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15 March 2022


The current R&D incentive may have increased the remuneration of R&D employees in beneficiary companies, an ‘unintended outcome’. The research and development (R&D) tax incentive is set to expire on September 30.

In December National Treasury and the Department of Science and Innovation (DSI) published a discussion paper reviewing the design, implementation and impact of the incentive.

There are essentially two decisions to be made:

  • Whether the incentive should continue; and
  • If so, whether the current policy design is suitable.


The R&D incentive currently allows a company to deduct 150% of its qualifying R&D expenditure for an “approved project” from its taxable income. A comprehensive definition of R&D for tax purposes is contained in the Income Tax Act. Treasury put forward other policy designs for consideration and discussion:

  • A volume-based incentive that would provide a tax allowance based on the volume of R&D undertaken.
  • An incremental tax incentive that would make use of a threshold; for example, a company would be required to spend a certain minimum amount on R&D before the incentive kicks in.
  • A hybrid system that would be a combination of the volume-based and incremental systems.


The World Bank, on the request of Treasury and the DSI, completed an impact evaluation of the R&D tax incentive in 2019. It found that: The majority of R&D applications were for projects in manufacturing and business services (including financial intermediation) sectors, and that large companies were more likely to have projects approved than smaller companies.

“There were no statistically significant effects of the incentive for any of the other outcomes measured in the survey, namely innovation, economic growth and employment.”

Louis Reed /Unsplash

The evaluation also revealed that “the incentive may have increased the remuneration of R&D employees in beneficiary companies, which is an unintended outcome”.

Less than a third of companies had submitted annual progress reports on R&D. It was not able to make conclusive recommendations because it was not possible to match South African Revenue Service (Sars) data with the DSI data.

It recommended streamlining and digitising the application process, introducing scoring tools into the application process, tightening up compliance with progress reporting, and strengthening systems for monitoring and evaluation.


The DSI conducted an internal synthesis analysis that considered various studies on 200 000 South African companies.

However, the studies looked at the additional spend on R&D from companies that benefitted from the incentive compared with those that didn’t, and did not address the “impact of R&D tax incentives on innovation, per se”, because, “it is methodologically more difficult to assess innovation: both due to data gaps and the fact that R&D output takes longer to materialise”.

It was also found that “a small number of large companies are the biggest contributors to BERD [business enterprise expenditure on R&D] in South Africa”, and the bulk of the R&D active companies “are more likely” to be in manufacturing and business services.

Treasury noted that: “About 74% of the companies that appeared in the 2006 R&D Survey had left the R&D system by 2016.”

International studies conducted indicated that “tax incentives are effective in encouraging R&D projects that will immediately result in new goods or services while government grants are better suited for basic research”.


Treasury and the DSI acknowledge that: “Any evaluation of a tax incentive is only as good as the available data.” The annual progress reports submitted by recipients of the incentive contain the necessary data to measure the impact of the incentive, and therefore the DSI will in future withdraw approval for companies that fail to report.

Treasury publishes tax expenditures in the annual Budget Review, and intends to break down tax expenditure by sectors in future. It is considering disclosing the companies that benefit from the incentive, depending on the taxpayer secrecy provisions.

Studies have reportedly found that globally, smaller companies tend to be more responsive to R&D tax incentives than larger companies. However, a tax incentive will not assist cash-strapped small companies. Suggestions have been made for a refundable tax credit.

“Government is keen to see more R&D activities happening in South Africa and understands that there may be prohibiting factors,” according to the discussion paper.


At a discussion organised by the South African Institute of Tax Practitioners on Monday (January 24), comments made by industry experts included:

  • Treasury and the DSI should publish comprehensive guidelines to point incentive applicants to “the rules of the game”.
  • There are currently inconsistencies with design and patent law in the definitions in the Income Tax Act, and these should be corrected.
  • Treasury and the DSI should be collaborate with industry experts and those who have to apply the incentive in practice.
  • If the incentive is to remain in the form of a tax incentive, a pre-approval process is not ideal as it leads to backlogs.
  • It is critical that the R&D incentive is renewed.

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