Finance Minister to boost global competitiveness?

South Africa became one of the first non-Organisation for Economic Development (OECD) countries to introduce tax-based R&D incentives when Section 11D of the Income Tax Act was introduced into legislation in February 2007. We recently saw R&D tax credits and incentives in numerous countries, including Australia, the United Kingdom, the United States, New Zealand and Mexico, coming under discussion. All of these countries were grappling with the same concern, namely whether R&D tax benefits are necessary to promote R&D.

With the exception of New Zealand which repealed its R&D regime in 2010, all these countries, after thorough investigation, continue to provide R&D tax incentives. Germany and Finland, amongst others, are currently discussing the introduction of new incentives.

In November 2010, the OECD, whose mission it is to promote policies that improve the economic and social well-being of people around the world, published a report on the rationale, design and evaluation of R&D incentives. One can only assume that this report resulted from the numerous studies conducted to establish the efficacy of R&D tax-based incentives.

According to the report, R&D incentives are generally introduced for a number of different reasons. These include contributing to national competiveness, maintaining or increasing employment, improving the viability of risky R&D projects and contributing to the long term growth of economies. Governments offer direct R&D support through grants or indirect support through tax incentives. The mixture of direct and indirect support differs between countries. It is also important to note that, in all likelihood triggered by the introduction of an extremely generous tax based R&D regime by France (which offers a volume based tax credit of between 5 and 50%), numerous other countries have either simplified or enhanced their R&D tax benefits.

South Africa currently offers a generous 150% supercharged tax deduction through Section11D of the Income Tax Act. In addition, support is also provided through the Support Programme for Industrial Innovation and the Innovation Fund, although currently these benefits are mutually exclusive. Although Section 11D is a relatively generous and simple tax incentive, which ranks in the top 10 most generous R&D regimes globally, there are a number of aspects that could be simplified or clarified to attract even more R&D activities to South Africa. It is also important to note that South Africa, although currently ranked in the 10 most generous regimes, did at one stage feature as the fourth most generous regime globally. We hope that South Africa will follow the global trend to enhance and clarify its regime in order to ensure the R&D regime remains globally competitive.