R&D tax incentive (s11D) permits double-dipping

The 150% R&D tax incentive aims to attract multinationals’ R&D to our shores.

According to s11D(7), a taxpayer may claim the 150% tax benefit where “that amount is not deductible by any other person in terms of this Act”.

Let’s consider the following scenario: CompanyA is a UK SME that qualified for 175% R&D tax incentive in the UK. If CompanyA pays CompanyB (a South African company / subsidiary) R1m for R&D, CompanyA could in some instances claim R1.75m as a tax deduction in the UK. On the other side, if CompanyB spends 0.9m on R&D (assuming that it retains R0.1m as profits), CompanyB could theoretically claim R1.35m as a tax deduction in South Africa. In addition, provided that CompanyB charges a reasonable mark-up for its R&D services, any resultant IP may be assigned to CompanyA. Ultimately, the parties could potentially claim a total of R2.1m in tax deductions for each R1m spent on R&D.

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