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WHAT IS THE SOUTH AFRICAN R&D TAX INCENTIVE?
The main aim of the Science & Technology R&D Incentive is to encourage South African companies to invest in R&D.
The aim is to help the country enhance productivity , stimulate economic growth, create jobs and boost skills development.
Companies gain by investing more in innovation, leading to more new products and services
The incentive is managed by the Department of Science and Innovation in coordination with SARS and National Treasury.
To qualify, companies must apply to the DST for pre-approval of their R&D projects.
Does your firm develop new or improved products or processes? If so, you are likely to qualify for a generous corporate tax allowance
HOW VANGUARD CAN SUPPORT YOU
We know R&D. We help you determine if your projects can meet the technical requirements for the Allowance
Our focus is helping companies qualify for the R&D Tax Incentive
We focus only on R&D Tax Incentive Applications and Approvals.
End-to-End Service: We handle the full application process for you. That includes identifying eligible R&D projects and expenses, filing the pre-approval application, and making sure your team has the necessary information to support the tax claim with SARS
HOW TO QUALIFY FOR THE SOUTH AFRICAN R&D TAX ALLOWANCE - SO YOU PAY LESS CORPORATE TAX
FREQUENTLY ASKED QUESTIONS ABOUT THE SOUTH AFRICAN R&D TAX INCENTIVE
What is the R&D Tax Incentive in South Africa?
The R&D Tax Incentive is also known as Science & Technology R&D Incentive. It is provided for in Section 11(D) of the Income Tax Act.
The incentive is aimed at encouraging businesses to undertake and invest in R&D in South Africa. The objective is to help companies build capabilities to create new products, processes, devices and techniques, and, or significantly improve existing ones. This incentive is part of a package of measures that the government of South Africa has introduced to support R&D-led innovation, industrial development and competitiveness.
This incentive encourages private-sector investment in innovation and R&D. It helps companies reduce the risk of R&D investment. From an economic perspective, it hopes to develop skills, create jobs and boost economic growth.
This incentive is available to businesses of all sizes in all sectors of the economy that are registered in South Africa.
A company undertaking R&D in the Republic of South Africa qualifies for a 150% tax deduction of its operational R&D expenditure.
Companies are also allowed an accelerated depreciation on plant and machinery on a 50/30/20 basis over 3 years.
What are the benefits of the R&D Tax Incentive for my business?
The South African R&D Tax Incentive provides the following benefits for your company:
- It lowers the marginal cost of R&D
- It reduces your tax burden
- It improves your cash flow and returns to shareholders
- It boosts R&D productivity
- It helps you fund more R&D and be more innovative
- You can carry forward unused tax credits until you need them
By undertaking R&D in South Africa, companies enhance their innovative capabilities and improve their ability to develop and sell new products and improve on existing products, processes and services.
At a corporate tax rate of 28%, the incentive benefit translates into a benefit of 14c for every rand spent on R&D, thus reducing the marginal cost of R&D
How to qualify for the SA R&D Tax Incentive?
In order to qualify for the R&D Tax Incentive, you need to apply to the Department of Science and Technology, before you start the R&D project. The R&D Tax Allowance is open to businesses of any size, in any sector of the economy. You have to be a registered taxpayer with SARS. The R&D activities must be conducted here in South Africa. Once approved you receive an application number.
To claim the tax deduction, you simply submit your next SARS assessment as normal. You include the expenses for the approved project and the application reference number from DST.
What business expenses are tax deductible?
If you company undertakes R&D in South Africa, you have very good/every reason to claim for the R&D Tax Allowance. It allows your company to deduct an additional 50% on Operational R&D Expenses from taxable income. This reduces your taxable income. The R&D Tax Incentive translates to an effective 14% reduction in SARS income taxes.
There are additional deductible expenditure:
- you are allowed to deduct the full cost of pilot equipment [or moulds, etc] in the year of the expense
- you are allowed to rapidly depreciate plant and machinery over 3 successive years at 50%, 30% and 20%
Will my company receive a tax refund?
The R&D tax allowance is non-refundable. This means you do not receive a cash payout. In the event you do not show a profit for that year, you are allowed to carry forward the tax ‘credit’ until you decide when to use.
Why does the R&D Tax Incentive require pre-approval in South Africa?
According to government, the pre-approval system provides certainty for companies when planning for R&D investment.
To access the programme, a company must submit an application to the Minister of Science and Technology for approval. The administration of the incentive is done by the DST. The application form must be completed, sent and received by the DST before commencing with the R&D, as only the expenditure incurred on or after the date on which the DST received the application will be considered.
What criteria must be met to qualify for the R&D Tax Incentive?
According to the provisions in the Income Tax Act, some of the main eligibility requirements of the R&D Tax Incentives are that:
- The expenditure must be actually incurred in the year of assessment
- The expenditure must be for purposes of discovery of information of a scientific or technological nature
- The expenditure must be for purposes of development of new products or processes or design
Taxpayers can claim for the eligible scientific or technological R&D expenditure on salaries and wages, materials, building, machinery equipment, R&D overheads and external R&D contractors.
To qualify for the Accelerated Depreciation of R&D assets some of the criteria are:
- A deduction is allowed in respect of a building, machinery, plant, implement, utensil and any item of capital nature that is used for the purposes of scientific or technological R&D in the year in which it is brought into use
- If the building was used partly for eligible activities in the same year of assessment:
- The part must be used regularly for scientific and technological R&D
- The part must be specifically equipped for such use and the allowable deduction for that year will be apportioned accordingly.
All other assets must be previously unused and should be used solely for R&D activities
What types of R&D activities are eligible for the R&D Tax Incentive?
The Organisation for Economic Co-operation and Development (OECD) provides a useful and practical definition of research and development.
As a guide the following definition can be used to assess activities:
- Research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts. The aim of a research activity is to discover novel, practical and non-obvious information of a scientific or technological nature.
- Development is the application of research findings or other scientific knowledge for the creation of new or significantly improved products, processes or services. Development activities are aimed at devising, developing or creating an invention, design or computer programme of a scientific and technological nature.
It is important to note that the usage of the terms should be confined to the definitions of scientific or technological research and development contained in the Income Tax Act.
What is Scientific R&D for purposes of the SA R&D Tax Incentive?
According to the Income Tax Act, the work can be scientific R&D or technological R&D. When the R&D activity meets the requirements of the Income Tax Act, we say it is eligible.
For scientific R&D to be eligible, it must be undertaken for the advancement of scientific knowledge in scientific fields of practice.
Scientific R&D is normally carried out in a laboratory setting and seeks to discover new scientific knowledge.
The building in which the scientific research activity is undertaken is expected to be equipped for that purpose.
Whether or not the R&D work achieved its objective is not relevant in determining its eligibility. Corporate social responsibility funds to universities e.g. bursaries are ineligible.
What is Technological R&D for the purposes of the SA R&D Tax Incentive?
Technological R&D requires that the work be undertaken to achieve technological advancement for creating, devising or developing any invention be it a material, device, product or process.
Technological R&D is normally undertaken in an industrial setting and the building in which it is done is expected to be specifically equipped for such a purpose.
As with scientific R&D, there is no requirement for the intended technological advancement to be successfully achieved for the claim to be eligible.
“Feedback R&D” which results after a new product or process has been turned over for production units and experiences technical problems that need to be solved some of which require further R&D can be included under technological R&D. Such feedback R&D should be included.
What kinds of activities are not eligible for R&D Tax Incentive?
The following expenditure will not qualify for the R&D Tax Incentive:
- Exploration or prospecting
- Drilling for or producing minerals, petroleum or natural gas
- Management or internal business processes
- Development of trade marks
- Social science and humanities research
- Marketing research or sales promotion
- Routine data collection;Quality control or routine testing of materials, devices, products or processes.
Tax incentives for companies in South Africa
One of the most generous tax incentives for companies in South Africa is the R&D Tax Incentive. All R&D Operational Expenditure in South Africa is 150% deductible. This is subject to pre-approval by the Minister of Science and Technology. In addition, the cost of machinery and other capital assets acquired for the purposes of R&D may be depreciated 50% in the first year of use, 30% in the second, and 20% in the third year. Buildings used specifically for R&D may be written-off over a 20-year period.
Scientific and Technological Research and Development Tax Incentive in South Africa
The Taxation Laws Amendment Act 2011 introduced specific enhancements to the existing scientific and or technological research and development (R&D) tax incentive provided under Section 11D of the Income Tax Act. These changes were effective from 1 October 2012.
A company undertaking R&D in the Republic of South Africa qualifies for a 150% tax deduction of its operational R&D expenditure. This incentive is available to businesses of all sizes in all sectors of the economy that are registered in South Africa.
All the eligible R&D expenditure will qualify for an automatic 100% tax deduction. An additional50% uplift applies to expenditures on R&D activities that have been approved by the Minister of Science and Technology, based on the provisions of Section 11D of the Income Tax Act.
The incentive is aimed at encouraging businesses to undertake and invest in R&D in South Africa. The objective is to help companies build capabilities to create new products, processes, devices and techniques, and, or significantly improve existing ones. This incentive is part of a package of measures that the government of South Africa has introduced to support R&D led innovation, industrial development and competitiveness.
To access the programme, a company must submit an application to the Department of Science and Technology (DST), which is responsible for the administration of the process. The application form must be completed, sent and received by the DST before commencing with the R&D, as only the expenditure incurred on or after the date on which the DST received the application will be considered.
How do you write off research and development?
If your company undertakes R&D in South Africa, you have very good/every reason to claim for the R&D Tax Allowance. The R&D Tax Incentive is provided for in Section 11[D] of the Income tax Act. It allows your company to deduct an additional 50% on Operational R&D Expenses from taxable income. This reduces your taxable income. The R&D Tax Incentive translates to an effective 14% reduction in SARS income taxes.
In order to qualify for the R&D Tax Incentive, you need to apply to the Department of Science and Technology, before you start the R&D project. The R&D Tax Allowance is open to companies of any size, in any sector of the economy. You have to be a registered taxpayer with SARS. The R&D activities must be conducted here in South Africa. Once approved you receive an application number.
What is the Process for Claiming R&D Incentives in South Africa?
To claim the R&D Tax Incentive, the taxpayer is required to complete and submit two forms, one to the DST and the other to South African Revenue Service (SARS), as follows:
- Complete and submit the R&D Tax Incentives Form to the DST. The form must be submitted to the DST within six months of the taxpayer’s financial year end.
- Complete the relevant entries in the Income Tax Return Forms as prescribed by South African Revenue Services (SARS). This is submitted in a normal process of income tax returns. The R&D tax incentive is administered by DST, in conjunction with SARS and the National Treasury, as follows:
- DST is responsible for promoting the R&D Tax Incentives programme and provides general advice to both government and private companies on strategic and operational issues of the programme. It is required to assess and validate the claims against scientific and technological R&D and advise SARS on the eligibility of activities included in the claim. In this regard DST may visit taxpayers to assess the validity of their claims. DST also has a responsibility to report annually to Parliament regarding the performance and impact of the R&D tax incentive programme.
- SARS is the government agency that administers the Income Tax Act. SARS administers the R&D Tax Incentives through the taxation system. Taxpayers claiming the R&D Tax Incentives do so by completing the relevant entries on their income tax return.
- A further responsibility on the functioning of the R&D Tax Incentives involves the National Treasury, with respect to the tax policy.
- There are strict confidentiality requirements applicable to handling all matters in connection with information provided by taxpayers for purposes of R&D Tax Incentives. All officials involved in the administration of the programme are required to take an oath of secrecy
Will the development of a Generic Medicine qualify for the R&D Tax Incentive?
Yes. Companies involved in developing a generic medicine can qualify for the R&D Tax Incentive.
The following types of medicines could qualify for the R&D Tax Incentive:
- Pharmaceutically equivalent products
- Pharmaceutically alternative products
- Therapeutically equivalent products
- Interchangeable pharmaceutical products
Eligible R&D activities in respect of generic medicine development can include:
- An activity in respect of analysis or characterisation of the properties of a pharmaceutical product with the purpose of determining the excipients and other ingredients to be utilised in the formulation of the multisource pharmaceutical product:
- Compatibility tests between the active pharmaceutical ingredients (APIs), excipients and other ingredients
- Dosage form design
- Laboratory-scale reformulation through experimentation on the APIs, excipients and other ingredients
- pilot-plant-scale reformulation
- The activities, tests, design and formulation of multisource pharmaceutical products
- Determination of analytical and stability testing methods if those methods are determined in conjunction with –
- the activities, tests and design of multisource pharmaceutical products
- the formulation of APIs, excipients and other ingredients; or
- the activities, tests and design of multisource pharmaceutical products and the reformulation of APIs, excipients and other ingredients
What is SARS role in the R&D Tax Incentive?
SARS is part of the Adjudication Committee that approves the application for the R&D Tax Incentive.
SARS is also responsible for the company Income Tax Assessment. When the company submits its Income Tax Returns, the R&D expenses that were approved for the R&D Tax Incentive are included.
SARS will then allow a deduction when:
- The R&D was pre-approved by the Minister of Science & Technology
- The approval can be confirmed with the Application Number that was provided when the Tax Incentive application was approve
- The expenditure has incurred:
- Directly for research and development
- In the production of income and
- In the carrying on of trade
SARS will work out whether the claimed expenditure is within the boundaries of the expenditure approved by the Pre-Approval committee. SARS will confirm whether the expenditure was actually incurred in the production of income and in the carrying on of trade.
SARS is part of the Adjudication Committee that approves the application for the R&D Tax Incentive.
SARS retains its audit oversight role, even if the taxpayer has received pre-approval of an R&D project.
Are Clinical Trials included in the R&D Tax Incentive?
Yes. The R&D Tax Incentive includes Clinical Trials for Phase I, Phase II and Phase III.
For the purpose of the R&D Tax Incentive, any R&D being carried on in respect of a clinical trial should be carried out in accordance with Appendix F of the Guidelines for good practice in the conduct of clinical trials with human participants in South Africa issued by the Department of Health (2006).
The company would need to provide the trial name, log number for the clinical trial as issued by the Department of Health as well as the NIH (National Institutes of Health) number.