Grants and Tax Incentives for Software Research and Development
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  • 1. SILICON CAPESoftware Development Incentives Discussion 24 July 2012
  • 2. Introduction: Catalyst Solutions Catalyst is a boutique grants and incentives consultancy offering a focused, efficient, value adding service offering • 13 years combined experience • assisted clients to get access to various grants and incentives in excess of R3bn • Part of a global organization that focuses on cost saving solutions
  • 3. Grants and Incentives: Introduction S11D R&D Tax Tax Incentives Incentive R&D SPII Cash Incentives TIA
  • 4. R&D Tax Incentive “To raise new questions, new possibilities, toregard old problems from a new angle requirescreative imagination and marks real advance in science.” Albert Einstein
  • 5. Section 11D R&D Tax Incentive: Background • Enacted in 2007 - backdated to November 2006 • Introduced to increase the amount of R&D expenditure in SA • Target for GERD as percentage of GDP of 1% by 2008 • In first 2 years of the incentive, 80 submissions with approximately R900 million of R&D expenditure • New target has been set of 1.4% by 2015 • Hence the change in legislation
  • 6. Section 11D R&D Tax Incentive: Current Incentive • Section 11D(1) – Operational R&D Expenditure • 150% tax deduction on expenditure directly related to R&D • Bottom line additional tax saving of 14% of qualifying R&D costs • Section 11D(2) – Capital R&D Expenditure • Accelerated depreciation of 50/30/20 • New and unused • Solely used for R&D
  • 7. s11D: Current Incentive - Qualification Criteria • R&D must be conducted in South Africa: • In the production of income • For the purpose of: • Discovery of novel, practical and non obvious information; or • Devising, developing or creating • Inventions - patentable • Designs - registerable • Computer programs • Knowledge essential to the above
  • 8. s11D: Current Incentive - Software Development • All coding is copyrightable and therefore qualifies • Despite the act not requiring it, SARS does still like to see an element of novelty
  • 9. s11D: Current Incentive - Relevant Exclusions • Any software developed for Management & Internal Business Processes (MIBP) even if for sale to third parties. For example: • HR Packages • Accounting / ERP packages • Administrative packages • Time sheet software • Sales or marketing promotion. For example: • Website development • Internet Sales Systems
  • 10. s11D: Current Incentive - Qualifying Costs • Any costs incurred directly in respect of R&D activities. For example: • Payroll costs – Developers • Sub-contractor costs • Overheads Excluded: • Rental • Finance Costs
  • 11. s11D: Current Incentive - Funding Issues • Funder of R&D can make the claim • Fundee can make claim if the Funder is unable to. I.e.: • Financial Institutions • Foreign Funding • Government Grants = 2 x Grant is excluded
  • 12. s11D: Current Incentive – Administrative Issues • Statistical form submitted to DST • Can reopen tax returns for 3 years from date of assessment
  • 13. s11D: New Legislation – Why The Change • Increase utilization • Clarification of grey areas • Better control of incentive • Allow for better budgeting by companies
  • 14. s11D: New Legislation – Main Changes • Implementation date: 1 October 2012 • Pre-approval process through DST • Improvements of previous software now eligible • Only companies can claim • No longer the ‘funder’ who can make the claim, but rather the company which ‘determines or alters the methodology of research’ • Govt. Grant = only 1 times grant is excluded • MIBP is allowed if for sale to third parties
  • 15. Support Program for Industrial Innovation “Never before in history has innovation offered promise of so much to so many in so short a time.” Bill Gates
  • 16. SPII: Basics Support Program for Industrial Innovation (SPII) Intended to promote technology development in SA • Product Process Development (PPD) Scheme • Matching Scheme • Partnership Scheme Applicable scheme is determined by the size of the company and the funding required
  • 17. SPII: Basics • Taxable non-repayable cash grants of 50 - 75% of qualifying costs incurred in ‘pre-competitive’ development activity • Maximum grant = R5m • Funding is provided on a per-project basis (only 1 project at a time) • 2 – 3 months approval time
  • 18. SPII: Qualification Criteria • At the discretion of IDC (as opposed to s11D which is law) • Intended to lead to commercialization of the developed product • Major portion of the project must take place in SA • IP must remain in SA registered co. for 3 years post development • Cannot be developed for a single client • Project must not be more than 50% complete
  • 19. SPII: Qualification Criteria What is the committee looking for? 1) Technological Innovation 2) Economic Merit – is the solution commercially viable 3) Team capabilities – to perform the project 4) Financial Ability – to complete the project & raise the rest of the finance
  • 20. SPII: Technological Innovation - Software • Global technological advance • Functionally unique and advanced • More efficient / lower cost / easier to use / faster • Innovation should be the result of technical development • New and unique product - attributes that have never been seen before • Enhancements – new features added so the entire product is seen as innovative
  • 21. SPII: Technological Innovation - Software • Global technological advance (cont) • Innovation that is not available in other products on the market • Integration may be innovative – if components have never been combined before and if it results in significant functionality improvements not currently available.
  • 22. SPII: Technological Innovation - Software • Only costs from commencement date • Salary and Labour (timesheets) • personnel directly involved • Management costs – directly involved (technically) • Project Management • Material • Sub-contractors
  • 23. Technology Innovation Agency“I have not failed, I’ve just found 10,000 ways that wont work.” Thomas A Edison
  • 24. TIA: Basics Technology Innovation Agency (TIA) • Established in 2008 • Promote development of technology – ICT is a focus sector • From proof of concept to early commercialization • Looking for ‘high social impact’ projects
  • 25. TIA: Basics 3 main programs for commercial entities: • Idea Development Fund • Industry Matching Fund • Equity Fund Each deal is unique and is structured on an individual basis
  • 26. TIA: What’s available? • Funding from R100k - R50m (matching finance) • Repayable as a soft loan or royalty (from revenues) • Each deal is unique • IRR required by TIA is dependent on social impact • No collateral required • Access to TIA advisors incl. – Patenting / Certification
  • 27. TIA: Requirements • Global Innovation • Does not need to be radical or novel • Must create a competitive advantage • Must be a market need for the invention • Majority local shareholding • IP to remain in SA
  • 28. Dov Paluch Michael Wingrin011 555 8339 011 555 8434082 773 7947 072 297 3867dovp@catalystsolutions.co.za michaelw@catalystsolutions.co.za www.catalystsolutions.co.za