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South Africa: National Treasury on Publication of Draft Research and Development Tax Incentive Improvements for Possible Inclusion in the Tax Laws Amendment Bill 2023

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  Budget and Tax Law Amendment Bill 2023 for Public Comment The government proposes to extend the Research and Development R D tax incentive beyond December 31 2023 likely for a period of 10 years after a consultation process with industry stakeholders However given the experience gained in awarding applications and the review carried out the government is of the opinion that the R D tax incentive requires some refinement It is the only political instrument designed to promote the early stages of R D The proposed refinements to section 11D of the Income Tax Act will bring the incentive closer to its intended goals The 2021 budget review indicated that the government would review the research and development tax incentive On December 15 2021 the National Treasury and the Department of Science and Innovation jointly released a discussion paper entitled Review of the Design Implementation and Impact of South Africa s Research and Development Tax Incentive for public comment The discussion paper included a link to an online survey website In the 2022 Budget Revision the National Treasury announced that the research and development R D tax incentive will be extended until December 31 2023 to allow the incentive revision to be finalized as there was not enough time to conduct a public consultation between the publication of the discussion document and Budget 2022 Responses to the survey were received from 74 stakeholders some of whom provided additional comments in writing A public workshop was held on April 7 2022 to discuss written comments and survey results and better understand industry concerns The draft enhancements and accompanying explanatory memorandum published with this press statement are being released for public comment today Interested parties will have 30 days to submit their comments To be clear the proposed refinements do not constitute a tax bill Based on these proposals and all public comments received a final proposal will be included in the 2023 Budget for inclusion in the proposed Tax Laws Amendment Act of 2023 TLAB The usual public consultation process will then be carried out Posting these suggested refinements today gives the public an additional opportunity to provide input before we see them in the 2023 TLAB draft The proposed amendments include the following Refine the definition of R D to make it simpler to understand and award resulting in an easier application process Clarifying that the intention has always been that the incentive only applies to activities with the objective of resolving a scientific or technological uncertainty Moving away from a bottom line approach or IP statute to acknowledge the reality that R D involves uncertainty and risk and that it is impractical to expect taxpayers to have detailed knowledge of how their R D will unfold D provided at the time of the request for the incentive Instead move towards incorporating some principles of the OECD Frascati Manual ie that activities should be novel uncertain systematic and transferable and or replicable The suggested approach removes the innovative requirement from the definition of R D which has created unwelcome complexity and misunderstanding the government acknowledges that innovation can occur without R D and does not necessarily encompass R D D To ensure that R D activities are not obvious or inventive in order to qualify for the incentive the revised definition should include testing whether a professional in the field with the appropriate knowledge and skills would resolve that scientific or technological uncertainty without undertaking any activity R D ie systematic research or systematic experimental activities Modify the exclusion of internal business processes so that if an activity is systematic research or systematic experimental with the aim of resolving a scientific or technological uncertainty and meets the proposed revised definition of R D for the purposes of this incentive it should be considered R D regardless of whether it is intended for sale or its use is granted to related parties Introduce an exclusion for agrochemical products so that activities carried out solely in preparation for product registration to comply with the Department of Agriculture Agrarian Reform and Rural Development are excluded from the incentive Introduction of a six month grace period for receipt of pre approval applications to allow smaller applicants new applicants or applicants conducting R D in a new field to collect more information on R D activities planned so that they are in a better position to provide detailed information and thus benefit from the incentive Introduce an information disclosure requirement to allow the SARS Commissioner to disclose certain information to the Minister for Higher Education Science and Innovation which will enable a better monitoring and evaluation function and Introduce sanctions for breach of secrecy The proposed changes to refine and simplify the legislation combined with moving to an online process and improving the application process for smaller businesses are expected to improve uptake of the incentive The draft improvements to section 11D of the Income Tax Law and the attached explanatory memorandum can be found on the website of the National Treasury at www treasury gov za and on the website of the Tax Service of South Africa at www sars gov za Due Date for Written Comments Please submit written comments to the National Treasury Tax Policy Repository at 2022AnnexCProp Treasury gov za link sends email and TaxIncentiveReviews Treasury gov za link sends email email and SARS at acollins sars gov za link sends email before the close of business on November 7 2022
South Africa: National Treasury on Publication of Draft Research and Development Tax Incentive Improvements for Possible Inclusion in the Tax Laws Amendment Bill 2023

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Budget and Tax Law Amendment Bill

Budget and Tax Law Amendment Bill 2023 for Public Comment The government proposes to extend the Research and Development (R&D) tax incentive beyond December 31, 2023, likely for a period of 10 years after a consultation process with industry stakeholders.

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However, given the experience gained in awarding applications and the review carried out, the government is of the opinion that the R&D tax incentive requires some refinement.

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It is the only political instrument designed to promote the early stages of R&D.

The proposed refinements to section 11D of the Income Tax Act will bring the incentive closer to its intended goals.

The 2021 budget review indicated that the government would review the research and development tax incentive.

On December 15, 2021, the National Treasury and the Department of Science and Innovation jointly released a discussion paper entitled Review of the Design, Implementation and Impact of South Africa‘s Research and Development Tax Incentive for public comment.

The discussion paper included a link to an online survey website.

In the 2022 Budget Revision, the National Treasury announced that the research and development (R&D) tax incentive will be extended until December 31, 2023 to allow the incentive revision to be finalized, as there was not enough time to conduct a public consultation between the publication of the discussion document and Budget 2022.

Responses to the survey were received from 74 stakeholders, some of whom provided additional comments in writing.

A public workshop was held on April 7, 2022 to discuss written comments and survey results and better understand industry concerns.

The draft enhancements and accompanying explanatory memorandum published with this press statement are being released for public comment today.

Interested parties will have 30 days to submit their comments.

To be clear, the proposed refinements do not constitute a tax bill.

Based on these proposals and all public comments received, a final proposal will be included in the 2023 Budget for inclusion in the proposed Tax Laws Amendment Act of 2023 (TLAB).

The usual public consultation process will then be carried out.

Posting these suggested refinements today gives the public an additional opportunity to provide input before we see them in the 2023 TLAB draft.

The proposed amendments include the following: Refine the definition of R&D to make it simpler to understand and award, resulting in an easier application process; Clarifying that the intention has always been that the incentive only applies to activities with the objective of resolving a scientific or technological uncertainty; Moving away from a “bottom line” approach or IP statute to acknowledge the reality that R&D involves uncertainty and risk, and that it is impractical to expect taxpayers to have detailed knowledge of how their R&D will unfold D provided at the time of the request.

for the incentive; Instead, move towards incorporating some principles of the OECD Frascati Manual, ie that activities should be novel, uncertain, systematic and transferable and/or replicable; The suggested approach removes the “innovative” requirement from the definition of R&D, which has created unwelcome complexity and misunderstanding (the government acknowledges that innovation can occur without R&D, and does not necessarily encompass R&D).

+D); To ensure that R&D activities are not obvious or inventive in order to qualify for the incentive, the revised definition should include testing whether a professional in the field with the appropriate knowledge and skills would resolve that scientific or technological uncertainty without undertaking any activity.

R&D (ie systematic research or systematic experimental activities); Modify the exclusion of internal business processes so that – if an activity is systematic research or systematic experimental with the aim of resolving a scientific or technological uncertainty and meets the proposed (revised) definition of R&D for the purposes of this incentive, it should be considered R&D – regardless of whether it is intended for sale or its use is granted to related parties; Introduce an exclusion for agrochemical products so that activities carried out solely in preparation for product registration to comply with the Department of Agriculture, Agrarian Reform and Rural Development are excluded from the incentive; Introduction of a six-month grace period for receipt of pre-approval applications to allow smaller applicants, new applicants, or applicants conducting R&D in a new field to collect more information on R&D activities planned so that they are in a better position to provide detailed information and thus benefit from the incentive; Introduce an information disclosure requirement to allow the SARS Commissioner to disclose certain information to the Minister for Higher Education, Science and Innovation which will enable a better monitoring and evaluation function; and Introduce sanctions for breach of secrecy.

The proposed changes to refine and simplify the legislation, combined with moving to an online process and improving the application process for smaller businesses, are expected to improve uptake of the incentive.

The draft improvements to section 11D of the Income Tax Law and the attached explanatory memorandum can be found on the website of the National Treasury at (www.treasury.gov.za) and on the website of the Tax Service of South Africa at (www.sars.gov.za).

Due Date for Written Comments Please submit written comments to the National Treasury Tax Policy Repository at 2022AnnexCProp@Treasury.gov.za (link sends email) and TaxIncentiveReviews@Treasury.gov.za (link sends email).

email), and SARS at acollins@sars.gov.za (link sends email) before the close of business on November 7, 2022.

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