South African Revenue Service (SARS) 2012 Strategic Plan: briefing by Deputy Minister & National Treasury

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Finance Standing Committee

07 May 2012
Chairperson: Mr T Mufamadi (ANC)
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Meeting Summary

The Deputy Minister of Finance, in conjunction with the National Treasury and the South African Revenue Service, briefed the Committee on their annual strategic plans and budget.

National Treasury

The Deputy Minister said that Treasury wanted to maintain a countercyclical fiscal stance through a real growth in non-interest expenditure averaging 2.6% over the medium term, additional allocations of R55.9bn over the next three years inclusive of a R9.5bn economic support package and a shift from consumption to capital spending which would be an important element in future budget processes. Treasury would be conducting expenditure reviews of selected government programs, and implement a range of measures to improve supply chain management and combat corruption.  It would also consider financing options and funding models for large infrastructure programmes.

Strategic government initiatives were savings and retirement reform, where discussions with stakeholders were in progress; job creation, where R2bn of a total R9bn job creation fund had been allocated; capacity building in financial management to improve spending efficiency, especially in municipalities; infrastructure development through the National Development Plan to improve long-term township regeneration strategies and supporting the Presidential Infrastructure Co-ordinating Council (PICC); and the strengthening of intergovernmental financial relations and cost effective procurement.

The Department would explore options for the phased implementation of contributions in social security reforms and the retirement industry through legislative amendments. It would arrange finance for government borrowing of  R581bn, continue to engage with ratings agencies and manage debt, which was set to peak at R1.5 trillion (38.5% of GDP) by 2014/15, and was exploring the modalities for the establishment of a BRICS-led development bank and reforming the South African Customs Union revenue-sharing arrangement.

Members asked what plans there were to revise the equitable share formula or to introduce new models. Would there be specific regulations governing the spending of the R845bn on infrastructure? Why was the quarterly target for reduction in security breaches not 100%? To what extent could Sasol reduce the impact of rising fuel prices? What informed the view that inflation rate would be down to 5% by the end of the year? Was there was concern in Treasury that Europe was moving to the left? Did Treasury have oversight over the e-tolling scheme?  Members were concerned that State Owned Entities (SOE) would not be able to service their debt should debt costs increase. Members wanted to know whether the cost of borrowing for South African National Roads Agency (SANRAL) would impact on the costs of other entities like Eskom and would this then have an impact on infrastructure development. Members wanted clarity that Treasury would have a revised youth employment subsidy policy by the end of June.

South African Revenue Service
The Deputy Minister said that the President had introduced initiatives to develop infrastructure, diversify exports, to reform the cost of doing business, to reduce the constraints on growth and to encourage entrepreneurship. These initiatives would require a reliable and sustained stream of revenue, growing at 10-12%.  This would be a formidable challenge for SARS to achieve, demanding greater tax and customs compliance, improved service and effective detection and deterrence of tax non-compliance. SARS had, however, achieved a growth in individual tax registrations from 1.7million in 1994 to 12 million in 2011.  In the same period there had been growth in company registrations from 422 000 to two million, in registered VAT vendors from 397 to 652, in registered employers from 177 000 to 385 000 ,and in total revenue from R114bn to R742bn.

He acknowledged that revenue would be susceptible to economic cycles and that government corruption and mismanagement were key challenges, as a citizen’s willingness to pay was influenced by their perceptions of how well the money would be spent.

The Strategic Plan covered four core outcomes; increased customs and tax compliance, increased ease of doing business with SARS and increased cost effectiveness and efficiency of SARS. To achieve this, it was modernising SARS systems and processes and empowering and reskilling its human resources.  SARS had appointed special advisors to assist it as businesses were using sophisticated, complex financial schemes to evade tax obligations. In addition, the growth of multinationals and the economic climate would impact on profit.  The debt book was another risk which was growing at an average of 8%, although last year it was only 1.3% mainly due to administrative penalties. There was also pressure to release VAT refunds earlier and an increase in attempted VAT fraud.

Customs compliance would be addressed through the roll-out of the preferred trader programme. It would strengthen border controls, especially with regard to a price database for clothing and textiles. Tax compliance would be enhanced by the implementation of the Tax Administration Act, once it had been enacted. All tax practitioners would be encouraged to be part of professional bodies, as 50% of them were not.

Meeting report

National Treasury Briefing
The Deputy Minister of Finance, Mr Nhlanhla Nene, said that Treasury wanted to maintain a countercyclical fiscal stance through a real growth in non-interest expenditure averaging 2.6% over the medium term, additional allocations of R55.9bn over the next three years inclusive of a R9.5bn economic support package and a shift from consumption to capital spending which would be an important element in future budget processes. Treasury would be conducting expenditure reviews of selected government programs, and implement a range of measures to improve supply chain management and combat corruption.  It would also consider financing options and funding models for large infrastructure programmes.

Strategic government initiatives were savings and retirement reform, where discussions with stakeholders were in progress; job creation, where R2bn of a total R9bn job creation fund had been allocated; capacity building in financial management to improve spending efficiency, especially in municipalities; infrastructure development through the National Development Plan to improve long-term township regeneration strategies and supporting the Presidential Infrastructure Co-ordinating Council (PICC); and the strengthening of intergovernmental financial relations and cost effective procurement.

Mr Lungisa Fuzile, Director General of the National Treasury, said that supply chain management was implementing strategic sourcing to reduce cost and that Information and Communications Technology (ICT) governance was King 3 compliant to reduce ICT risk. On economic policy, the Department would produce a revised policy paper on carbon tax proposals for the 2013 Budget. The Department was exploring policy measures to increase savings and models to finance National Health Insurance.

On the core outputs of Public Finance and Budget management, the Department would explore options for the phased implementation of contributions in social security reforms and the retirement industry through legislative amendments. The Department would arrange finance for government borrowing of  R581bn, continue to engage with ratings agencies and manage debt, which was set to peak at R1.5 trillion (38.5% of GDP) by 2014/15.

The Department was exploring the modalities for the establishment of a BRICS-led development bank and reforming the South African Customs Union revenue-sharing arrangement.

The Department would also provide procurement and technical advisory services for the public sector, specifically to the Renewable Energy Feed-In Tariff, the Infrastructure Skills Development Grant for Municipalities and the Government Technical Advisory Centre. The Department’s total budget was R21.55bn, with an operational budget of R1.536bn.

Discussion
Mr D Ross (DA) asked what plans there were to revise the equitable share formula or to introduce new models. Would there be specific regulations governing the spending of the R845bn on infrastructure?

Ms P Adams (ANC) asked why the quarterly target for a reduction in security breaches was not 100%.

Ms Z Dlamini–Dubazana (ANC) asked to what extent Sasol could reduce the impact of rising fuel prices. What informed the view that the inflation rate would be down to 5% by the end of the year?

Mr N Koornhof (COPE) asked if there was concern in Treasury that Europe was moving to the left. He was concerned that State Owned Entities (SOE) would not be able to service their debt should debt costs increase.

Mr S Swart (ACDP) said that as Treasury had an oversight role over SOE’s and needed to ensure that thegovernment’s money was spent efficiently, he wanted to know whether the cost of borrowing for South African National Roads Agency (SANRAL) would impact on the costs of other entities like Eskom and would this then have an impact on infrastructure development.

Mr T Harris (DA) asked if Treasury have oversight over the e-tolling scheme. The Committee had been told that R8bn of SANRAL’s debt had been guaranteed by the Government. Was this correct and was a government guarantee applicable to all SOE’s?  He said SANRAL had more than R32bn of debt. What would the costs be were it to be immediately settled? How would Treasury and SANRAL repay the debt? Did Treasury believe the 5% inflation rate by the end of the year was still possible? He wanted clarity that Treasury would have a revised youth employment subsidy policy by the end of June. In 2010 SOE’s failed to spend 40% of their funds and he failed to see how increased spending on infrastructure would occur without bottlenecks, such as a skills shortage and delays, were addressed.

Mr Nene said that he did not want a situation where the Treasury’s Performance Plan appraisal was hijacked by the SANRAL issue. The government had established a process to deal with the SANRAL issue and the case was possibly sub judice.

The youth wage subsidy was dealt with by Nedlac, where agreement by all was required before implementation could happen.

On the possibility of a 5% inflation rate, he said that the Budget was what the fiscus could afford. On the spending of R845bn on infrastructure, he said the establishment of the PICC process was precisely to address the issues raised.

Mr Kenneth Brown, Head of Intergovernmental Relations at the Treasury, replied that the equitable share would increase from 8% to 9%, but that for basic services it would grow at 12%. A large percentage would go to poorer municipalities. It had to deal with increasing urban migration while at the same time breaking apartheid era development patterns which it would address through city support programs, as cities were engines of growth. The Department hoped to have a new formula by the time of the tabling of the Budget.

Mr Freeman Nomvalo, Accountant-General at the Treasury, replied that capacity skills would be developed through the financial management grant.

Ms Fundi Tshazibana, Head of Economic Policy at the Treasury, replied to the question on youth employment subsidies saying that the jobs created would not be sector specific, but would be mainly in the private sector. She said the only sector not creating jobs was the manufacturing sector.

Mr Thuto Shomang, Head of Asset & Liability Management at the Treasury, said that Eskom was on a sound financial footing. The Department was always monitoring SOE’s on their ability to borrow and repay. Government had guaranteed 56% of SANRAL’s R37.9bn debt, and this amounted to R21,4 bn.  The Government’s guarantee meant that the loan attracted lower interest rates and therefore reduced costs.

Mr Stadi Mngomezulu, Head of Corporate Services at the Treasury, said that the target was 100% security for the systems in place, but that where there was a human element involved, the target was 60-70%.

Mr Fuzile said the inflation rate projection was arrived at by picking a range of variables which affected inflation, and taking a view on that. He replied that Sasol was an important player but that South Africa was a price taker with regards to fuel. Regarding political developments in Europe, France was talking a language of growth, although it was not as strong fiscally, having undergone a ratings downgrade under Mr Sarkozy.

He said Treasury had consulted and decided it was correct to join SANRAL in the court case because if SANRAL’s revenue stream were to be threatened, its financial standing would be under threat of being downgraded to sub-investment standard. Were that to happen, it would force institutions to divest because their investment mandates precluded investment in sub-investment standard bonds. He affirmed SANRAL was different from other institutions, as it had a strong guarantee. He said that SANRAL would meet its obligations for the next six months and that the Cabinet’s process was in place, parallel to the court process.

The Chairperson said that due to time constraints any other questions members had were to be submitted in writing for the Department to respond to.

South African Revenue Service (SARS)
Briefing
Mr Nene said that the President had introduced initiatives to develop infrastructure, diversify exports, to reform the cost of doing business, to reduce the constraints on growth and to encourage entrepreneurship. These initiatives would require a reliable and sustained stream of revenue, growing at 10-12%.  This would be a formidable challenge for SARS to achieve, demanding greater tax and customs compliance, improved service and effective detection and deterrence of tax non-compliance. SARS had, however, achieved a growth in individual tax registrations from 1.7million in 1994 to 12 million in 2011.  In the same period there had been growth in company registrations from 422 000 to two million, in registered VAT vendors from 397 to 652, in registered employers from 177 000 to 385 000 ,and in total revenue from R114bn to R742bn.

He said one of the reasons for the Greek debt woes was the lack of tax compliance, as the tax gap between what they owed and what they paid was equivalent to the country’s budget deficit. He acknowledged that revenue would be susceptible to economic cycles and that government corruption and mismanagement were key challenges, as a citizen’s willingness to pay was influenced by their perceptions of how well the money would be spent.

Mr Oupa Magashula, Chairperson and Commissioner of the South African Revenue Services, said the Strategic Plan covered four core outcomes; increased customs and tax compliance, increased ease of doing business with SARS and increased cost effectiveness and efficiency of SARS. To achieve this, it was modernising SARS systems and processes and empowering and reskilling its human resources. SARS’ cost to tax ratio was 1.1%.

To address key risks, it was collaborating with the Department of Home Affairs, for example, as the Tax Register was dependant on the Population Register. SARS had appointed special advisors to assist it as businesses were using sophisticated, complex financial schemes to evade tax obligations. In addition, the growth of multinationals and the economic climate would impact on profit.  The debt book was another risk which was growing at an average of 8%, although last year it was only 1.3% mainly due to administrative penalties. There was also pressure to release VAT refunds earlier and an increase in attempted VAT fraud. Even were SARS to have a 99% efficient service, 1% would amount to 120,000 unsatisfied people as SARS had 12m taxpayers.

Customs compliance would be addressed through the rollout of the preferred trader programme. It would strengthen border controls, especially with regard to a price database for clothing and textiles. Tax compliance would be enhanced by the implementation of the Tax Administration Act, once it had been enacted. All tax practitioners would be encouraged to be part of professional bodies, as 50% of them were not.

The construction industry was the least tax compliant sector in South Africa. He said the SARS figure of approximately 15 000 employees was expected to remain the same. The budget had nominally increased from R9.5bn to R9.99bn

Discussion
Mr Harris asked if there was an international benchmark on the cost of compliance, as a study had put it at R63 000 for small business. How did SARS plan to implement the low risk tax practitioner program? What timeframe was there for the Border Management Agency?

Mr Swart asked what caused the increase in the debt book. He said there was an unfavourable public perception of corruption and billions wasted through procurement. How would this impact on building financial citizenship and tax compliance?

Mr Ross asked if there would be stricter regulations on the international movement of funds. What assistance did SARS offer small enterprises to become tax compliant?

Dr Z Luyenge (ANC) asked what the time frame for the preferred trader program roll-out was. What was the tax compliance level at local government level?

Mr D Van Rooyen (ANC) asked how SARS viewed its static employee figure in relation to the call to create jobs.

Mr Nene replied that the Border Management Agency was a government project and SARS was only one of many role players. The project was at an advanced stage.

M Magashula replied that SARS ‘ approach was to automate as a much of the routine work as possible and employees were then reskilled to do higher level jobs. Customs and border control as well as tactical enforcement task teams might require additional manpower in the future.

SARS collaborated with the rest of government, and a multi-disciplinary working group had been established as part of the Anti-Corruption Task Team. He said that a citizen’s view that the state was not fighting corruption would affect tax compliance.  In comparison to other countries South Africa’s tax compliance was very good and was guarded very jealously and therefore the challenge of corruption, theft and fraud was emphasized.

He replied that there were structures like the African Tax Administration Forum and instruments like double tax agreements that could be utilised to monitor the movement of money. SARS also embarked on joint audits with other countries and the Financial Intelligence Centre also monitored the movement of money. Small business tax paperwork had decreased from 12 returns to two returns.  It had increased the margin limit before tax was payable to R69 000 and it conducted educational programs, including a mobile kit where SARS went to small business areas.

Mr Barry Hore Chief Officer: Operations, at SARS, said the debt book had increased by 1.3% due to administrative penalties. SARS had instituted a tiered, automated case system at 14 land border posts to date, which had reduced the transaction time from two hours to 20 minutes. The system would be operational at all borders by the end of June. Delays, though, were still dependant on the neighbours’ capacity level, so SARS had shared whatever could be shared of captured information.

Mr Kosie Louw, Chief Officer: Legal and Policy at SARS, said the one-stop border post bilateral agreement needed to be brought before the Committee and Parliament for ratification. A challenge was that other departments were also affected by the agreement.

Ms Trix Coetzer, Chief Finance Officer at SARS, said the debt book’s increased risk exposure was due to the ageing of the book. SARS was cleaning the book and the figure of 1.3% was due to hard work.

Mr Peter Richer, Chief Strategy Officer at SARS  said there was no international benchmark for the cost of doing business. Small business hit a wall when it came to tax compliance with the key area of debt cost being the start-up phase. SARS was encouraging all tax practitioners to be members of a professional body. On local government compliance, it was focusing on the seven top priority areas and with teams working with local governments.

Mr Hore said that with the preferred trader program, the trader did a self-audit. It was working with organisations doing high volume business.

The meeting was adjourned.

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