Maximising global R&D tax incentives - An exceptional opportunity for multinational corporations
Approximately forty countries offer incentives to encourage R&D and investments in innovation, to stimulate activity and job creation. Even though the basic principles of R&D Tax Incentives are fairly universal, the R&D incentives often vary widely from country to country, because of differing treatment of, for example:
• IP-ownership requirements;
• the form of incentives (tax credits vs tax deductions vs grants);
• the location of R&D activities; and
• industry-specific exclusions.
So: where in the world are the R&D incentives the most generous? These complex factors can make relative comparisons very difficult to make. This article looks at two aspects of the South African R&D model, namely:
• what makes the South African R&D tax incentives such an attractive option; and
• how global R&D incentives can be maximised by intelligent application of the South African model.
The South African Regime: In A Nutshell
Despite the territorial restriction, the extremely generous rate of the incentives and the absence of IP ownership requirements makes South Africa a destination of choice for conducting R&D. In fact, ever since R&D tax incentives were introduced to South Africa, it has remained amongst the top five global destinations globally (1).
For more specific detail of R&D Tax Incentives in South Africa, click here.
As far as the value of the incentives is concerned, South Africa is one of the few states in the world that offers a supercharged deduction for R&D activities. But how does South Africa measure up against other states in that elite category? Consider this sample of "supercharged states(2)" :
It's no wonder that South Africa is so highly regarded for its R&D tax incentives: there are few jurisdictions that offer such a lucrative supercharged incentive.
How Best To Take Advantage Of These Benefits?
There are two extremely lucrative opportunities available:
1.The "Double Dip"
In a recent introduction to the Income Tax Act, the South African Revenue Authorities now permit the following:
• a South African taxpaying entity
• that is funded by a foreign (ie non-South African) entity
• to conduct R&D activities anywhere within South Africa;
• will be entitled to claim the supercharged deduction on that funding, as if it paid the expenditure out of its own pocket;
• provided that the foreign entity should not be a South African taxpayer.
A word of caution, though: restrictions elsewhere in the Act may affect arrangements between connected persons. It is always advisable to obtain expert advice in this very technical area.
2.Foreign Entities Without Geographical Restrictions
A number of major European and Asian states offer R&D tax incentives, without any geographical restrictions. Simply put: tax incentives are offered in those states, regardless of where the actual activities are conducted. The best known examples include: the UK, Belgium and the Netherlands, while others are illustrated below (3).
The opportunity here is as follows:
• a foreign entity;
• that conducts qualifying R&D activities in South Africa;
• may be able to claim a tax deduction in both South Africa and its country of residence;
• ie: two deductions, in respect of the same basket of expenditure
Consider the X Group of Companies, a global leader in the industrial diamond market. X has its global headquarters located in Antwerp, Belgium and distributes its finished goods out of its London offices. Mining operations are conducted predominantly in South Africa, Namibia and Angola. X is currently considering the issue of where in the world to locate its research facilities, in order to optimise its position.
With a little forward-thinking, if the X Group locates those facilities in South Africa, it might be able to claim a supercharged tax deduction in each of: Belgium, the UK and South Africa – in respect of the same expenditure! What's more, X's South African operation may also be able to claim a "double dip" incentive on top of this, too, and could be done in such a way to satisfy both Belgium's and the UK's strict IP-ownership requirements.
Furthermore, all of this could be achieved without any restriction on ownership of any intellectual property that is devised in conducting the R&D . When it comes to competitive R&D regimes, South Africa remains the jurisdiction to beat for the global opportunities that it offers. This opportunity is simply too big to ignore.
If this has been of interest to you, and if we can be of assistance, you're very welcome to contact us
2) This comparison considers only minimum supercharged deductions. For simplicity, it does not consider alternative or maximum supercharged deductions, nor does it compare every state that offers any form of supercharged deduction.
3) Source: Deloitte Touche Tohmatsu India Private Limited; Deloitte Global R&D Survey;
4) A note of caution: other restrictions regarding the transfer of Intellectual Property do exist in South Africa. However, these have no bearing on the R&D tax incentives whatsoever.