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FINANCE PORTFOLIO COMMITTEE, FINANCE SELECT COMMITTEE: JOINT SITTING
14 May 2002
SOUTH AFRICAN REVENUE SERVICE BUDGET & BUSINESS PLAN: BRIEFING
Co-Chairpersons: Ms Hogan (ANC), Ms Mahlangu (ANC)
PowerPoint Presentation by SARS - Business Plan 2002/2003
The South African Revenue Service (SARS) presented its budget vote to the Committee. One of the main challenges facing SARS is how to maintain the level of collection and to better understand the tax gap to increase compliance. The Commissioner briefed the Committee on achievements during the past fiscal year and on the plans to enable SARS to face those challenges.
Before SARS made its presentation the Minister of Finance, Mr Trevor Manuel, made a few introductory remarks. He said that SARS has over the past few years gone through numerous changes. There has been a shift to a more scientific approach to tax collection. For the last 5/6 years SARS has collected more than what was estimated and this needs to be understood, it must be known whether it is sustainable and it must be tied in with the general framework. Government needs to know what part of the over runs are sustainable because mistakes cannot be afforded. Most of the over runs are due to better compliance.
The Commissioner for Inland Revenue, Mr Pravin Gordhan, made the presentation. SARS's focus was on the details of deliverables for this fiscal year.
The Commissioner said that the challenge that faces SARS is to delivery R265 billion, how to keep delivering at this rate and how to sustain the current operations. Over the next two years SARS must change the compliance focus to the tax gap, design and implement the transformation programme and implement a cultural change management programme.
SARS achievements include:
- Exceeded estimates by 6.5%
- Implemented tax proposals
- Siyakha roll-out as a pilot in KZN.
- Increased compliance
- Process efficiencies through the Warrooms had increased the number of returns processed
- Customs had better control over movement of goods and established anti-smuggling teams
The current operations of SARS include improving service to taxpayers, further improving processing efficiencies, shifting from the 'normal flow' of revenue to the 'tax gap', increasing the skills base and measuring the performance.
Understanding the Tax Base
The Commissioner said that for SARS to do its job well it must understand the tax base. SARS must understand what it means to operate in a dual economy, understand the informal economy, understand the legacies of a low tax morality and at the end of the day balance service, education and enforcement.
In an attempt to understand, SARS has segmented the tax base into the different tax payer groups from an enforcement point of view. This is supplemented by behavioural segmentation where SARS looks at who intentionally does not register but also at those who unintentionally do not register because each category needs to be dealt with differently.
The Strategic Revenue Analysis Project is a model to plug the tax gap. The model looks at what is being collected and what should be collected. The difference is the tax gap. This impacts on and informs revenue estimation.
The Revenue Analysis and Estimation Project is a model that SARS is trying to work with to look at what the future 'natural' revenue flow is, how much extra can be collected by plugging that tax gap and by that, determining what the remaining tax gap is.
It was submitted that these processes would lead to a more stable estimation process.
The analysis suggests that 5.9 million people are missing from the tax register. They are earning some kind of income - not all of these people necessarily have to be registered but SARS needs to understand their activity to know who should be registered.
SARS has been looking at what drives compliant behaviour and non-compliant behaviour. The behaviour is broken down into two categories being monetary objectives and emotional objectives. The questions that needs to be answered is how to change tax paying behaviour and the analysis tries to understand what aspects of Personal Income Tax gives rise to non-compliant behaviour. The early results show that much of the non-compliance comes from the formal sector. The Commissioner said that it seems that the popular belief - that it is the informal sector that contributes most to non-compliance - is not true. The number of allowances of deductions in the system is related to non-compliance so if these allowances are reduced compliance is increased.
On the Corporate Income Tax side, SARS again looks at whether there are loopholes and weaknesses.
SARS Compliance Model
The model is intended to address the tax gap. It is built on the analysis of intentional and unintentional behaviour. The idea is that if non-compliance is intentional then the appropriate action needs to be taken. If the non-compliance is unintentional then another approach is needed, one that rather educates and aids. The more unwilling the person is to comply, the more aggressive the measures will be to enforce compliance.
The Geographic Information System targets high net worth individuals . it maps car ownership, home ownership with the lifestyles of persons to see if they are being truthful in their declarations. Third party information will be relied on as well as all the SARS databases.
Changing the Culture and Work Ethic & Siyakha
The staff must understand why SARS is trying to make the change from a bureaucratic mindset to one of service orientation. In this regard intensive internal communication is embarked upon.
The Commissioner said that it is one thing to set revenue targets and another making SARS capable of fulfilling this. The implementation of Siyakha in KZN forms the basis to become more customer orientated and to build capacity and capability.
The Commissioner advised that the rest of the slide presentation deals with each division in SARS and requested guidance as to whether he should go through it all or if it would be better to cover it in discussion.
Ms Hogan asked that the Customs Division be presented to the committee.
Mr Shabalala the General Manager of Customs took the committee through the slides.
- Quality management documents and manuals were placed on the website.
- The valuation guide and database was installed
- The refund reference guide is on the website
- The Cape System, a customs control system that was only present at the 11 large offices, was implemented in small ports
- The Cape system and the CCA1, a system used for common customs areas, was enhanced for transit processing.
- Client accreditation has commenced
- The warehouse management system has been developed
- An informal dispute resolution mechanism was implemented
- A paperless Cape System developed. In the past there was paperless electronic submissions but there was still a paper trail because the electronic signature legislation was not in place. This legislation will be in place soon and then the process will be completely paperless.
Achievements around Enforcement
- Post clearance and anti-smuggling teams have been established nationally. They do investigations and inspections of exporters, importers and check if any goods by pass customs.
There are customs mobile unit inspections in 16 ports. Some ports are visited more than once.
- Integrated compliance operations are executed
- The post African Growth and Opportunity Act implementation was ratified by the USA.
- Customs carried out a joint operation with the EU on roundtripping in fishing.
- The revenue yield model indicates that there is a 6% gap in Customs duty and Vat on imports nationally.
- Export controls introduced with dedicated teams
- Rail controls improved through submission of manifests to first port of entry and through anti-smuggling operations.
- Passenger controls were improved through risk based measures and anti-smuggling interventions.
- Risk Assessment system enhanced through compliance database linked to suspicious activity reports.
Achievements in Personnel Development
Mr Shabalala said that in the past, level of skill and quality of management decreased because customs was traditionally not a big revenue earner. Last year the management positions nationally were advertised and everyone had to apply. This process was completed in October 2001. Technical management training took place and 147 out of 167 managers have completed the course. Team leader training has been completed. 68 customs officers have been through the revamped basic customs course.
Mr Shabalala concluded by looking at the focus areas for 2002/03:
- Approximately 1100 officers will go on enhanced management and officer skills training this fiscal year
- The service culture amongst officer will be enhanced
- The operational policy review will be completed
- Continuation of the infrastructure upgrade
- Strengthen external compliance partnerships with SAPS, Home Affairs, Transnet and other customs administrations and stakeholders
- Enhance customs integrity and good governance. Internal corruption must be rooted. Another important area is the security of customs officers when they deal with syndicates.
- Enhance regional and international co-operation.
Ms Taljaard (DP) requested that SARS quickly go through Law Administration as well as Strategy & Planning
The Commissioner said that the Taxation Laws Amendment Act, 2001; the Revenue Laws Amendment Act, 2001, the Second Revenue Laws Amendment Act, 2001; the Unemployment Insurance Contribution Act, 2002; the double taxation agreements and the Customs % Excise Tariff Amendments are examples of the achievements of this division. There were also 35 rulings on High Level Income Tax and 700 rulings on CGT. Litigation in the Tax court has been 81.8% successful and in the High Court, 80.7% for customs cases and 68% for non-customs cases. There had been 139 income tax cases and 35 Vat cases that went through dispute resolution. There had been 31 requests for access to information and 1288 applications for exemptions by public benefit organisations.
The focus area for Law Administration is to amend the SARS Act, assist in developing budget proposals, recommence the rewrite of the Customs Act and investigate the advance ruling system among others. The division will assist in dispute resolution process roll-out and in closing the tax gap by exposing tax avoidance techniques.
Strategy and Planning
This is a new component that is involved in the revenue analysis and the tax gap project. These are the major responsibilities of this division. The division implemented an interim performance management system and formalised the business planning process.
A member requested that the commissioner go through the Finance Division
The achievements include the approval of a new procurement process, the Own Accounts received an unqualified audit for the first time, in respect of Administered Revenue, the 2001 financial statements compiled with GRAP. An "except for audit" was received due to a lack of controls within the assurance process and is not a reflection of inadequate accounting records.
Prof. Turok asked what was SARS policy on duties across African borders and how did it fit in with the African regeneration programme. Secondly he wanted to know what kind of co-operation was received from the accounting and auditing profession.
The Commissioner replied that duties arise from tariffs and it is the duty of the trade department to set tariffs. Whatever the tariff regime dictates the way duties become due.
The Minister added that there is a complex set of arrangements that one deals with. To boost inter-African trade requires economic development. In SADC the free trade agreements present difficulties. One of them is that countries violate the rules of origin. If a SADC country is a mere conduit for goods that are manufactures in another country and it comes into South Africa duty free then jobs in this country are undermined.
In respect of the accounting and auditing profession, the Minister said that there is likely to be conflict. He recently addressed the South African Institute of Chartered Accountants (SAICA). The profession advises their clients to take aggressive steps, there is no professional liability as clients are expected to sign a long list indemnifying their advisors. The client takes the advice, gets into trouble and the firm moves onto the next client. The Minister said that this situation cannot continue. He said that much more disciplinary action is needed for ethical violations. He had told SAICA that he wanted to recast the legislation governing the accounting profession entirely - especially in the light of Enron and the Report on Regal Treasury that names individuals from Ernst & Young.
Dr Rabie (NNP) asked how prevalent the problem of roundtripping of fish was.
Mr Shabalala replied that the investigation with the EU was one specific case. There are indications that the problem is much bigger but there is no hard evidence at the moment.
A member referred to the many African arts and crafts at flea markets and said that much of it is not from South Africa. He asked if there was a system to protect South African products.
Mr Shabalala replied that local arts and crafts at flea markets is a debating point at SARS. In terms of the current trade regime SADC products are free of duty. If certificates of origin are produced there is no duty payable. It is difficult to say where the crafts come from and SARS needs to be advised in this regard. Persons with small quantities pay duty because often they have no certificates.
Ms Mahlangu asked if SARS has contributed to shaping the Immigration Bill to make sure that border control issues are addressed. Secondly, she wanted to know to what extent was corruption prevalent and what action was taken against officials.
Mr Shabalala replied that SARS had held discussions since 2000 but were not able to agree on many issues. SARS had to be restrained in the way it interacted because of the tensions. He said that one department cannot designate a port of entry without consultation. If there are parallel regimes, there is a duplication and things can pass through the cracks. He had no problem with Parliament passing the provisions that deal with migration control but hoped that ports of entry are dealt with in an integrated manner.
In answering the second question he said that SARS worked on the basis that there was lots of corruption. Officers have lots of discretion. If the duty is R5 million, traders have no problem paying the official R100 000. SARS is aware of this and has an internal corruption unit. Officers are also rotated from office to office.
The Commissioner added that corruption is across the board not only in Customs. If caught, there is immediate dismissal. In respect of the Immigration Bill he added that the drafters were unhelpful. It is not understood that border control is not a security issue but is more about trade facilitation.
Ms Taljaard asked what was the ultimate vision of Customs and how did other agencies relate to this vision.
The Commissioner replied that Customs play a trade facilitation role. If SA wants to be a significantly export-based country then there must be a system to enhance this. The compliance system must quickly check exports and imports must be processed quickly. Risk is evaluated by understanding industry and the key role players. A database is being developed to gain this understanding. The system must also be compatible with neighbours - this is a goal to be achieved in a few years time. A system that is compatible with the UK and Europe is something to strive for because they are our major trading partners. There have been discussions with the UK and they are willing to discuss and investigate a seamless system.
In respect of other departments, and how they interact with SARS, is a political decision. Administratively SARS is willing to do anything but cannot do anything about organisational barriers. Mr Shabalala already said that an integrated approach is needed.
Mr Pillay (SARS) added to the discussion on corruption and said that there had been 49 dismissals and 13 convictions in court during the last fiscal year.
Mr Moloto (ANC) asked if there was any comparison with other developing countries in respect of the cost of collecting taxes.
The Commissioner replied that various developing countries were looked at and the norm is 1 - 2.5% of revenue. Last year SARS administration costs were 1.1% of actual revenue collected. It rises to 1.29 and 1.4% of estimated revenue collected for the next two years. Most developed countries are at 1.5 - 2.5%.
Ms Taljaard referred to the tax gap and the comment that the formal sector is responsible for the gap. She asked what assurances are there that SARS will not forget about the informal sector as more information becomes available.
The Commissioner replied that that the member has assurances from an administrative policy point of view that SARS is already looking at the informal sector. SARS needs to see if the current systems that are available are relevant to the informal sector.
Ms Taljaard asked SARS to clarify the 700 CGT rulings and asked why the employment incentive scheme that was brought about by the Revenue Laws Amendment Bill was lagging behind.
Mr Louw (SARS) replied that the CGT rulings were of a technical nature. Many dealt with requests on how to value property, how the exemptions worked and who could do the valuations. None of the rulings were of a high level. In response to the second question Mr Louw said that proposed draft legislation on the wage incentive was commented on. The trade unions response was negative. Treasury is consulting with them to see if it can be resolved. He advised that it will be included in the Revenue Laws Amendment Bill in June this year and will be retroactively implemented from October 2001.
Ms Taljaard asked why there were objections.
Mr Louw replied that they were not very specific on the issues but it involved the deductions being too generous.
Ms Mahlangu asked if the new procurement process is inline with the preferential procurement policy. Finally, she commented that there are very little African females and asked how will this be remedied. There is also a little women at senior management level.
The Commissioner replied that SARS is not unmindful of gender and knows that much needs to be done. SARS had not gone through any retrenchments but has an employment equity plan and has come a long way in respect of equity issues at all levels. The new procurement policy is consistent with the PFMA and it takes into account the preferential procurement policy. Managers are being trained on these policies.
Ms Taljaard was concerned about the use of third party information because there are certain constitutional issues especially in respect of privacy that could arise.
The Commissioner replied that SARS is behind other countries in the use of third party information. Even the private sector is ahead with all their credit checks. If there is to be increased compliance the right of privacy will have to be compromised slightly. He reiterated that the world was ahead of South Africa in this area.
Ms Hogan asked how prepared SARS was for the implementation of the Financial Intelligence Centre.
The Commissioner relied that SARS was part of the process from the inception phase. SARS is part of the reporting mechanism and is ready and aware of the responsibilities and the opportunities.
There were no further questions and the meeting was adjourned.