Section 11D : deduction for scientific or technological research and development : a comparison to international best practice

Abstract

Research and development (R&D) has been identified as a crucial element in stimulating and boosting the economy of a country, as it increases a country’s ability to produce, be innovative, as well as enhances its human capital. However, every great reward is not without its risks: R&D is very expensive, and often carries the risk of failure. R&D activities can be incentivised in one of two ways: either through direct subsidies or with tax incentives. Direct subsidies allow governments to maintain control over the nature of the R&D conducted, which ensures that issues affecting the public, such as defense, health care and energy development, are addressed. They can also assist in R&D in the private sector, however firms in the private sector are hesitant to invest in R&D as the investments tend to see high social returns but have limited benefits for the individual firms. Government subsidies have also been criticised for “picking favorites” when it comes to the type of R&D that is subsidised and the individual firms that receive the funding. R&D is regarded as important on an international level. The Organisation for Economic Co operation and Development (OECD) has published an extensive document, the Frascati Manual, dealing with what constitutes R&D and how it should be measured. The OECD has also published a study on the trends and issues relating to tax incentives for R&D. South Africa also considers R&D to be important. The government released the South African Research and Development Strategy in August 2002. Inter alia, this document set out the country’s objectives for R&D. It also stated that, in order for these objectives to be met, tax incentives for R&D would have to be put in place. This resulted in 2006 in the insertion of section 11D into the Income Tax Act: Deduction for Scientific or Technological Research and Development. The study conducted by the OECD revealed that the effectiveness of tax incentives depends to a great extent on their design relative to policy objectives, and identified a number of aspects that should be considered when designing tax incentives for R&D. Four years into the operation of section 11D, based on studies conducted by the Human Sciences Research Council’s Centre for Science, Technology and Innovation Indicators, it appears that South Africa has not met the goals set out in its Research and Development Strategy. In addition, only a handful of businesses have made use of the incentive. South Africa is currently under consideration for membership of the OECD. It is therefore important that the aspects identified by the OECD for the design of R&D tax incentives were at least considered in the drafting of section 11D. Further research is thus required to determine whether the South African tax incentives for R&D are adequate and have been appropriately designed. AFRIKAANS : Navorsing en ontwikkeling (N&O) is geïdentifiseer as ‘n sleutelelement in die stimulering en versterking van ‘n land se ekonomie, aangesien dit vervaardigingskapasiteit, innoveringsvermoë en menslike kapitaal vergroot. (Departement Wetenskap en Tegnologie g.d). Elke groot wins is natuurlik nie sonder risiko nie – N&O is baie duur, en kan dikwels misluk. Gevolglik is baie besighede in die privaatsektor huiwerig om N&O projekte te onderneem. Daar is dus ‘n behoefte vir aansporingsmaatreëls vir besighede om N&O te onderneem. N&O aktiwiteite kan op twee maniere aangespoor word – direkte subsidies van die staat of deur belastingverligting. Direkte subsidies maak dit moontlik vir regerings om regstreeks beheer oor die aard van N&O uit te oefen – dit verseker dat aangeleenthede wat die publiek raak soos verdediging, gesondheid en energie-ontwikkeling aangespreek word. (OECD, n.d.). Beleggings neig egter om ‘n hoë maatskaplike opbrengs te lewer, maar lewer beperkte direkte opbrengs vir individuele firmas wat N&O onderneem. Belastingaansporings kan die huidige netto waarde van die belegging van die individuele firma verhoog, aangesien dit die totale koste van die belegging verlaag. Dit maak dit ook moontlik vir die mark, in teenstelling met regerings, om te bepaal hoe N&O gelde toegewys word. Dit verseker ook dat die individuele firma voordeel trek uit die N&O. N&O word op internasionale vlak as belangrik beskou – die “Organisation for Economic Co operation and Development” (OECD) het ‘n omvattende dokument, die “Frascati Manual”, uitgegee oor waaruit N&O bestaan en hoe dit gemeet moet word. Die OECD het ook ‘n studie oor die neigings en ander aangeleenthede, rakende belastingaansporings, ten opsigte van N&O gepubliseer. Ook Suid-Afrika beskou N&O as belangrik – die regering het die “South African Research and Development Strategy” in Augustus 2002 uitgegee. Onder andere, sit die dokument die land se doelwitte rakende N&O uiteen. Dit bevestig ook dat belastingaansporings ingestel moet word om die doelwitte te behaal. Dit het gelei tot die invoeging van artikel 11D – “Aftrekking vir Wetenskaplike of Tegnologiese Navorsing of Ontwkkeling” in die Inkomstebelastingswet in 2006. Die studie van die OECD het getoon dat die effektiwiteit van belastingaansporings grootliks afhang van hulle ontwerp teenoor beleidsdoelwitte, en het ‘n aantal aspekte geïdentifiseer wat oorweeg moet word in die ontwerp van belastingaansporings vir N&O. Vier jaar na die instelling van artikel 11D, blyk dit volgens ‘n studie van die Raad vir Geestesnavorsing se Sentrum vir Wetenskap, Tegnologie en Innoveringsindikatore, dat Suid-Afrika nie die doelstellings soos gestel in die Navorsing en Ontwikkelingstrategie gehaal het nie en dat slegs ‘n handjievol besighede deur die aansporings gebaat het. Suid-Afrika word tans oorweeg vir lidmaatskap van die OECD, en dit is dus belangrik om te bewys dat die riglyne wat die OECD gestel het vir die ontwerp van N&O belastingaansporings minstens in ag geneem is in die opstel van artikel 11D. Verdere navorsing is nodig om te bepaal of die Suid-Afrikaanse wetgewing rondom N&O voldoende is.