose/objective of the SA R&D incentive regime can be found within section 11D(12) of the Income Tax Act as follows: The Minister of Science and Technology shall annually and in anonymous form submit to Parliament a report advising Parliament of the direct benefits of the activities contemplated in subsection(1) in terms of economic growth, employment and other broader government objectives and the aggregate expenditure in respect of such activities. (own emphasis) 11

13 Government policy to encourage R&D finding the right balance Industry policy: Benchmark regional/global best in class Incentivise investment in R&D, attract MNC s, retain R&D in country Revenue perspective As at June about 601 preapproval applications received with about 35% (215) finalised Compliance framework Tax versus Science / Engineering approach Only 1/3 rd of all Compliance cost versus Ease of claiming pre-approval applications have been Level of incentive inducement factor? approved to date Incentivise - Relax rules, higher rates of benefit, improved level of participation Protection - Tighter rules, lower rates of benefit, decreased level of participation 12

14 Summary and request 13

15 Finding the right balance policy direction of the legislature Priority in next round of legislation in South Africa: Provide administrative recourse to taxpayers avoid costly court cases! Clarify intention of Parliament (economic growth + employment) versus subjective implementation ( World-beating requirement is questionable for a developing country?) Let us not score an own-goal : administrative date for submitting the application should not determine when the project should qualify More meaningful interaction required! - SCOF to provide legislative oversight - NT to respond to submissions in more detail - DST undertaking to have a joint task team a move in right direction 14

16 Questions Presentation by: Mohammed Jada Partner KPMG South Africa 15