A speech delivered by the Minister of Science and Technology, Mrs Mmamoloko Kubayi-Ngubane, at the R&D Tax Incentive Meeting with Leaders of Business at the Innovation Hub in Tshwane
Programme Director;
Leaders of Business;
Government Officials;
Distinguished guests;
Ladies and gentlemen;
Let me take this opportunity to thank you for briefly shelving other important matters, and honouring this meeting. The objective of this meeting is to strengthen communication between the government and the business sector on the research and development (R&D) Tax Incentive.
The success of the R&D tax incentive is dependent, among other factors, upon ongoing and constructive dialogue between the government and the business sector. This is why, in November 2015, my predecessor Minister Naledi Pandor established a Task Team comprising representatives from the private and the public sector to evaluate the challenges identified at that time, and make recommendations on the improvements to the R&D tax incentive in a manner that support the objectives of the business sector, government and to the regulators. Much progress has been made in implementing the recommendations of the Task Team and there is clear evidence of improved efficiency in the implementation of this incentive.
I would like to thank the Task Team for its contribution. I also thank the respective organisations that afforded time to their officials to serve in the Task Team.
The R&D Tax Incentive aims to promote private-sector R&D investment in South Africa. In that regard, companies of any size in any industry can qualify for the R&D Tax Incentive. At a corporate tax rate of 28%, the incentive benefit translates into a benefit of 14 cents per Rand spent on R&D, thus reducing the marginal cost of R&D.
That gesture is a reflection of the extent to which government is committed to promoting a conducive environment for business to operate.
Recent studies by the International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) indicate that many countries are exploring ways to stimulate productivity and move out of sub-optimal growth. These countries are looking at tax policy interventions directed at promoting innovation throug support for R&D, entrepreneurship and technology transfer.
A number of developing economies have introduced R&D Tax Incentives over the past decade, following on the trend in OECD countries. The move has seen several countries introducing enhancements to their R&D Tax Incentives by making them more beneficial for businesses, and improving the way they are implemented.
It is vital for both the companies and the country to derive benefits of the R&D Tax Incentive programme. By undertaking R&D, companies enhance their innovative capabilities. They improve their ability to develop and sell new products and improve on existing products, processes and services. They also improve their ability for absorbing technologies from elsewhere. By so doing, they expand the human capital and knowledge base in the country.
In a nutshell, by undertaking R&D, companies can boost economic growth and transform the structure of the South African economy from a resource-based to a high-value adding one.
I therefore urge the business sector to take advantage of the R&D Tax Incentive and invest more in R&D.
One major challenge is that gross expenditure on research and development (GERD) as a percentage of gross domestic product (GDP) still remains below 1%. That reflects an underperformance relative to our own policy targets and some comparable economies, which have gross expenditure on research and development to GDP ratio (GERD)/GDP of around 2%.
For the period since November 2006, when the 150% tax deduction was introduced, to 28 February 2017, a total of 1 087 companies have applied for the R&D Tax Incentive. The incentive has supported just over R45.4 billion in R&D expenditure over the same period.
Innovative companies tend to be more competitive in their markets. The aim of government in promoting R&D and technological innovation through the R&D Tax Incentive and other programmes, is to broaden the pool of innovative companies in order to boost South Africa’s competitiveness. We want to see more South African products and services in the mainstream of the global economy.
Ladies and gentlemen, we have pick up some valuable experiences and lessons over time in implementing the R&D tax incentive. For instance, while this incentive has proven vital for many companies, our previous engagements with the business sector confirmed that the design and implementation of this programme is key to its uptake.
I am proud to inform you that to date, much progress has been made in implementing the recommendations of the Task Team. The latest reports of our Department show that some key performance indicators have been improving. For instance, the approval rates on applications received from small medium enterprises (SMEs) have increased compared to the situation two years ago. The major improvement has been on the turnaround time of decision-making on new applications. Further improvements are happening in this respect as we move to the 90-day turnaround time that the Department committed to in its Strategic Plan. This will go a long way in enhancing certainty and support planning for R&D investment by companies.
Encouraging news is that the Task Team has confirmed that the South African R&D Tax Incentive incorporates the basic tenets commonly found in similar incentives internationally. Its design allows companies to decide which R&D to undertake and when to do so. Aligning the incentive with the tax returns system helps to keep down the incentive administration and compliance costs.
Ladies and gentlemen, let me remind you that the DST is currently developing a new White Paper on Science, Technology and Innovation. In that document we recognise the complementarity between public and private investment in R&D and the role of international investment. Among other sources, the DST has drawn from the recommendations of the Task Team in framing how the overall portfolio of government support programmes for R&D and innovation should evolve in the coming years. We recognise the important role played by different forms of support, such as grants, loans, equity holding, partnerships and public procurement. The R&D tax incentive is especially useful for supporting early phase research, while other grants are used to support other stages in the innovation process.
Business expenditure on research and development (BERD) accounts for the largest share of gross expenditure on research and development (GERD) in South Africa. But its share has dropped from a peak of 58.6% in 2008/09 to 42.7 per cent in 2015/16. Since around 2009, Business expenditure on research and development (BERD) has increased at a relatively slower rate compared to R&D in sectors that are highly dependent on government R&D funding, namely higher education and Science Councils. A key concern is that in some critical sectors, such as mining, manufacturing, electricity, gas and water supply, R&D spending has not fully recovered since then.
Interestingly, there are important shifts in the industry composition of Business expenditure on research and development (BERD). The financial and business services industry is now the largest contributor to BERD, reporting 42% of Business expenditure on research and development (BERD) in 2015/16. Manufacturing’s proportional share of Business expenditure on research and development (BERD) has decreased over time, from 38% in 2008/09 to 32% in 2015/16. Although manufacturing R&D spending has improved compared to the period between 2009 and 2011, additional effort is necessary if South Africa is to truly re-industrialise. The R&D plans agreed to by stakeholders in the mining industry should be commended as a positive step to revive and build new capabilities that will retain South Africa’s global leadership in some of the technologies in this area.
Of cardinal importance is that business sector R&D helps to expand employment and build a knowledge based economy. Just more than 20 000 R&D personnel are reported to be directly involved with the R&D supported through this incentive. This number comprises core research personnel such as scientists, engineers, technologists and technicians, and support personnel in a form of R&D managers and other technical staff.
To assess the impact of this incentive, an impact evaluation has been initiated jointly by the DST and the National Treasury. The DST also commissions annual surveys to produce statistics on R&D and innovation in South Africa.
Let me conclude by appealing to all companies to cooperate when they are requested to provide information for purposes of these important studies. Today’s meeting should provide us with a sense of how the business sector is experiencing the enhancements that have been introduced. It should also point to new opportunities we should be investigating as we improve the efficiency of the incentive. Once again I would like to thank all you who took time out of your busy schedule to attend this gathering today. Let’s work together to build our economy.
I thank you.
