28 February 2007
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On 7 February 2007 the Minister of Finance, in consultation with the Minister of Science and Technology, promulgated an incentive scheme to promote the development of science and technology in South Africa by industry.
This incentive takes the form of a deduction during any year of assessment of an amount equal to 150 percent of any expenditure actually incurred by a taxpayer in that year of assessment, directly in respect of activities undertaken in the Republic for the purposes of R&D, as defined in Section 11 D of the Income Tax Act. Portions of this incentive are effective retrospectively to 2 November 2006.
In short, it appears that the deduction may be allowed where expenditure is incurred in the Republic for one of the following purposes:
However, no deduction shall be allowed in respect of expenditure or costs relating to exploration or prospecting, management or internal business processes, trade marks, the social sciences or humanities, or market research, sales or marketing promotion.
It is apparent from the above that it will be necessary for anybody carrying out R&D or developing software and wishing to make full use of the available deduction, to put policies and processes in place to identify all expenditure actually incurred directly in respect of each activity, which results in an output for which the deduction would be applicable. It is our view that such policies and processes need to be put in place as quickly as possible, so as to ensure that potentially deductable expenditure does not melt into general expenditure and is then not deductable, as it cannot be identified unequivocally as having been incurred directly in respect of such activities.
Furthermore, due to the dual technical and legal nature of the processes requiring a knowledge of the technical subject matter as well as the legal requirements of the eligibility for the deduction, the patent attorneys at Hahn & Hahn Inc are excellently placed to assist with the design and implementation of said policies and processes.
A further issue which we believe will arise, is the determination of whether a particular output, for which expenditure has been incurred, is of a nature which would trigger the deduction. It is likely that independent expert opinion would need to be obtained as to whether the output meets the measure of a discovery of information of a scientific or technological nature that is novel, practical and non-obvious. Such expert would likely need to conduct searches and then analyse the located prior art and provide an opinion on the basis of reports provided by the taxpayer requiring the deduction and the prior art located in the search. Again, the patent attorneys at Hahn & Hahn Inc, who are technically/scientifically and legally qualified, are ideal for the provision of such an opinion. It is, however, uncertain as to how the Minister will evaluate these claims for deductions where a patent or design application has not been filed.
In the event that the expenditure was incurred in the Republic for the purposes of the devising, developing, or creating of any invention, design, or any computer programme, or other statutory intellectual property, it is likely that the filing of a patent and/or registered design application, followed later by proof of granting of the patent and/or design, is likely to satisfy the Minister that the expenditure was indeed for this purpose.
As South Africa is a non-examining jurisdiction as regards patent and design applications, it would appear to be prudent to file an International Patent Application through the South African Patent Office which would result in both an International Search Report and eventually an International Preliminary Report on Patentability which, with or without an expert report as circumstances dictate, could be used to substantiate that the requirements for the deduction have been met.
Section 11 D, at sub-section 11 thereof, has a peculiar requirement that, regardless whether a deduction has actually been claimed or not, in respect of each year of assessment during which any taxpayer is eligible for the deduction, or would be so eligible, that the taxpayer must submit to the Minister of Science and Technology such information as that Minister may require in such form and manner (including electronically) and at such place as that Minister may from time to time prescribe. Failure to file the report timeously and in the prescribed manner is a criminal offence which is punishable by imprisonment, a fine, or both. Again, the processes which are put in place should cater for easily generating such reports.
Janusz Luterek
Director
Hahn & Hahn Inc
28 February 2007