South Africa

Details

  • Service: Tax
  • Type: Business and industry issue
  • Date: 2011/09/12

Corporate Tax

KPMG’s Corporate Tax practice provides a wide range of taxation services to clients in several sectors including financial services, mining, as well as consumer and industrial markets.

Overhaul of R&D allowances 

Five years ago, attractive Research and Development (R&D) income tax allowances were made available to those taxpayers that conducted research or were involved in devising, developing or creating any invention, design or computer program.

In terms of section 11D of the Income Tax Act, taxpayers who were involved in R&D could claim

a 150 percent allowance on expenditure (excluding capital expenditure) actually incurred by such taxpayers directly in respect of activities undertaken in the Republic.


It eventually became apparent that the audit division of the South African Revenue Service (SARS) did not have the capability to assess whether the activities that taxpayers conducted, qualified as research or development. The determination of whether, for example, an advancement made by the taxpayer would qualify as an invention is a difficult one and would likely need an assessment by a qualified engineer or an intellectual property expert.


Recognising this dilemma, and suspecting that some taxpayers were claiming R&D allowances that they were not entitled to, the National Treasury re-wrote section 11D in the draft Taxation Laws Amendment Bill, 2011.


Among many amendments to the section, from 1 April 2012 taxpayers would require approval from an approval committee comprising five members appointed by the Minister of Science and Technology and three members appointed by the Minister of Finance. According to the Explanatory Memorandum to the Amendment Bill, the committee must not only review the initial approval but must also engage in monitoring and reporting on an annual basis.


While this development is understandable in that the fiscus wants to make sure that it is not being fleeced, in practice the approval process is likely to be difficult for many taxpayers to comply with.


Most taxpayers undertake R&D because it is their lifeblood. Without constant innovation their businesses would suffer. Regardless of whether or not they have approval from the committee, they would need to continue with the R&D.


The National Treasury has recognised that an onerous approval process could stymie R&D activity – this is contrary to the stated policy of government, which wants to encourage as much innovation as possible. It appears, from consultation with various stakeholders, that National Treasury will revisit the approval process so it does not hold up R&D activities. It has been mooted, for example, that instead of a pre-approval process, a post-approval process be put in place that would work concurrently with a taxpayer’s income tax return filing. The final outcome will be seen when the revised Taxation Laws Amendment Bill becomes available.


In the meantime, taxpayers that conduct R&D activities should be aware of these upcoming changes and prepare themselves accordingly.