Research and Development (R&D) Tax Incentives; Indigenous Knowledge Systems Bill: briefing

Science and Technology

07 June 2017
Chairperson: Ms L Maseko (ANC)
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Meeting Summary

The Committee convened with the delegation of the Department of Science and Technology for a briefing on the Research and Development Tax Programme, as well as an update on the Indigenous Knowledge Systems Bill with regards to discussions held with the Department of Trade and Industry.

The Department stated that companies undertaking the Research and Development (R&D) in South Africa qualified for a 150% tax deduction on their R&D expenditure in terms of Section 11D of the Income Tax Act (1962), as amended. The status update in processing the applications from October 2012 to 18th May 2017 was that 88% of 1 169 applications were now adjudicated, with only 1% of applications in backlog, received between October 2012 and December 2015. Regarding cumulative contribution since November 2006 when the 150% deduction was introduced, the number of participating companies were 962, 1 013 were pre-approval applications and 1 575 were retrospective type of applications. The adjudication status to date was that 749 were adjudicated and a collective 241 applications were yet remaining. Of the 1 013 pre-approval applications received, 40% were from very large enterprises (annual turnover of R100 million and above); 39% were from Small-and-Medium Enterprises (annual turnover of R40 million and below); 8% derived from large enterprises (annual turnover of R41 million – R100 million), and 8% did not disclose turnover size.

Regarding rates of approval, larger companies had higher rates of approval than Small to Medium Enterprises (SME’s) and were dominant in terms of the number of applications received and the estimated amount of R&D expenditure. Partly, this indicated that SMEs needed support in terms of the preparation of applications and understanding the eligibility criteria of the incentive. Furthermore, it indicated a gap in incentives support. The content of applications showed that many SMEs were involved with innovation activities, such as the acquisition of off-the-shelf technology and integration of technology, without necessarily engaging in R&D as defined under Section 11D of the Act. A higher percentage of applications from the Agriculture, Hunting, Forestry and Fishing sector, as well as the Electricity, Gas and Communication sector was approved to access the R&D Tax Incentive. Overall, about R36.1 billion in R&D expenditure was estimated in support of the incentive. This amount comprised of R10.7 billion in estimated R&D expenditure indicated on approved applications (under the pre-approval system) and R25.4 billion reported under the retrospective system.

Members questioned what the 150% encompassed in practical terms. How did this programme contribute towards transforming the economy and what happened in the event of unsuccessful applications? What was the problem that induced such delay and resulted in almost 200 applications that pended adjudication? They wanted to know how old the 145 applications were that was supposedly sitting on the Minister’s desk, and for how long should it have been there. If the 90 days started upon submission of application to the Department or once approved, how could a backlog accumulate? Members also wanted to know what measures were in place to inform SME of the R&D incentive and if double dipping of tax incentives by other industries occurred, would this implicate on companies of a Science and Technology nature as a disadvantage, and was South Africa the only African country that offered the R&D tax incentives?

 

The update on the Indigenous Knowledge Systems (IKS) Bill with regard to the DST and DTI discussions was presented as well. The meeting was against the backdrop of the decision of the Joint Committees of Science and Technology and of Trade and Industry. In that meeting the DTI contended that there was widespread public perception that the IKS Bill was intended to refute the Intellectual Property Law Amendment Act. This contention was based on a letter sent by the Director General DG of DST to his counterpart at the DTI for purposes of sharing what was authored by the State Law Advisors, and also by a statement made by the officials at a meeting with the Department of Environmental Affairs (DEA). DST indicated that it would be highly imprudent that DST should state a position based on the fact that it could not repeal an Act of another Department.

Furthermore, DTI was referred to Section 32.1 and Section 32.3 that indicated that the IKS Bill did not detract or alter any right in the state of intellectual property in terms of Section 32.1 and did not detract or alter any of the amended laws that informed the IPLA Act. In terms of those, the DTI was quite adamant that the issue of repealing IPLA was not on the table, and subsequently discussion on the repealing of the IPLA Act should cease to exist given that the DTI and the Committee spent considerable time and energy on promulgating the Act. Regarding the issue of alignment, the DST raised the issue that currently there was no policy framework that the IKS Bill had to align itself to. However, the IKS Bill aligned itself to the IKS policy, which was approved by Cabinet in 2004. In terms of other agenda items, DTI indicated that it did not recognise the particular agenda items as enlisted in a letter written by the Chairperson of the Portfolio Committee of Science and Technology to the respective departments, due to issues that the DST raised at the joint sitting. Thus, at that point, the Chairperson closed the meeting. The take home message was that the issue of repealing the IPLA Act was not on the table, according to DTI, thus no discussion of its repeal would be made. In terms of progress on the Bill regarding the independent opinion, DST developed Terms of Reference, which was submitted to the procurement division and was currently in the process of securing procurement of a service provider. In terms of the technical draft, there were quite a few iterations with the parliamentary legal team, which resulted with a refreshed document. In the next weeks, a joint presentation of the revised document would be presented to the Portfolio Committee on Science and Technology.

 

Members commented that if no cooperation from the Department of Trade and Industry existed, the IKS Bill would continue to be finalised by means of the Portfolio Committee of Science and Technology and DST. This unprecedented stance would be debated in house and substantiated as the feasible option. Members also expressed disappointment that the cited legal expert opinion was sought after once the meeting elapsed and not preceding it, and asked if DTI was aware that DST took such measures. Members noted that the legal expert opinion might not be a catch-22 scenario if DTI would also independently pursue legal advice, because such would depend on the questions asked to the lawyers for their legal opinion. Members concluded that the Committee would take ownership of the IKS Bill going forward, and subject the IKS Bill, the Revised version and the full brief of decision-making process for review of an external legal opinion.

 

Meeting report

Briefing by the Department on Science and Technology on the Research and Development Tax Programme

Mr Imraan Patel, Deputy Director General: Socio-economic Innovation Partnership, Department of Science and Technology, said that the R&D Tax incentive began in South Africa in 2007 and to follow would be the materialism since its inception.

Mr Godfrey Mashamba, Chief Director: Science and Technology Investment, DST, said that companies undertaking the Research and Development (R&D) in South Africa qualified for a 150% tax deduction on their R&D expenditure in terms of Section 11D of the Income Tax Act (1962), as amended. Through this incentive, Government wanted to encourage increased R&D in the business sector, by firms of any size or industry. This was important in order to:

  • Increase the overall investment in R&D.
  • Promote innovation, i.e. development of new products, processes and services.
  • Promote technological advancement and competitiveness.
  • Secure innovation spill overs, expand and retain the R&D workforce  

However, the delivery of the incentive shared responsibilities among DST, National Treasury (NT) and the South African Revenue Services (SARS). When the application process started in October 2012 the Minister of Finance and National Treasury (NT) was involved in devising it by which firstly the taxpayer submitted the application, adjudication took place, decision letters would be granted to every applicant, after which progress reporting was expected from the approved applicants only.

He said that the status update in processing the applications from October 2012 to 18 May 2017 was that 88% of 1 169 applications were now adjudicated, with only 1% of applications in backlog, received between October 2012 and December 2015. The Department was working towards eradicating the backlog of adjudicated applications en-route for the Minister of Science and Technology’s final decision. Regarding cumulative contribution since November 2006 when the 150% deduction was introduced, the number of participating companies were 962; 1 013 were pre-approvals and 1 575 were retrospective type of applications. The adjudication status to date was that 749 were adjudicated and a collective 241 applications were remaining, and the final decision for the 749 adjudicated applications was that 367 applications were approved entailing 292 companies granted approval and 382 applications were not approved entailing that 307 companies were not granted approval.

He said that the 2015/16 performances added to the cumulative contribution of the incentive since its inception in November 2006. Two periods were distinguished: November 2006 to September 2012 were retrospective claims and October 2012 onwards was part of the pre-approval system. By the end of the reporting period, 749 (73.9%) of the 1 013 pre-approval applications received since October 2012 were adjudicated. A total of 367 (49%) applications were approved, covering 292 companies that would access the incentive. Of the 1 013 applications received, 40% were from very large enterprises (annual turnover of R100 million and above); 39% were from Small-and-Medium Enterprises (annual turnover of R40 million and below); 8% derived from large enterprises (annual turnover of R41 million – R100 million), and 8% did not disclose turnover size.

He said that regarding rates of approval, larger companies had higher rates of approval than SMEs and were dominant in terms of the number of applications received and the estimated amount of R&D expenditure. Partly, this indicated that SMEs needed support in terms of the preparation of applications and understanding the eligibility criteria of the incentive. Furthermore, it indicated a gap in incentives support. The content of applications showed that many SMEs were involved with innovation activities, such as the acquisition of off-the-shelf technology and integration of technology without necessarily engaging in R&D as defined under Section 11D of the Act.

He said that the proportions of approvals and non-approvals per industry sector (October 2012 to February 2016) showed that the Transport, Storage and Communication industry received more non-approvals than approved status. The Financial and Business Services industry, inclusive of ITC, also received more non- approvals and it was discovered that ITC actually bought technologies and were installing it, as opposed to developing from scratch. The financial sector was responsible for doing much innovative activity, but did not develop it and consequently did not comply with the prerequisites required. A higher percentage of applications from the Agriculture, Hunting, Forestry and Fishing sector, as well as the Electricity, Gas and Communication sector were approved to access the R&D Tax Incentive. Overall, about R36.1 billion in R&D expenditure was estimated in support of the incentive. This amount comprised of R10.7 billion in estimated R&D expenditure indicated on approved applications (under the pre-approval system) and R25.4 billion reported under the retrospective system. The data was revised annually to record claims processed at SARS.

He said that regarding R&D personnel involved in total applications supported (November 2006 to February 2016), 19 445 was reported as R&D personnel involved in the R&D supported by the incentive. These estimates were an undercount of the potential employment impact of the supported R&D, as further employment could arise from successful R&D; knowledge gained contributing to human capital stock and spill overs in the system of innovation. Specifically that meant 4 152 personnel members were Engineers (21%); 1 658 were Scientists (9%); 2 389 were Technologists (12%); 4 195 were Technicians (22%); 1 886 were Managers (10%), and 5 165 were other technical staff (26%). The incentive showed a strong orientation of supporting the priority focus areas of the Industrial Policy Action Plan (IPAP), with about 59.7% (219) of the approved applications addressing those areas, accounting for about 57% (R6,1 billion) of the approved R&D expenditure. The top five IPAP sectors in terms of supported R&D spending were:

  • Electro-technical and ICT.
  • Upstream Oil and Gas.
  • Chemicals, Cosmetics, Pharmaceuticals and Plastics.
  • Metal Fabrication and Capital Equipment.
  • Forestry, Pulp and Furniture.

Discussion

Mr C Mathale (ANC) appreciated the presentation, and requested clarity regarding the 150% incentive. What did it encompass in practical terms?

Secondly, how did this programme contribute towards transforming the economy? It seemed that simply those who were aware of this programme and knowledgeable of the system, such as those who drafted the legislation, would be benefactors hereof. Other obvious benefactors would be those who were established within the various industries. Given the history of our country it would be racially biased to one group, which currently might be unintentional, but established companies within industries typically derived from previous systematic privilege. Thus, it was inevitable that established companies would be at the forefront to ascertain any form of incentive, or acquire the know-how for its eligibility, in order to capitalize on any opportunity that might maximise turnover and/or savings. Was awareness and participation during public hearings sufficiently inclusive of all of the various industries and its different levels available in South Africa?

Thirdly, what happened thereafter in the event of an unsuccessful application? If the application was outside of the scope of Socio- economic Innovation but was yet relevant to other agencies of DST, would the applicants be directed accordingly or would it fall to the wayside? Were any connections made?

Fourthly, regarding the status of the processing of applications, what was the problem that induced such delay and resulted in almost 200 applications that pended adjudication? Once approved merely a letter of approval was necessary, which meant that no research and its subsequent consumption of time was required, thus the 193 applications was too large a number to have pending. How old was the 145 applications that were sitting on the Minister’s desk, and for how long should it be there? The R&D tax incentive was a very good programme that could assist many businessmen across the sectors by its benefit that was two-fold, because they would develop an innovation that could enhance their business for maximised profits and be incentivized for it, which was somewhat a reward.

Mr N Koornhof (ANC) requested clarity to understand why the backlog existed. When did the 90 days start, upon submission of application to the Department or once approved? Since if it was upon application, how could a backlog accumulate? Was this due to insufficient personnel? Additionally, the 90 days seemed much too long. Three months in business was too long to attain feedback regarding anything, thus the Department should strive to minimise the time.

He said that in the context that the financial sector had the least amount of approved applications regarding innovation, could a list of the approved companies be provided for along with the reasons that equated approval? Knowing which prerequisites sufficed approval, assistance could be given to SME’s that were previously denied the R&D tax incentive to improve eligibility. Was qualifying information explicitly stipulated on the Department’s website? If not, it should be made available on the website, because large companies would have the necessary expertise, but the SME that might depend on this incentive to survive as a business may not know appropriately how. This information should be widely available and accessible, as it was required to encourage an innovative society. An example of societal upgrade and subsequently economic growth due to innovation was the GetSmarter innovation that began as a small company, but ended up extremely successful.  

Ms N Ndongeni (ANC) noted that since the Department and National Treasury were discussing the interest operation of the incentive, what progress was made in this regard thus far? Secondly, were further legislatives that were structural amendments to the R&D incentive being completed? If yes, what would it comprise of?

Ms C King (DA) noted that in 2014/15 and 2015/16 there were no reflection of amounts indicated for the Foregone Tax. It was cited that amounts would be presented cumulatively, however, could the exact amounts for those financial years be made available? The Impact Evaluation Plan that was previously presented, how far was the full implementation thereof? Also, what measures were in place to inform SME’s of the R&D incentive? It was satisfactory that the entire criterion necessary reflected on the website, since it was personally scrolled through. Lastly, it was concerning that a duplication of tax incentive may occur, as most of the industries had its own Research and Development funding, which was industry-specific, and this was apart from the funding offered by DST. An example of an industry that was self- sponsored was the manufacturing sector. Would this implicate on companies of a Science and Technology nature as a disadvantage, if indeed double dipping of tax incentives by other industries occurred?

The Chairperson agreed that the aspect of monitoring and evaluation was imperative, because the aim was to decipher how close towards the 0.5% of the GDP the sector was. How far were the adjudicated applications on the Minister’s desk? Was it a matter that delay occurred due to the Minister’s legal advisory committee? It was known that there was adjudication team and sometimes there were even external experts that may supplement the capacity of the Department. If that was case the process needed to move faster and smoother. The external experts hired were inevitable of certain expertise that would capacitate DST in areas that were lacking, but yet those areas were required for overall compliance. Why was the incentive set at 150%? What was the logistics involved that resulted in an incentive that went beyond 100%? It was also agreed that the 90 days were much too long. Personally, the longest consumption of time should be around the adjudication process that involved the experts, after which the Secretariat and the Minister should not reopen the application.

 

Mr Mashamba answered that it was historical debt that the backlog was in actual fact quite larger than that which it became. Therefore, the current backlog reflected much progress that was made. For instance, at the onset of the programme when migration was made from the previous retrospective system in October 2012, 200 applications were received within the first month. At that point the Department did not have the capacity to evaluate the influx as readily available as speculated. The same Secretariat, which was the unit that dealt with the retrospective, did not change in form or size, neither in terms of the skills set. Thus, it took time to actually kick-start the evaluation, and subsequently for the first six months there was no activity before the Adjudication Committee started to work on the submissions. Regarding the backlog that was deferred from one year to another and the build-up at the Secretariat, there were applications that required evaluation by external legal experts and were allocated accordingly. However, as means to save cost there were applications that continued to be evaluated by the Secretariat followed by analogy by external experts. Yet, admittedly, the backlog incurred to save these costs coupled with the fact that the initial influx of applications received was larger in volume that speculated, was a learning experience for DST. It therefore taught the Department to plan better and highlighted issues of capacity, which were concerns that were grappled with.

He replied that the 150% in practical terms translated to 14 cents for every approved R1 spent. Regarding the transformation of the economy, it currently was true that the same groups, which were knowledgeable of the system, were likewise the benefactors of the incentive for innovation. Therefore, when the large companies that knew R&D would apply, the probability that the outcome of their applications were successful was more likely. It might be an issue of policy to inform smaller enterprises. To increase the likelihood of successful application, smaller companies that did not have internal capacity could work with universities by means of funding the Higher Education Institutions (HEI) in exchange for its legal expertise or benefit from its Science Council, as there were provisions for such in the legislation.

He said that regarding other industries that established R&D formations, the Department found cases where companies “clubbed together” to fund a joint R&D initiative and those were actually approved. Those groupings were usually larger companies that worked with smaller companies regarding innovative work that would benefit the entire industry. DST deemed such collaborations as very good, as long as it was done within the legislative provisions. He said that the challenge was at the Secretariat regarding resolve for the backlog of adjudications, and not the Minister to clear it. The 90 days started from the date of application. Considering the backlog, the 90 days was an indication of minimum norms and standards, after which a faster rate was expected. Notably, it was yet not possible to achieve that on a large part of applications, due to constraints of capacity, but such was a target that DST was working towards as a resolve. However, once the 90 days were achieved on the critical applications, better ways to accelerate the turnaround time would be considered.

He replied that it was not possible to provide the list of companies that applied neither its outcome, due to restrictions by the law. Even within the reports that were presented to Parliament, the Minister was not allowed to outline the particulars of the applicants, such as revealing the identities of the companies. However, it might be possible to disclose the type of projects that were submitted in application as examples if the relevant companies would consent to their disclosure, as sometimes these examples were used to demonstrate the benefits garnered from the tax exemption.

 

Regarding the Foregone Taxes in the last year, the figures were sourced from National Treasury (NT) Publication on Budget Review. Thus, by the time the report was compiled those were the only figures that were referenced as no figures beyond it were available. The EME tool used to monitor the R&D to GDP ratio was the R&D National Survey that was done by the Human Research Council (HRC) commissioned by DST to run the survey annually on an independent basis, which would inform the Department of the figure. The Minister of Science and Technology launched the latest results in April 2017, which might indicate the ratio as well.

Mr Strini Perumal, Deputy Director: R&D Tax Incentives, DST, added further clarity by noting that regarding the 150% in tax terms, it equated that for every R1 spent the successful applicant would get R1.50c back. He said that depending on the corporate income tax rate paid, a maximum of 14 cents may be gain for every R1. Therefore, for every R1 spent in taxes, the applicant, if approved, would get a return of 14 cents. Therefore, on R1 million spent on R&D, a saving of R150 000 would result.

He said that regarding transformation of the economy and the tax policy in as far these related, “we were creatures of stature meaning that we could only do that which the law tells us to do”. Determining R&D was mostly a factual question up until the law enabled consideration of aspects of transformation, it would be hard pressed facts that informed the determinations of what would qualify and what could not. Regarding what was done of applicants that did not qualify, it should be admitted that the Department did not do enough, considering that the rate of approval was at 49%. The other half of the applicants that were unsuccessful could be directed to other programmes within either DTI or DST, but the unit was working on such a possibility. Becoming a one-stop shop might be a good solution and work was underway to discover how taxpayers could benefit from the programme.

He said that regarding why it took as long as it did to adjudicate, the process determining if a company qualified entailed a number of questions and extensive research that required of applicants themselves to sufficiently disclose what R&D constituted. Thus, the taxpayers themselves may take an exorbitant amount of time to respond, which added to the lateness processing the applications in the manner that it was done.

He said that with regards to the discussion between DST and National Treasury on the programme and probable future amendments, the Department was looking to mitigate some of the ambiguity in the legislation so that taxpayers could fully understand what was meant by the definition of R&D and its qualifying criteria without further incurring the large non-approval rate. Lastly, to explain the applicants that qualified, the Department received so many applications from the ITC and financial sectors, specifically in banking, which was evidence of fairly innovative products deriving from South Africa by way of banking products, as disclosed in the Annual Report. These were companies that dealt with the likes of Silicon Valley and Apple in the financial services industry, and were not traditionally large companies, but were mainly SME. Another example of approved applications were of some winemakers who developed the treatment of effluents that was also environmentally friendly.

Mr Patel elaborated that the reason why certain companies were not complying, was because the design of the tax incentive was based on profit. Thus, if a company had no profit as turnover, it would not qualify. In a sense, the 150% tax incentive was reducing the taxable income. Therefore, many SME may not be at the stage of profit and if they started recently they might not be at the stage of profitability soon. As an example, Amazon would not qualify for the tax incentive, because it was not making profit, but was losing money instead. Another example was ϋber car services that were losing money as well, $2 billion annually. Those companies would not be able to claim even though they might have done the necessary Research and Development. The tax incentive was applicable only on the basis of profit and it was not a matter of receiving direct funding back, but was a lesser payment of taxes made to government. The 150% was fairly competitive globally, even though the Department witnessed countries that were offering higher margins of tax incentives, such as Israel and Canada that offered 300%. The tax incentive was designed to incentivized taxes on profits made, because if not, it would serve as a governmental grant, which it was not. The second issue to highlight was that the applications were not sitting on the Minister’s desk. In order to prepare the letters, it was not simply the case of taking what the Adjudication Committee did. The applications currently remaining were the ones that were not approved as opposed to approved. The Letters of Approval were easy to adjudicate, because it would reference the relevant sections of the legislation to the applicant that denoted approval and request report feedback by a certain date. The non-approved applications were more complicated, because the taxpayer needed to be provided with full reasons, which sometimes the reasons could go back and forth to ensure that legally the reasons provided were sound. Therefore, non-approved letters took a long time to complete.

He said that hopefully, with the guidelines provided to companies, coupled with the improvement of the formulation within the Act, the anticipation was that going forward, fewer projects would result in non-approval. This was simply due to the fact that taxpayers now had a better understanding of the prerequisites that would suffice approval and those which could not qualify, particularly following the extensive work done by consultants within the private sector.

He said that with regards to the 90 days turnaround time, unlike other incentive programmes that was mission critical and business would stop on account of the pending application status, there were no adverse outcomes that might cause impediment should the Department take a year or longer to finalize it. The 90 days was, therefore, quite acceptable and reflected an aspect of cost-and-benefit. At the moment, the unit had six full time staff members that received the applications, prepared for the adjudications and wrote the letters. The Department was not able to extend that unit, because as the process changed, at the same time constraints of staff incurred. In fact, the R&D unit was a very constrained environment. There was a need to increase, but the need for balance was paramount. The tax incentive programme in Canada was the oldest, as opposed to the R&D programme in South Africa that was fairly new, because ten years was not a long time for a tax incentive programme. Being novice was part of the reason for the backlog. As soon as the procedure was changed, an influx of almost 300 applications were received in October 2012 and it encompassed different types of industries, with acute knowledge of the relevant experts needed and internal capacity was unbeknownst resulting in lack of preparedness. The Department was dealing with historical applications, but was confident that by the end of July 2017 the applications submitted before 31st December 2015 would be adjudicated. The Department, SARS, the applicant companies’ and the process itself matured, despite the constraints of capacity within the unit.

He said that regarding the concern of double- dipping, it should be assured that no double- dipping of tax occurred. Since if support was provided for, for instance in the manufacturing industry, it was done with the Corporate Social Responsibility (CSR), because DST hardly provided direct grants to companies. Large companies would claim by means of the R&D tax incentive formation that required declaration. Thus, the transparencies of the disclosure ensured that no double dipping took place. Companies would disclose innovative projects that were devised by their own means and expenditure, and the Department was of the view that the procedure was adequately developed to prohibit possible exploitation. In terms of the Impact Study, National Treasury and others advised that the backlog was to be resolved first before proceeding with an Impact Study, because should the backlog remain, it would compromise the outcome and information. Once cleared, the Department had the intention to do a full-scale analysis, in which international comparison would occur. However, in the interim, basic impact assessments were done annually.

He said that regarding the complexity of transformation, the Department did not review elements of equity within the applications, such the mark-up of women within Senior Management Service (SMS) positions for instance. However, the best way to deal with transformation with respect to R&D might not be by means of a tax incentive, because such would be too difficult, it would be best dealt with direct grants. Direct grants may yield high-end value. Although there were only six people in the Secretariat the unit drew on external technical expertise, however, the ideal systematic order was yet to occur. For example, if an opportunity was noticed, perhaps the Department could go further than its mandate. There were instances of applications with projects of innovation in the private sector that were similar to projects underway by government, but it was not possible to connect them accordingly, due to the legislative restrictions of privacy.

The Chairperson noted that the issue of communicating this programme was essential, because prospective applicants who were established in the respective industries would apply, but the average citizen may be oblivious to its existence, particularly if they were located in remote areas such as the rural parts of the country. On the concern of equity, were statistics available to note the margin of young people, women and those with disabilities who benefited from the R&D tax incentive?

 

Mr Mathale followed up with the comment that since both Israel and Canada offered a higher tax incentive margin, of 300%, should South Africa not consider increasing the tax incentive rate to accelerate motivation for innovation as such was the purpose of the tax, and the said countries were seemingly ahead of the country regarding innovation? The suggestion was not to mimic other countries. However, “if you incentivised me enough to do what I would not ordinarily do, then it could provoke innovation, because would 14 cents tax back encourage me to do what I cannot live without?” The 150% tax incentive required review, because he personally believed it to be an insufficient motivation. It was advantageous for established businesses, but may be inadequate encouragement for a Spaza shop owner to develop innovations, which denoted that the tax incentive was not sufficiently inclusive regarding the inequality across the economy, but catered for a selective few. This thinking did not take the emerging aspects of the economy into consideration, but predominantly had the established companies as the target market in mind. There were companies in South Africa that were already competitive globally, and this incentive merely further advantaged those. It did not provide higher tax returns for smaller businesses as means to address economic inequality.

The Chairperson added that an effort to grow the township economy should be made.

Mr Patel answered that this was a strategic discussion that would inevitably recur in the Committee together with the Department, because from the Budget Vote speech clearly there was a joint commitment to increase the R&D spending. Yet, the question that it posed was ‘what instruments would be used to accomplish it’? From a personal view, based on the evidence at hand, the incentive should not necessarily be increased from 150%. DST would need to do some modelling to ascertain if 200% would result in more innovative projects. In the short term to yield bigger banking, inclusive of the township economy, would be to strengthen those programmes and systems that were aimed at creating large numbers of new enterprise. For example, the Department looked at technologies stations programmes that were a well-established network with SME’s based at universities, which provided SME’s with technology services that would increase their worth. Presumably, such intervention was what SME’s wanted, as SME’s was not interested in having their own kind of R&D incentives, but was interested in knowing where to go to gain R&D if they were interested in innovating. Admittedly, R&D tended to change behaviour very slowly, because a lot of companies did not pursue research programmes for one year, but on average would conduct research for three to four years. Therefore, since it was a slow-moving enactment, consideration in improving it from administration and then building other programmes and industry development centres should be made. Overall, the share spent on R&D as a country needed to increase from the 0.77%. However, this posed the question, ‘if increased from 0.77% to 1.5%, where would the additional amount be best used to get maximum return’? Possible increase was a good comment noted that would be liaised with the Executive.

Mr Mashamba added that there was a portfolio of instruments in place. During the Budget Vote Speech, concerns were raised about the reduction of one of the Programmes that was intended to build the capabilities of companies to improve. The building of companies could be a determinant for them to engage in R&D, as most of the SME’s required technical services. Also, on page 28 of the Research and Development Tax Incentive Programme-Report to Parliament 2015/16 showed that although there were 16 countries that were more aggressive than South Africa, there were 19 countries that SA was ahead of, which proved that the 150% was still competitive.

The Chairperson asked that since the graph reflected South Africa as the only African country, did other African countries also offer R&D tax incentives.

Mr Mashamba answered that most of the countries that provided the tax incentives were Northern Hemisphere countries. However, South Africa was currently the only African country that had the R&D tax incentive underway, whilst Kenya might have recently began with one.

Update brief on IKS Bill with regard to the DST/DTI discussions

Mr Suchanau Tom, Director, DST, presented the update brief on IKS Bill with regard to the DST/DTI discussions. Albeit a very short meeting, it was convened against the backdrop of the decision of the Joint Committees of Science and Technology and of Trade and Industry. In the opening statement the DTI contended that there was widespread public perception that the IKS Bill was intended to refute the IPLA Act. This contention was based on a letter sent by the DG of DST to his counterpart at the DTI, and also by a statement made by officials at a meeting with the Department of Environmental Affairs (DEA). Regarding the letter sent by the Director General of DST to the DG of DTI, it was merely sent for purposes of sharing, and State Law Advisors authored it. He said that DST indicated that it would be highly imprudent that DST should state a position based on the fact that DST could not repeal an Act of another department. Furthermore, DTI was referred to Section 32.1 and Section 32.3 that indicated that the IKS Bill did not detract or alter any right in the state of intellectual property in terms of Section 32.1 and did not detract or alter any of the amended laws that informed the IPLA Act. Thus, in terms of those, the DTI was quite adamant that the issue of repealing IPLA was not on the table. Hence, discussion on the repelling of the IPLA Act ceased to exist given that the DTI and the Portfolio Committee spent considerable time and energy on promulgating the Act.

He said that regarding the issue of alignment, the DST raised the issue that currently there were no policy framework that the IKS Bill had to align itself to. However, the IKS Bill aligned itself to the IKS policy, which was approved by Cabinet in 2004. For example, the edification, certification and registration of the IKS were envisaged in Chapter 8 and Chapter 3. The establishment of the national offices was in Chapter 4. In terms of other agenda items, DTI indicated that it did not recognise the particular agenda items as enlisted in a letter written by the Chairperson of the Portfolio Committee of Science and Technology to the respective departments. The DTI indicated that it did not recognise those agenda items, due to issues that the DST raised at the joint sitting. Thus, at that point the Chairperson closed the meeting. This was a brief description of that which transpired on 26th May 2017. The take home message was that the issue of repealing the IPLA Act was not on the table, according to DTI, and subsequently no discussion of its repeal would be made. In terms of progress on the Bill regarding the independent opinion, DST developed Terms of Reference, which was submitted to the procurement division and was currently in the process of securing procurement of a service provider. In terms of the technical draft, there were quite a few iterations with the parliamentary legal team, which resulted in a refreshed document. In the next weeks, a joint presentation of the revised document would be presented to the Committee.

Discussion

The Chairperson noted that the Committee had the minutes of the third meeting and would work on the programme to “resuscitate continuation of finalising the Bill.” It was the intention of the Committee to highlight the notion to other departments that although governmental departments were not working in silos for the sake of efficiency, it was imperative that National Government operated as a “one stop shop”, instead of sending civilians from pillar to post. Having said that, if no cooperation from the DTI existed, the IKS Bill would continue to be finalised by means of the Committee itself. This unprecedented stance would be debated in house and substantiated as the feasible option.

Mr Kroonhof noted that it was a pity that the cited meeting occurred before the legal opinion was appealed for. Thus, it might be premature to assign a stance, because confirmation of the legal opinion should be awaited upon first. If the legal opinion was satisfied that no dissension could impede on the outcome was evident, then DST should proceed with the IKS Bill. However, receipt of the legal opinion had to be waited upon. At that stage, DST would obviously revert to DTI. Was DTI aware that DST sought after a legal opinion or not?

Mr Tom replied that DTI was not aware of the pursuit by DST for a legal opinion. Also, DST wanted to expatiate the process by having the meeting first; the legal opinion could be received later. The only problem about the legal opinion according to DST was that most service providers tended to deem DTI favourably, which might have even prolonged the process. The DTI could hire its own independent legal opinion, which would be presumably more favourable to its department. Essentially, this could revert back to a catch-22 situation. 

Mr Kroonhof commented that a catch-22 might not necessarily be the case, because it would depend on the questions asked to the lawyers for their legal opinion. If it were a good lawyer s/he would not dance to the tune of the client if the client was incorrect, because concluding what was correct in terms of legislation was paramount. The need for this unbiased legal opinion had to be included in the brief to Council. Objective measures were what DST required, irrespective of which department it ultimately might be in favour of, as long as legal certainty was guaranteed. It was the duty of the Committee to ensure such.

Mr Mathale agreed with the approach of Mr Kroonhof, however, the situation may compel the Committee pursue the IKS Bill independent of other stakeholders. The IKS Bill was with the Committee and was no longer with DST, as the Department was merely facilitating and ensuring a support function to the Committee, because effectively it was the responsibility of the Committee. It was the Committee that should receive the legal advice as proposed by Mr Kroonhof, and on its basis a position could be taken or a recommendation to Parliament could be made citing challenges that might prohibit its continuation. This took cognisance that the Bill was no longer in the court or scope of the Department, as it was now up to Parliament to decide and the Committee was the extension of Parliament. Within context of that which was explained, it was advisable that an external legal opinion was sought for. However, it was essential that it would be a competent legal opinion, and was not similar to the parliamentary legal advisors that could not “tell heads or tails apart”. Notably, there should be funds available to approach legal experts and the Committee should make a definitive decision to appoint, by means of the relevant channels, external legal experts that could competently and technically advise the legislation.

Mr Patel commented that it was prudent that the Committee took ownership of the IKS Bill. Also, the DST could share the Terms of Reference drafted by the Department to the Committee.

The Chairperson replied that receipt of the Terms of Reference would be appreciated and reviewed, after which an external legal opinion would be sought for, and it would be funded by the unspent funds of the current financial year. As soon as the legal opinion was received it would be revised for decision- making, as the Bill required finalisation.

Mr Patel requested clarity if the legal opinion would be sought for the actual Bill itself published in November or its revised version?

The Chairperson answered that a legal opinion would be sought on both.

Mr Mathale expressed that he thought it was wise to review both, because it undermined the work that the Committee already did. Thus, the legal opinion should be sought on the revised Bill only.

The Chairperson agreed that the latest version included other steps taken to have reached the decisions made resulting in the revised version.

The Committee Secretary counteracted that both the actual Bill and the revised version should be subjected to an external legal opinion. Firstly, the Bill and the work that transpired since should be submitted as a full brief to account for how the Committee reached the decisions that it had in the revised Bill. Thereafter, submission of the revised Bill should take place, which the legal expert could technically highlight if the process undertaken and the decisions made were legally sound.

The Chairperson agreed with submissions of the Bill and the revised version of the Bill and the full brief of decision-making process for review of an external legal opinion.

The meeting was adjourned.

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