South Africa: National Treasury on Release of Draft Research and Development Tax Incentive Improvements for Potential Inclusion in the Tax Laws Amendment Bill 2023

Budget and Tax Laws Amendment Bill 2023 for public consultation

The government is proposing to extend the research and development (R&D) tax incentive beyond 31 December 2023 – likely for a period of 10 years following a consultation process with industry stakeholders . However, based on the experience gained in assessing applications and the review conducted, the government is of the view that the R&D tax incentive needs to be fine-tuned. It is the only policy instrument aimed at encouraging the first phases of R&D. The proposed improvements to Section 11D of the Income Tax Act will bring the incentive closer to its objectives.

The 2021 budget review indicated that the government would review the tax incentive for research and development. A discussion paper titled Review of the Design, Implementation and Impact of the Research and Development Tax Incentive in South Africa has been published jointly by the National Treasury and the Department of Science and of Innovation for public comment on December 15, 2021. The discussion paper included a link to an online website. investigation. In the 2022 budget review, the National Treasury announced that the research and development (R&D) tax incentive will be extended until December 31, 2023 to allow for the finalization of the incentive review as it does not There was insufficient time to hold a public consultation between the release of the discussion document and the 2022 budget. Survey responses were received from 74 interested parties, some of whom provided additional written comments. A public workshop was held on April 7, 2022 to discuss the written comments and survey results and better understand industry concerns.

The draft improvements and accompanying explanatory memorandum released with this media statement are released for public comment today. Interested parties will have 30 days to provide comments. To be clear, the proposed improvements do not constitute a tax bill. Based on these proposals and any public comments received, a final proposal will be included in the 2023 budget for inclusion in the Tax Laws Amendment Bill of 2023 (TLAB). Thereafter, the usual public consultation process will follow. The publication of these

Today’s suggested improvements give the public an additional chance to provide input before they see it in the TLAB 2023 draft.

Proposed changes include the following:

• Refine the definition of R&D to make it easier to understand and arbitrate, resulting in a simpler application process;
• Clarifying that it was always intended that the inducement only apply to activities aimed at resolving scientific or technological uncertainty;
• Moving away from an “end result” or IP law approach to recognizing the reality that R&D involves uncertainty and risk, and that it is impractical to expect taxpayers have detailed knowledge of how their intended R&D activities will proceed at the time of claiming the incentive;
• Instead, move towards incorporating certain principles from the OECD Frascati Manual, namely that activities should be novel, uncertain, systematic and transferable and/or replicable;
• The suggested approach removes the “innovative” requirement from the definition of R&D, which has led to unintended complexity and misunderstandings (the government recognizes that innovation can occur without R&D and does not encompass necessarily the DR).
• To ensure that R&D activities are not obvious or inventive to qualify for the incentive, the revised definition should include the test of whether a professional in the field with the appropriate knowledge and skills would resolve this scientific uncertainty. or technological without undertaking any R&D activities (i.e. activities of systematic investigation or systematic experimentation);
• Modify the exclusion for internal business processes so that – if an activity is a systematic investigation or systematic experimentation with the aim of resolving scientific or technological uncertainty and meets the proposed (revised) definition of R&D for the purpose of this inducement, it should be considered R&D – whether it is intended for sale or its use is granted to related parties;
• Introduce an exclusion for agrochemicals so that activities conducted solely for product registration to comply with the Department of Agriculture, Land Reform and Rural Development are excluded from the incentive;
• Introduction of a six-month grace period for receiving pre-approval applications to allow small applicants, new applicants or applicants undertaking R&D activities in a new area to gather more information about the activities planned R&D so that they are better placed to provide detailed information and thus benefit from the incentive;
• Introduce an information disclosure requirement to allow the SARS Commissioner to disclose certain information to the Minister of Higher Education, Science and Innovation that will enable a better monitoring and evaluation function; and
• Introduce penalties for breach of secrecy.

It is expected that the proposed changes to refine and simplify the legislation, combined with moving to an online process and improving the application process for small businesses, should improve uptake of the incentive.

The draft improvements to Section 11D of the Income Tax Act and the accompanying explanatory memorandum can be viewed on the National Treasury website at (www.treasury.gov.za) and on the South African Revenue Service website at (www.sars.gov.za).

Deadline for written comments

Please forward your written comments to the National Treasury Tax Policy Custodian at [email protected](link sends e-mail) and [email protected](link sends e-mail), and to SARS at [email protected](link sends e-mail) before the close of business on November 7, 2022.

Distributed by APO Group on behalf of the South African Government.