The digital revolution is in full swing. It is transforming jobs and skills, overhauling conventional industries such as retailing and publishing and quite likely to upend most conventional industries in the near future.
The underlying technology behind cryptocurrencies (blockchain) will certainly revolutionize finance by making transactions faster and more secure, while better information on potential clients can improve how client needs are met.
Breakthroughs in quantum computing would introduce unprecedented advances in calculations that are beyond the capabilities of traditional computers. While enabling exciting new products, these computers could undo even some new technologies. For example, they could render current standards in cryptology obsolete, potentially affecting communication and privacy on a global level. And this is just one aspect of threats to cyber security, an issue that is becoming increasingly important, given that almost all essential public services and private information are now online.
Computers are learning to drive taxis – and many human-powered activities could be automated using existing robotics and artificial and machine learning technologies. Elon Musk says pursuing AI is in a way ‘awakening the demon’. One clear difference between the digital revolution and the steam and electricity revolutions is the speed at which the technology is being diffused across countries. The gig economy is changing the way we see conventional jobs and the workplace.
Software Development and Digital platforms are reengineering the relationships between customers, workers, and employers as the silicon chip’s reach permeates almost everything we do—from buying groceries online to seeking medical care. All this is being driven by software development. What will The Fourth Industrial Revolution hold for in the future?
“To force a man to pay for the violation of his own liberty is indeed an addition of insult to injury.” Benjamin Tucker |
Software development has become more innovative and experimental, with the development of new platforms, advanced algorithms, new ways of storing and accessing information – and software development is taking place in the least conventional places.
R&D is driving the change in economic success through a confluence of new ideas, strategies, software and algorithms, and innovation. Digital firms like Facebook and Alphabet are spending around 15-20 percent of their revenue on R&D, whilst smaller and start-up companies probably a much higher level of investment in R&D.
The world is in need of more scientific and engineering talent that will drive Research and Development.
Companies will be carefully constructing their R&D strategies and investing resources if they any chance of being successful in the highly competitive environment of the modern digitally-driven world.
What is the R&D Tax Incentive – Software Development companies in South Africa?
The R&D Tax Incentive in South Africa is provided for in Section 11(d) of Income Tax Act. The SA R&D Tax Incentive reduces the after-tax cost of R&D conducted by companies. The Tax Incentive or Tax allowance in SA allow firms investing in R&D to deduct more from their taxable income than they actually spend on R&D. The tax Incentive is a deduction from taxable income that allows companies to deduct an additional 50% for R&D Operational expenses. The value of a tax allowance depends on the corporate income tax rate. At a corporate tax rate of 28% in SA, this translates to a 14% tax benefit from SARS. A company that invests R1 million on R&D can obtain a tax benefit of R140k. There are no limits: there is no cap [floor or ceiling] on the absolute amount of R&D that can be claimed; or a cap on the maximum amount of the tax incentive that can be deducted.
An unused tax allowances in the year of assessment may be carried forward to offset future tax under normal loss carryforward provisions. Allowing the tax allowance to be carried-over increases its value to firms incurring losses in a given year, particularly smaller companies that are unable to make a current tax claim or tax credit due to insufficient taxable income.
Companies who wish to qualify for the SA R&D Tax Incentive should be familiar with the Copyright Act of 1978.
“You don’t pay taxes — they take taxes.” Chris Rock |
How do you write-off research and development in the Software Development industry in South Africa?
Software Developers that invest in R&D in an attempt to develop or improve software and related technologies may be eligible to qualify for the South African R&D Tax Incentive. The R&D projects do not have to be successful to qualify. Attempting to make incremental improvements may be sufficient to qualify. You may be eligible for the tax incentive whether your business is directly conducting the R&D, or contracting third party contractors. R&D is volume-based, and there is no threshold or ceiling to the amount of the projects or the size of the tax incentive.
Factors to consider when assessing the eligibility of your Software Development R&D activities
The Frascati Manual is the international reference for R&D and helps in understanding the requirements of Section 11D of the South African Income Tax Act.
The Frascati Manual adopts the approach that activities will be R&D if they embody scientific and/or technological advances that result in an increase in the stock of knowledge. The following examples are given in the Frascati Manual of software development activities that may involve R&D:
- the development of new operating systems or languages
- the design of new search engines based on original technologies
- the effort to resolve conflicts within hardware or software based on the process of re-engineering a system or a network
- the creation of new or more efficient algorithms based on new techniques or approaches
- the creation of new and original encryption or security techniques
“Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.” F.J. Raymond |
The method to establish if there is R&D involves answering some key questions:
- Is there a scientific or a technological uncertainty?
- Will the effort involve formulating hypotheses specifically aimed at reducing or eliminating that uncertainty?
- Will the overall approach adopted be consistent with a systematic investigation or search, including formulating and testing the hypotheses by experiment or analysis?
- Will the overall approach for the purpose of achieving a scientific or a technological advancement?
- Will you keep a record of the hypotheses tested and the results kept as the work progressed?
What is technological advancement in respect of Software Development?
- New of improved techniques and methods in computing to store, search, process, and management data
- Advancements necessary to support software technology stacks or tools
- Advancements for new or improved infrastructures such as internet-driven cloud and distributed computing
- Advancements to support scaling, reliability and availability of software-based systems
- Advancements in technology areas such as vision and medical imaging, video transmission, telecommunication, automation, image processing, geographic data representation, character recognition, artificial intelligence and so forth
- You seek advanced technology in operating systems, programming languages, data management, communications software or software development tools
- You will produce advances in generic approaches for capturing, transmitting, storing, retrieving, manipulating, or displaying information
- You will conduct research and development into software tools or technologies in specialised areas of computing
Have questions? Contact Vantage R&D Tax Incentive Advisors