1. Theme heading insert RESEARCH AND DEVELOPMENT TAX INCENTIVE PROGRAMME Briefing to the Portfolio Committee on Science and Technology 08 May 2013

2. 1.Overview of the R&D tax incentive programme 2.2011/12 report to Parliament on performance of the R&D tax incentive programme: –Uptake by companies –Impact areas (R&D expenditure, IPAP sectors, R&D personnel, additionality aspects) 3.Progress in implementing the new administrative processes Presentation Content 2 www.dst.gov.za

3. Companies undertaking R&D in South Africa qualify for a tax deduction in terms of Section 11D of the Income Tax Act (1962), as amended. Through this incentive, the government wants to encourage increased R&D in the business sector, by firms of any size or industry. This is important in order to: –Increase overall investment in R&D –Promote innovation, i.e. development of new products, processes and services –Promote technological advancement and competitiveness South Africa is amongst the countries in the world that offers generous R&D tax incentives, offering up to 150% in tax deductions. Overview of the R&D Tax Incentive programme 3 www.dst.gov.za

4. The 2011/12 report to Parliament on performance of the R&D tax incentive was tabled in Cabinet on 28 February 2013. The report is based on information submitted by 477 companies that have reported to the DST to have claimed for the R&D tax incentive between November 2006 and February 2012. For that period, a total of 1026 forms were received. Companies were required to submit claims every year, hence the repeat claims by some of the companies. Rules that operated until September 2012 allowed companies to submit claims retrospectively. Annual data on uptake, therefore, gets revised as new submissions (form) are received at the DST. 2011/12 report to Parliament 4

5. Between November 2006 and February 2012, a total of 477 companies reported to the DST that they claimed for the R&D tax incentive. These companies submitted 1 026 forms to the DST. Of these forms, 311 submissions (or forms) were received during the reference year 2011/12, with 130 pertaining to R&D expenditure in that same period. Small and medium enterprises (SMEs – turnover of R40 million and below) constituted 45.5% of the 477 companies that have benefitted from the programme between November 2006 and February 2012. 5 Uptake by companies (as in the 2011/12 report)

6. The total R&D expenditure reported for the period November 2006 to February 2012 is R12 billion, of which R10 billion is eligible for the R&D tax incentive. Large companies (turnover of above R40 million) were the most dominant participants in the programme, accounting for up to 85% of the total reported R&D expenditure. For the 2011/12 year, total R&D expenditure of R985 million was reported, R669 million of this was eligible expenditure. Additionality: Companies reported that they made additional R&D investment of R347 million, which they could not have invested if there was no incentive. R&D expenditure supported (as in the 2011/12 report) 6

7. 7 Contribution to R&D in specific economic sectors Economic sectorNumber of companies supported R&D expenditure reported (in R 'million) Agriculture, forestry and fishing29608 Mining and quarrying19783 Manufacturing2297 339 Electricity, gas, water supply, construction, wholesale and retail 14563 Transport storage and communication14956 Financial and business services1671 733 Community and social services540 Totals47712 021

8. The manufacturing sector is dominant in terms of number of beneficiary companies and R&D expenditure, with 48% of all submissions and 61% of the R&D expenditure. This is followed by the business and financial services, with 35% of the submissions and 14% of the R&D expenditure. Just over R5 billion of the overall R&D expenditure supported through the incentive was in sectors prioritised in the Industrial Policy Action Plan (IPAP version 2010-2012). For the year 2011/12, 38 submission were received from the IPAP sectors, reporting R395 million in R&D expenditure. 8 Contribution to R&D in specific economic sectors (continued)

9. The number of R&D personnel involved in the supported R&D is estimated at 11 086 (Nov 2006 – Feb 2012). Dominant R&D personnel are technicians and engineers, with 21% and 23% respectively. The other technical staff represent 25% of the total R&D personnel Analyses of 23 companies that participated in the programme for five consecutive years shows that they had a net increase of 86 in their R&D personnel. 9 R&D Personnel

10. An analysis of the uptake up to February 2012 indicated that the incentive programme was accessed by a small number of companies compared to what it should have been supporting. To achieve a greater impact, the incentive should support more companies. Just more than R2 billion (or 17%) of the R&D reported were undertaken by foreign owned multinational companies, indicating that the incentive is able to attract R&D of foreign owned multinational companies. Qualitative information collected from companies indicate that the incentive also aided the improvement of manufacturing processes and introduction of new products, and that companies that benefitted plan R&D as part of their organisational strategy. 10 www.dst.gov.za Other observation on impact of the incentive

11. New amendments to incentive that became effective in 01 October 2012 require companies to apply for pre-approval of their R&D projects in order to qualify for the tax deduction. The Adjudication and Monitoring Committee has been established and started evaluating applications in January 2013. Committee comprises DST, South African Revenue Service and the National Treasury. Between October 2012 and 31 March 2013, the DST received 235 applications from 221 companies. The incentive is now able to assist new participants: From the 221 companies that applied, 102 were first time applicants to the programme Progress on the new Administrative process 11 www.dst.gov.za

12. 12 THANK YOU www.dst.gov.za