The success of the research and development (R&D) tax incentive is dependent on ongoing and constructive dialogue between the government and the business sector, Science and Technology Minister Mmamoloko Kubayi-Ngubane said on Friday.
A task team, comprising representatives from the private and the public sectors, was set up in 2015 to evaluate the challenges identified at that time, and to make recommendations on the improvements to the R&D tax incentive in a manner that supports the objectives of the business sector, government and regulators.
“Much progress has been made in implementing the recommendations of the task team and there is clear evidence of improved efficiency in the implementation of this incentive,” Kubayi-Ngubane said at a tax incentive seminar, in Pretoria, adding that the R&D tax incentive aims to promote private-sector R&D investment in South Africa.
She pointed out that companies of any size in any industry qualified for the incentive.
“At a corporate tax rate of 28%, the incentive benefit translates into a benefit of 14c for every rand spent on R&D, reducing the marginal cost of R&D,” she said.
Recent studies by the International Monetary Fund and the Organisation for Economic Cooperation and Development (OECD) indicate that many countries are exploring ways to stimulate productivity and move out of suboptimal growth.
These countries are looking at tax policy interventions directed at promoting innovation through support for R&D, entrepreneurship and technology transfer.
Several developing economies have introduced R&D tax incentives over the past decade, with many countries introducing enhancements to their R&D tax incentives by making them more beneficial for businesses, and improving the way they are implemented.
“It is vital for both the companies and the country to derive benefits from the R&D tax incentive programme. By undertaking R&D, companies enhance their innovative capabilities and improve their ability to develop and sell new products and improve on existing products, processes and services. They also improve their ability for absorbing technologies from elsewhere,” Kubayi-Ngubane noted.
By undertaking R&D, she said, companies could boost economic growth and transform the structure of the South African economy from a resource-based to a high-value-adding one.
“I, therefore, urge the business sector to take advantage of the R&D tax incentive and invest more in R&D.
Kubayi-Ngubane highlighted that a major challenge was that gross expenditure on R&D as a percentage of gross domestic product (GDP) still remained below 1%.
She added that this reflected an underperformance relative to the country’s own policy targets and some comparable economies, which have gross expenditure on R&D to GDP ratios of around 2%.
“For the period since November 2006, when the 150% tax deduction was introduced, to February 28, 2017, a total of 1 087 companies have applied for the R&D tax incentive. The incentive has supported just over R45.4-billion in R&D expenditure over the same period,” she said.
She highlighted that the approval rates on applications received from small, medium-sized and microenterprises have increased compared with two years ago.
“The major improvement has been on the turnaround time of decision-making on new applications. Further improvements are happening in this respect as we move to the 90-day turnaround time that the department committed to in its strategic plan.
“This will go a long way in enhancing certainty and support planning for R&D investment by companies,” the Minister said.