Research and Development Tax Incentive Programme; National Research Foundation Amendment Bill: briefing

Meeting report

The Chairperson welcomed a new Member to the Committee, Dr S Thembakwayo (EFF), who was replacing Mr N Paulsen.

Overview: Department of Science and Technology (DST)

Mr Imraan Patel, Deputy Director-General (DDG): Socio Economic Innovation, DST, said that the purpose of the presentation was to follow up on the letter that the Department had received from the Committee requesting an update on the research and development (R&D) tax Incentive. The briefing was comprehensive and would include not only where the Department was in terms of the two to three year backlog spoken about, but also what had emerged from a very important process that Minister Naledi Pandor had put in place with the business sector in 2016.

The Department had sat down to look at the R&D tax incentive programme and what could be done to improve it. A task team had been established that included business, some academics, some universities and other government departments. It had finalised the report and come up with a number of recommendations and an update would be provided on how the Department had managed some of those recommendations. There were recommendations that had future policy implications, but as part of its work on the R&D tax incentive, the DST did have plans to do a more detailed impact assessment next year, taking into account that the tax incentive programme would be more than a decade old.

Out of this would emerge some very important strategic issues that the Portfolio Committees would need to deal with. It was hoped that this was the start of a process also to look at how to maximise the impact of the R&D tax incentive. It was known that the Committee was concerned about the backlog, so the current statistics on where the Department was in this regard would be provided.

Research and Development (R&D) Tax incentive Programme

Mr Godfrey Mashamba, Chief Director: Partnerships, DST, outlined the application process, crucial to which was the decision letter. Much progress had been achieved, with 1 158 (or 93%) of the 1 239 valid applications that the DST had received since October 2012 having been adjudicated. 81% (1 002) had received decisions on their applications.

The quality of applications had improved. This was attributed to improved guidance and clarifications on information requirements. The processes for accessing the incentive had been simplified. An amendment to enable companies to catch up on their claims had become effective in January 2017.

Matters that required substantive policy shifts were to increase the 150% deduction rate, and to introduce a refundable tax credit to support small and medium enterprises (SMEs).

It was recommended that the Portfolio Committee on Science and Technology note the status update presented, and the progress made.

(See Research and Development Tax Incentive Programme Report)

Discussion

Ms A Tuck (ANC) asked to see a list of companies that had qualified.

Mr Mashamba said that it was restricted by law to give out a list of companies. The way it was required to report about this was that it had to be done in an anonymous fashion. That was why, in the Department’s Annual Report, it spoke about sizes of companies, categories or sectors and types of R&D activities undertaken instead of giving out the names of companies. One was not allowed to do this by law. The way it was presented in the annual report gave an idea of what types of companies were actually benefiting from this incentive.

Ms Tuck asked what criteria that had been used for these companies to qualify.

Mr Mashamba replied that it required that a company or project would qualify if it involved the discovery of non-obvious scientific and technological knowledge. A company had to be developing an invention, a functional design, a computer programme or what was called a multi-source product, or knowledge essential to the use of all these things. The other component was that it had to be making a significant improvement to things like inventions, functional designs and new computer products. These approval criteria were also included in Section 11(d).

Ms Tuck asked if the external experts who were appointed to supplement the DST’s capacity in evaluating applications had been budgeted for.

Mr Mashamba said that external experts had been budgeted for, as the Department paid them under the Departmental budget line on professional services. The ones that the Department had now were contracted for a period of two years, so applications were allocated in terms of their areas of expertise, and they were given a turnaround time.

Mr N Koornhof (ANC) said that this tax incentive was very important. He asked if there was an R&D definition in the Income Tax Act

Mr Mashamba said that there was a definition under Section 11(d) of the Act, which explained the criteria. It required that a project would qualify if it involved the discovery of non-obvious scientific and technological knowledge. The definition of R&D was adopted from the international guidelines.

Mr Koornhof asked if, when the DST assessed and made proposals to the South African Revenue Service (SARS), there were any tensions between the DST and SARS, or whether they just accepted the DST recommendations.

Mr Patel replied that essentially there was not a great deal of tension, because there was a lot of interpretation and contestation at play. Many of the borderline cases were about whether it could be R&D or not, and this was where external experts had to be brought in, because each department was mandated to perform its responsibilities. SARS could of course adopt a more conservative attitude, because every approval they gave meant that there was less income to the fiscus. The DST was more flexible, and there had been a lot of learning between the officials and the adjudication committee. Previously, the conflict had been mainly around clinical trials, but now the law had been corrected so there was clarity. The biggest area that still posed a challenge was around services like information technology (IT) and software development.

Ms C King (DA) asked what the time frame was for appeals for unsuccessful applicants, before they were told whether they had been successful or unsuccessful.

Mr Mashamba said that there was no explicit process for appeals provided, so the task team had raised this as an issue because there was a need for an appeals process.

Ms Nomonde January, Head: Legal Services, DST said that in terms of income tax law, there were no appeals, only a review. The reason for this was that decisions were taken by Ministers, and one was bound by the decision taken and one could not review one’s own decision. That was why the income tax law had a provision. One of the delays was that companies did not have recourse except for the review, which was costly. One of the recommendations made by the task team was that a discussion should be had with SARS about having an independent Appeals Commission which would be outside of the DST and would look at non-approvals.

Ms King said the Department had stated that increasing the 150% tax reduction rate was not feasible in the medium term. If one considered the budget constraints this country was under and the decline in the budget over the years for science and technology, was it at all feasible that it could ever be effective?

Mr Patel said that the 150% tax reduction had to be looked at as a part of the overall tax regime. There was no need to go higher. There was a need to drive the right behaviour in order to get more companies into the net with the right kind of R&D. The DST would wait for an impact report first.

Dr Thembekwayo asked about the status update in processing applications, specifically the 12 companies on October 2012 and 34 companies on December 2015, referred to in the presentation, where it was stated specifically ‘adjudicated’ and ‘required sign-off by the Minister’ in brackets. If one compared the information, the DST spoke about the turn-around times. How could the 12 and 34 companies be accommodated in the 90-day turnaround period, as per the DST strategic plan? The raising of awareness should include sections in the application which could be problematic to all companies. This was what had caused the backlog of 12 in 2015 and 34 in 2016.

The Chairperson referred to slide six of the presentation, which reported that out of all companies that submitted applications under the pre-approval system, 53% had been granted approval. She asked what had happened to the remaining 47%.

Mr Patel said the reason for the delay in 2015 and 2016 was because those had been the most difficult cases. He was confident that those applications, which were the 12 companies plus the 34 companies, would be signed off by the Minister because the DST would have forwarded the batches to the Minister to sign-off timeously. The team now had a pipeline of batches.

Mr Mashamba said the delays were mostly due to the historical backlog. Staff members had spent a lot of time processing historical work. The historical work of the backlog had been cleared, so now the Department would be able to function more efficiently in the future.

The Chairperson said that the 150% in tax deductions on R&D were in line, because the Committee had continuously tried to advocate a separate budget for R&D, and it believed that if that was done then even the incentive scheme would be more effective.

Mr Mashamba said that with the 150% tax credit, there was a study/survey that confirmed that South Africa was among the countries that offered what was called super deductions. Super deductions were offerings higher than a 100% tax rate on R&D tax incentives. SA was amongst those leading countries in that space. There were countries that were quite aggressive and, for example, offered tax holidays for pioneer firms and would go up to 300% in tax deductions. In discussions with the National Treasury, South Africa was not ready to move into that space. It was still competitive internationally. Furthermore, the offering of the tax incentive was not the only measure that was in place. There had to be an overall improvement in the investment environment, as well as the R&D environment, to encourage firms to move into the space.

The Chairperson said that the turnaround time, especially on the signature of Minister, had been a concern for this Committee. There were a number of applications that required the Minister’s signature that were still outstanding. Despite the external experts that had been appointed, what was the delay?

Mr Patel said that the delay was not with the Minister. The delay was with the officials. The remaining applications were largely ones where there had been no approval. Because there was no approval, it had to be sent to Ms January, Head of Legal Services at the DST, to look at the merits, because the accompanying letter could be contested. So in formulating the letter, it was the officials who had to ensure that enough time was given to make sure there was a solid case for refusing. Until the submission reached the Minister, she could not sign off. There were turnaround times because the applications went through himself, the DG, and then the Minister. The delays were on the side of the team, not the Minister.

Mr Mashamba said that the DST provided due dates to external experts by which they should submit or present their evaluations. He did not think there were big challenges presently, as opposed to historically. The whole team at the DST was better at what it was doing than before. Firms had a better understanding of the requirements now.

The Chairperson asked what target rate was expected on the approval of applications. When would the backlog be cleared to be in line with the DST’s strategic plan?

Mr Patel said the target rate was what was called a “90 day turnaround”. Two important conditions had to be implemented within the 90 days after the DST received a full and complete application. The end date was the date on the letter that the Minister sent to the company. Each application was monitored and reported through quarterly progress reports on the average days taken. He was quite confident that once the backlog was clear – the backlog was anything before November 2015, and now included December 2016 - by December, the Department would be dealing with current applications. There might still be a struggle in the first quarter of 2017/18 to get to the 90-day turnaround time, but with the systems in place now – experts, the online system, the committee working much better and taking less time to adjudicate applications because had a shared language – the Department was confident of achieving a 90-day turnaround time for all applications. He had looked at other jurisdictions on how they defined their performance indicators around this issue. Canada’s performance indicator was that they would deal with 80% within the 90-day turnaround time. There would always be difficult cases, where either the project or application was complex, but the Department was quite confident of achieving success.

Ms Tuck asked which law prevented the list of companies being exposed.

Mr Mashamba said that Section 11(d) had a particular section, 11(d)17, which required that when one reported as a Department, it should be done without disclosing the identity of any person or persons. Section11(d)18 restricted every employee of the Department to preserving all secrecy with matters that came to their knowledge. Here also, the identities of companies could not be disclosed.

Dr Thembakwayo said that she was still not satisfied, and referred to slide 7 where it said in brackets ‘adjudicated’ and in brackets ‘require sign off by the Minister’. This created the impression that these 12 and 34 companies were the Minister’s problem. The wording should be changed so that the blame was not put on the Minister.

Mr Patel reiterated that the problem was not with the Minister. The majority of the 12 and 34 cases were non-approved and complicated cases. The adjudication had recently been finalised, or their letters needed to be finalised with full and proper reasons as to why the applications had been rejected. As explained earlier, until the Minister got the letters, she was unable to sign them off. Better language would be found to resolve this matter.

The Chairperson said that the main issue was that these companies were benefiting from the incentive of the Department, and if one wanted to benefit one could not be secretive. The Committee would be following up and monitoring the amendments that had been sent.

National Research Foundation Act Amendment Bill

Dr Thomas Auf der Heyde, DDG: DST, said the presentation on the National Research Foundation Act Amendment Bill would be an introduction to the process that the Committee would be engaging on in considering and refining the Bill.
He said that one of the new objects of the Foundation was to contribute to national development by supporting and promoting public awareness of, and engagement with, science.

The stakeholders were consulted and their comments had been reported on. The Bill was endorsed by:

• The National Research Foundation board and management;
• Economic sectors, employment and infrastructure development cluster;
• Socio-economic impact assessment systems unit of the Department of Planning, Monitoring and Evaluation; and
• The Chief State Law Advisor.

(See attached document)

Discussion

Mr Koornhof asked if this was the first time that the Bill had been formally tabled with the Committee, and if this was the case, whether there was a process to follow. After looking at the comments, the Committee would probably call for public hearings.

The Chairperson said that the Committee would probably work on a road map for the process.

Ms Tuck asked what Department’s expectations were of how many submissions it wanted to receive.
What did the DST think the reason was that other institutions had not submitted responses? In this regard, what was the Department going to do? Had a need arisen to close gaps?

Dr Auf der Heyde said that the two Members had asked very closely related questions. He was a little surprised that there had not been more inputs on this. After reflecting more on this, he realised that what they were proposing did not involve any really controversial recommendations being made. The DST was largely codifying established practice, and making clearer processes or practices that were to some extent in place already, but had not been codified in the Act. It was much more about housekeeping than anything substantially new. In that context, he was quite relieved that more inputs had not been received, because the Members may know that scientists and their institutions can be extremely pedantic and can be extremely “picky” about one word rather than another. On reflection, he was quite relieved that the Department had not been flooded with a whole lot of individual submissions from professors and doctors complaining about the choice of words.

He said it was entirely the Committee’s remit on how it decided to proceed with this. This was the first formal presentation at the start of the process that the Committee would now be managing and owning. The purpose of the presentation was therefore to contextualise this to Members. Having spoken briefly to the Committee Secretary and also to his colleague, Ms January, his understanding was that there was an opportunity after this presentation for officials in Parliament, or those who were assisting the Committee on legal aspects, to begin working on some of these things with the Department if they so chose. It had probably been six months since this document had been developed, and it might be opportune to ask a representative of the Committee and the Department to just do some “fine tooth combing” of the Bill just to pick up minor problems so that the Committee could apply its mind to more substantive matters. The Department was in therefore in the Committee’s hands.

Ms Rose Msiza, Director, DST, said that when the Bill was published for public comment, the University of South Africa had invited universities to submit their comments through their office, so the comments here were actually a consolidation of all university submissions, although some universities did submit individually.

The Chairperson said that the Committee would deal with the process early next year, as had been done with the Indigenous Knowledge Systems (IKS) Bill. The Committee welcomed this Bill and looked forward to engaging with it -- at least it was not starting from scratch. The Content Advisor would bring together the same team as was the case with the IKS Bill to deal with the language and legalities of the process.

This was the last meeting of this Committee for the year, so everyone was thanked and wished well for the festive season.

The meeting was adjourned.