Experts Welcome Revised Definition Of Incentives In Tax Bill

Author: Amanda Visser (Business Day)

Proposed changes to the definition of the research and development tax incentives have been toned down or not included in the Taxation Laws Amendment Bill that was tabled in Parliament at the end of last month.

Tax experts widely welcomed the revised approach by the Treasury from the initial draft version that was released in July. The previous definition would have excluded all research and development that did not qualify as “world-beating”.

MD of Catalyst Research Solutions Dov Paluch said the government held a workshop with role players and seemed to have paid attention to the concerns raised by industry. There seems to be a softer approach towards IT developments and the legislation now provides room for the science and technology minister to declare certain activities as research and development.

Issues that the minister could designate as research and development include clinical trials, which have been contentious, and generic medicine, he said.

According to Izak Swart, tax director in the research and development division of Deloitte, most of the definition of research and development as it was on October 1 last year was retained. The Treasury seems to have taken a more practical approach to research, with fewer changes than expected.

“The legislation is becoming more stable, which offers taxpayers greater certainty and a better chance of interpreting it correctly,” Mr Swart said on Friday.

The definition that was tabled before Parliament include “systematic investigative or systematic experimental activities” of which the result is uncertain for the purpose of creating an invention, design or computer program that is innovative in nature.

It also includes a “significant and innovative improvement” to any invention, functional design or computer program that will improve performance, reliability or quality.

In terms of the previously proposed definition, these improvements would not have qualified for the incentive.

Mr Swart said under the previous definition a manufacturing company that wanted to “reverse-engineer” new international technology to improve its efficiency, would not have qualified.

Non-qualifying research and development includes routine testing, analysis and collection of information, and the development of internal business processes unless they are intended for sale to third parties.

Oil and gas exploration or prospecting, except for research that is aimed at developing technology used for the prospecting and the creation of financial instruments or financial products, also do not qualify.

Mr Paluch said they were awaiting regulations and guidelines from the Department of Science and Technology in order for industry players to submit clear and better defined applications.

Mr Swart said he found it unusual that the entire 150% tax deduction would in future have to be approved by the department because until now, only the additional 50% deduction had to be approved.

South Africa has set a target of spending 1.5% to 2% of gross domestic product on research and development in five years’ time. The country is currently spending less than 1% on research and development.

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