South African tax incentives as a motivation for the private sector to invest in research and development

Abstract

The South African economy is growing at a very low rate and slipped into recession once in 2017. The country has to find a possible way to sustainably grow the economy going into the future. It is the responsibility of both the government and the private sector to grow the economy. Innovation is at the heart of economic growth. To grow the South African economy, the country has to develop new products to offer the market. In order to develop new products, research is required. The process of researching, developing and testing new products can be very long and expensive, coupled with the fact that not all research performed will conclude with a product that will create a return. This process and its risks and uncertainties might deter investors from spending on research. The government has a responsibility to create an environment that encourages research and development. Investors taking the risk of using their resources to conduct research and to develop products that will eventually help the entire economy of the country to grow, would have to be incentivised to do so. Many governments around the world use tax breaks as one of the ways to incentivise investors who invest in research and development. South Africa, just like many other countries, introduced a tax incentive to motivate the private sector to invest in research and development. Section 11D was introduced into the Income Tax Act (58 of 1962) (the Act) in 2006 and replaced the old section 11B, which had previously dealt with research and development incentives. This purpose of this study is to evaluate whether the incentives provided by the Act are adequate to actually motivate the private sector in South Africa to invest in research and development. This will be achieved by making a comparison of the research and development incentives available in Brazil and China. Brazil and China were chosen for the comparison due to them being members of the BRICS states. BRICS states are states whose economies are still in the growing phase, with a potential of being amongst the biggest economies in the world. These states have an agreement whereby they are committed to helping each other to grow and develop their economies. It has been found that Brazil and China are offering more generous tax incentives for research and development as compared to those available in South Africa. A list of recommendations for the South African government has been presented at the end of the study.