1. R&D incentives in South Africa: a sense check of policy implementation Presentation by Mohammed Jada to SCOF 27 August 2014

2. 1 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Agenda: DTLAB 2014: impact on South African R&D investment Problematic proposed amendments – factors discouraging companies to invest in R&D Conclusion and recommendation Overview – where SA stands compared to rest of the world

3. 2 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Global Scale R&D Incentives Numerous countries offer R&D incentives to attract foreign business and help drive their economy forward Australia Brazil Canada China India Russia South Africa South Korea Japan USA Mexico Singapore Malaysia Israel Argentina Chile Colombia Cyprus European Union (EU) Hong Kong New Zealand Philippines Puerto Rico Thailand

4. 3 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Concerning downward trend of R&D in South Africa… R&D as % of GDP20072008200920102011 Australia..2.26..2.20 (c).. Canada 1.961.921.941.851.74 (p) France 2.082.122.272.242.25 Germany 2.532.692.822.802.84 (c) Ireland 1.291.461.76 (c)1.71 (c)1.72 (c,p) Japan 3.463.473.363.26.. Korea 3.213.363.563.74.. Spain 1.271.351.39 1.33 Sweden 3.403.70 (c)3.603.39 (c)3.37 (c) United Kingdom 1.771.78 (c)1.84 (c)1.80 (c)1.77 (p) United States 2.722.862.912.832.77 (p) South Africa 0.950.930.92N/AN/A (0.67)* OECD Total 2.292.362.412.382.30 Source: OECD Science, Technology and R&D Statistics (last updated 27 May 2013) *Per DST information session June 2014

5. 4 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. World of R&D 2011 South Africa

6. 5 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Government Competition for Investment in R&D Industry policy –Incentivise investment in R&D, attract MNC’s, retain R&D ‘in country’ –Benchmark regional/global ‘best in class’ Level of incentive – inducement factor? Incentivise - Relax rules, higher rates of benefit OR Protection - Tighter rules, lower rates of benefit Revenue perspective –Compliance framework – Tax versus Science / engineering approach –Compliance cost versus Ease of claiming

7. 6 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Proposed amendments – problematic, subjective and prejudicial

8. 7 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Proposed Amendments – recommend recourse mechanism is inserted into legislation  No recourse for applicants Applicants have received rejection letters (more than 18 months later) – - No detailed reasons provided for rejection - Complaint of insufficient interaction with regulatory authorities - Complaint that rules have changed - Draft guidelines only released in July 2014 Unlike other sections of tax legislation, there is NO objection and appeal process built into Section 11D of the Tax Act Submitting new applications - prior expenditure to date of lodgment is LOST Applicants only recourse is to take decision on appeal to the High Court – contrary to PAJA, Constitution?

9. 8 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Proposed Amendments – recommend revisiting of Parliament’s intention for incentivising R&D  ‘World-beating” requirement removed from 2013 proposed amendments …BUT still being applied subjectively by committee members Problematic wording: no definition of the term ‘innovative’ Higher threshold applied: ‘new to the world’ requirement in South Africa Countries like Singapore and Australia apply a lower threshold of the R&D being unique to the country as opposed to unique to rest of world Parliament policy intent needs to be confirmed...

10. 9 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Proposed Amendments – constitution of adjudication committee members to be restricted to DST and NT  Questionable composition of committee members DST acknowledged as appropriate verification regulatory authority Role of SARS: to administer tax system versus pronouncing on eligibility? Adjudication committee should be restricted to DST and NT members

11. 10 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Summary – where we stand as SA...  Increasing competition for outsourcing R&D functions to R&D attractive regimes - focus on investments into R&D to drive economic growth  R&D remains a priority for many governments worldwide (India and Singapore implemented new incentives, Australia/NZ proposing cash back for start-up companies in loss making positions, UK regime has two tier system for large entities and SME’s and has a patent box regime)  Subjective application of ‘innovative’ threshold together with lack of recourse (objection and appeal) process are KEY factors discouraging both SA based companies and MNE’s  Policy direction of Parliament needs to be reaffirmed to help encourage more SA investment in R&D in South Africa

12. 11 © 2014 KPMG South Africa, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in South Africa. Questions Presentation by: Mohammed Jada Partner KPMG South Africa