Tax Statistics 2011: South African Revenue Service (SARS) overview

Meeting report

South African Revenue Service (SARS) Tax Statistics 2011 overview
Mr Oupa Magashula, SARS Commissioner, said that the Tax Statistics 2011 was a joint publication by SARS and National Treasury, and was aimed at providing information, in line with the Promotion of Access to Information Act (PAIA), to a wide variety of stakeholders involved in the development and implementation of tax, fiscal and economic policy (slide 3). It was the fourth edition and contained information as of 31 March 2011 on a range of tax and customs data sourced from the core SARS systems including: the tax register, tax returns and assessments, declarations and assessments, payments and refunds, and bills of entry. Taken over a period of time, this information provided a useful insight into taxation and the South African economy including such areas as: the sources and trends of revenue over the past few years; the demographics of taxpayers and how these were changing, including gender profiles; the sources of income and deductions of taxpayers submitting annual returns; and the contributors to Value Added Tax (VAT) and Corporate Income Tax (CIT) according to economic and industrial sectors, to name but a few.

Since the first release of Tax Statistics in 2008, it was increasingly widely used by MPs, academics, economists, the media, and other commentators to help inform and guide debates about tax policy and how best to meet the needs of South Africa (slide 4). The latest publication was more than 150 pages long and contained thousands of points. Statistics could be abused, and indeed abused, to support a wide variety of arguments and counter-arguments. Members would be familiar with the famous Mark Twain quotation that there were three kinds of lies: 'lies, damned lies and statistics'.

Thus, the true power of statistics was not in any individual data point but rather through the trends and shifts that they revealed when used over a period of time and when interpreted within a particular context.

Commissioner Magashula did not present Tax Statistics 2011 page by page, slide by slide, or statistics by statistics, but rather gave an overview of the story which these statistics told – a story of how South Africa had been able to weather, with remarkable resilience, the economic storm which continued to buffer it, its key trading partners, and the entire globe. It told of how South Africa was able to do this through Government's adoption and careful implementation of a prudent fiscal policy supported by a strong culture of compliance.

Revenue correlated strongly with shifts in gross domestic product (GDP) and economic activity and South Africa had not been immune from the 2008 economic downturn. From 2000 to 2008 SARS maintained a compound annual growth rate in tax collections of 13.2%. This halved to just 5.9 during and post the financial crisis starting 2008 (slide, bar chart, slide 6). The concomitant reduction of tax to GDP ratio from about 27% at its peak in 2008 to just over 24% currently has meant that the Government has had to raise its gross loan debt to GDP ratio from 27.8% to 40.1% during this period to maintain the counter-cyclicality stance assumed as par of the overall fiscal strategy (slide 7).

The impact of the global recession on the South African fiscus amounted to an estimated R255 billion of reduced tax revenue (graph, slide 8).

However, the fiscal space, which South Africa’s policies had provided, allowed South Africa to increase borrowings without having to resort to raising taxes and punishing austerity measures as in Brazil, the Eurozone and elsewhere (graph slide 9).

In many of the developed countries, tax collections had contracted sharply in 2008. At that stage, and in general terms, developing countries still enjoyed reasonable growth in tax revenues (see Address, page 4).

During this period of global upheaval, South African tax collections remained comparatively resilient. In 2008/09 they grew by 9.1%. This was mostly due to the support provided by the lag effect of Corporate Income Tax (CIT). In 2009/10 the combined effect of flat consumption and trade taxes and the reduced company profits that came through in the tax collections led to a contraction of 4.2%. Tax revenue rebounded strongly by 12.6% in 2010/11 and all taxes, with the exception of CIT, had now recovered to pre-crisis levels. For the 2011/12 year the unaudited revenue showed a growth of 10.2%. The tax revenue for the current year was expected to grow by 11.3% (slide 10).

The Deputy Minister had pointed out in the SARS Strategic Plan presentation that among the very visible signs of significant compliance gains since 1994 were significant increases in the number of taxpayers contributing to South Africa's national well-being. These gains were borne out in the numbers of registered taxpayers reflected in Tax Statistics 2011 (bar chart, slide 12). However, this publication covered only the past five years. The true story of the growth in contribution was reflected in the figures since 1994. (See Address, page 5).

It was worth emphasising again that almost every single South African made a contribution to the fiscus whether through income tax on earnings, capital gains or interest, VAT, the fuel levy, or the many other tax instruments designed to ensure that everyone shared the responsibility for South Africa's future. It was this shared responsibility that had contributed to SA's fiscal strength and stability growing each year as reflected by revenue increasing from R114 billion in 1994/95 to over R742.7 billion in the most recent financial year.

The growth in compliance was also reflected in the increase in submission of individual income tax returns on time to SARS. On-time filing increased from 58% in 2008/09 to 80.7% during 2010/11 (Tax Statistics, page 26).

This improvement was directly attributable to the impact of the modernisation programme, which had made it much easier to submit returns, and vastly improved the turnaround times for assessment and payment of refunds. It had also allowed much more accurate enforcement of return submissions by individuals including through administrative penalties. Over R1 billion rand had been raised through administrative fees.

However, it was worrying that similar compliance was not yet reflected in the statistics for Corporate Income Tax (Tax Statistics, page 79; table, slide 14). The percentage of assessments for companies liable to submit returns was 54.6% for 2007, 44.5% for 2008, 37.5% for 2009, and a disappointing 28% for 2010. The percentages were still very poor. Thus individuals were far more compliant than companies; however, companies could be dormant and not trading. (See Commissioner's Address document, page 6).

SARS was currently busy with the modernisation of CIT. This included a clean-up of the register and working with other departments to ensure that companies, which were registered, were also registered for tax.

The impact of modernisation was also being felt in the VAT register (Tax Statistics, page 116; slide 15). Registrations had actually declined by approximately 80 000 between 2008 and 2011. This was part of an on-going clean-up of the register as part of its focus on bogus VAT registrations and attempts to defraud the fiscus via illegitimate VAT claims. The extent of VAT fraud was shocking.

The Tax Statistics also gave insight into the changing dynamics of the three largest contributors to revenue annually: personal income tax (PIT), Company Income Tax, and Value Added Tax, which together accounted for 80% of all tax collected (slide 16; bar chart, slide 17).

Commissioner Magashula highlighted some of the trends, which were reflected in the statistics.

Personal Income Tax
In 2011/12 the biggest portion (98.1%) of PIT was collected through the Pay as You Earn (PAYE) system and tracking compliance was relatively easy as the employer was responsible for providing taxpayer information.
The remaining PIT was collected through the provisional tax system. This category accounted for investment, rental and trust income. It was in this area that there was a greater potential for tax evasion.

The statistics generally showed little impact on salary income as a result of the global recession. Job losses certainly occurred, but figures suggested that most of these losses occurred mainly in the lower income groups, most of whom were below the tax threshold. (Slide 18).

The statistics showed the increased earnings and upward mobility of South African workers (slide 19).

There was also growing gender equality in the workplace (bar chart, slide 20).

The rate structure was progressive (bar chart, slide 21).

The effective tax rate on individuals declined significantly in the 2010 tax year as a result of the tax relief combined with lower growth in remuneration and employment than expected which resulted in PIT collections in 2009/10 growing by only 5.1% (slide 22). (See Commissioner's Address, pages 7-8)

PIT Tax relief
The statistics told a story of real tax relief for South Africa's taxpayers over the past few years (Tax Statistics, pages 25-26; slide 23). (See Commissioner's Address, page 8)

Corporate Income Tax
Corporate Income Tax (CIT) suffered the most dramatic decline in its contribution to the fiscus, during the global financial crisis, and had not yet recovered to pre-crisis levels (graph slide 24).

South Africa continued to have a very concentrated corporate sector with less than 1% of companies paying just over 60% of corporate taxes (slide 25).

The introduction of the 80% rule had a very positive impact on the fiscus (slide 26). (See Address, pages 8-9)

Value Added Tax
VAT collections declined sharply during 2009/10 as a result of the recession but recovered quickly in 2010/11, achieving the highest growth since the introduction of VAT (graph, slide 27). (See Address, pages 9-10)

Commissioner Magashula concluded by expressing SARS hopes to expand it in future editions by including an analysis of the top 2 500 companies across various tax types. SARS was also considering sector specific publications for sectors such as mining and banking (slides 28-29). (See Commissioner's Address, page 10).

Discussion
The Chairperson thanked the Commissioner for a very comprehensive summary, from which one could extrapolate the performance of the South African economy.

Mr Koornhof said that SARS did not get the praise it deserved. He put on record that COPE praised SARS. He noted that corruption cost South Africa half a trillion rand. According to SARS' statistics, the loyal taxpayers were the Pay as you earn category. Did SARS do enough for them, as compared to companies?

Commissioner Magashula believed that among SARS' achievements were its improvements in service. In terms of turnaround times on assessment, the turnaround time for feedback on assessments after filing had decreased from eight months to as little as 24 hours, if the taxpayer was entitled to a refund. This was a remarkable turnaround time, especially for the taxpayers who were compliant. Moreover, this quick turnaround time encouraged taxpayers to file early. Also, SARS had introduced many enabling technologies to make it easy for people to file. SARS had pre-populated almost 80% of simple returns. All that people had to do who had one source of income with only a few deductions was to visit a SARS office, or file by e-filing, sign their tax return, and in 24 hours it was done. There had been a big investment in call centres. At least six million calls a year were fielded, with 95% of calls resolved the first time. The majority of calls were answered within 15 seconds. However, with such a big tax base of 12 million taxpayers on SARS' register, even if SARS was 99% effective, there would still be 120 000 taxpayers who were unhappy – enough to fill the FNB stadium in Soweto. In the next tax filing season, SARS would be introducing some other innovations, like, for example, core browsing, where, when the taxpayer needed help in filling in forms, SARS could, with the taxpayer's permission, enter his or her computer and give guidance in completing tax returns. This would be done after telephoning the call centre. There would be assistance in populating the form by both taxpayer and SARS agent seeing the same screen. SARS would also be launching a facility to download applications to enable use of smart phones to complete tax returns. SARS was doing everything to make it easier to comply.

Commissioner Magashula said SARS was only just beginning the modernisation of CIT. The cost of compliance had come down after completing the modernisation of PIT and VAT. SARS had done much on the side of small business. SARS had reduced the number of returns from a monthly return to an annual return to reduce time spent in compliance. Moreover, SARS was now visiting small businesses rather than requiring them always to visit SARS offices. Also SARS had expanded its footprint and created more than 15 new offices.

Ms J Tshabalala (ANC) asked how VAT exemptions affected the lower income groups. Did SARS do them justice? Their living standards were also affected, not only the living standards of higher income groups.

Commissioner Magashula said that the zero VAT rated list of goods was a protracted outcome of a discussion raised in the National Economic Development and Labour Council (NEDLAC). If SARS wanted to improve it, it would have to refer to NEDLAC. South Africa was one of the few countries where the zero rating took place through stakeholder engagement, and SARS encouraged that.

Mr D Ross (DA) had heard on 21 May a presentation from a well-known analyst, who had said that there were two sectors in South Africa who were currently dis-empowered - the unions and labour force and also big business, such as Anglo-American, which had shifted its base from South Africa to the United Kingdom. Where else would one find a government that would allow such a tax loss to its fiscus? He asked what exactly was the cost of losing Anglo-American. He also asked about the cost of doing business in South Africa. Was it becoming more problematic to do business in South Africa? Were we encouraging job creation and entrepreneurship, especially small, medium and micro enterprises, through the tax incentives?

Commissioner Magashula replied that it had been decided to allow off-shore listing to make it easy for those companies, at a time when South Africa still had exchange controls, to raise debt easily, so that they could expand while they still retained their core tax base in South Africa. With few exceptions, these companies had grown exponentially, and the returns of some of them had been coming home. Some of them, like MTN, still had a base here, and much of their corporate tax was paid in South Africa. It was not accurate to say that South Africa had expatriated much of the income.

Dr Randall Carolissen, Group Executive: Revenue Analysis, added that there was also a downside when a company relocated overseas. With multinational companies there was, especially in developing countries, a scourge of transfer pricing. In Africa especially, transfer pricing was so bad that it far exceeded the donor aid that was directed to those countries. SARS had some studies on that.

Mr T Harris (DA) said that there had been major concern on the non-fulfilment of the commitment to the single business register project. SARS was one part of that project but it was delayed. What could SARS report? It seemed to be something that would enhance the working of Government and make it easier for business. It was unfortunate that progress was slow.

Commissioner Magashula replied that the business registration project had been going on over eight years but had not made enough progress. There had to be the enabling legislation to have one business registration process. There were also issues around tax registration and compliance that were confidential. Also there had to be agreement on the technology platform. Stats SA had a real technology challenge because it was in need of modernisation. SARS believed that once it had completed its own single registration system, it would be in a better position to collaborate. It was not a matter of being unwilling to participate, but there was a practical problem because different players were at different starting points.

Mr Harris expressed concerns from certain constituents on tax clearance certificates. Because of alleged corruption in SARS, there appeared to be a tightening of the processes around tax certificates. This hurt many legitimate businesses.

Commissioner Magashula replied that with regard to tax clearance certificates (TCC) and allegations that there had been corruption in SARS, SARS had revamped the TCC platform. Most of the corruption with TCCs was with people who tendered for Government business and needed a TCC and kept forming new entities. Now SARS had formed a new platform to connect the individuals who were beneficiaries in each of the entities. To do so one needed the Master's Office to ascertain the directors. Also the database had to be accurate enough for SARS to issue a TCC based on the directors being compliant. Thereafter there was need for enabling legislation to hold directors liable for tax clearance of an entity of which they were only part-owners, not necessarily full owners. Until SARS had resolved those contradictions, the loop would always remain that made tax clearance certificates difficult to be made foolproof. SARS agreed that there were challenges. Because the system was not foolproof, there were opportunities for people internally to sell these TCCs.

Commissioner Magashula said that another issue was once a TCC had been issued to a person who had applied for a tender, it did not guarantee that throughout the implementation of this tender, the person to whom the TCC had been issued would remain compliant. The Multi-working Group on Procurement was tasked with drafting PFMA regulations to require that at any point during the implementation of the tender the one to whom the tender had been granted had to go through tax clearance.

Mr Harris said that the loss of R255 billion to the fiscus on account of the financial crisis was a really interesting statistic. It was a loss associated with slower growth. What would be the tax benefits if South Africa grew faster?

Dr Carolissen replied that the estimated loss of R255 billion (slide 8) would have been bigger if SARS had assumed that growth had maintained its previous trajectory. Once one had these numbers one could develop hypothetical cases and give different scenarios. The current gap was based on a reduced growth in GDP.

Mr Harris could not believe the Indian statistics (slide 9) that in the aftermath of a recession, India grew its tax revenue massively by 60% over five years. That must be because the Indian tax base was growing enormously. South Africa's performance, as reflected in slide 9, seemed to be disconnected from the reality of its growth rates. South Africa was growing at 3% in 2009/10 and 2010/11, yet the growth in tax revenue between 2009/10 and 2010/11 as indicated by the graph increased to about 130% of the 2009/10 figure. This would require growth rates significantly higher than what South Africa was achieving unless South Africa was also growing its tax base. Did South Africa in the past two years manage to grow its tax base in a similar way to India?

Commissioner Magashula replied that India's expansion of its tax base was because it was growing its tax to GDP ratio, which had been very low for a population of 1 billion people. The tax to GDP ratio (as a percentage) had been around 11 to 12%. So India had introduced a range of tax products to expand the tax base in order to achieve a much higher tax to GDP ratio. So it was not because of the performance of the economy but because India had introduced instruments to collect more tax and it had modernised its tax systems. That expansion of 60% over five yeas was a reflection of India's recovery of the taxes from its population base that it was supposed to collect in the first place.

Mr Harris found the jump in the number of registered individuals was fascinating (slide 12). Could the Commissioner give the number of returns in 2009? How many of the 10.3 million persons who registered submitted returns?

Dr Carolissen said that the growth in the register for individuals to a figure now close to 13 million meant that employers were now required to register all employees whether they were under the tax threshold of about R60 000 or whether they were not required to submit. All were required to be registered now. So the number of assessed taxpayers would remain roughly in the range of 4.2 million, because they had to submit. All that SARS had done was to add those people who previously had not been required to submit in order that there was now a complete register of the employment profile in South Africa.

Mr E Mthethwa (ANC) asked, with reference to the growth of company registration, where were these companies? Was this increase not because of the 2010 World Cup? Was there any data that could verify this growth? If so, such data could be used for other departments.

Mr Harris said that the number of VAT vendors had decreased because of a clean-up, but to what extent had the number decreased because of a decline in legitimate business activity?

Dr Carolissen replied that SARS had found much duplication in the register. When companies went out of business they retained their VAT registrations. A deeper study was required. SARS' much stricter registration requirements had dampened the growth in registrations. Companies were now required to undergo almost a Financial Intelligence Centre Act (FICA) type of compliance.

In the budget hearings, Mr Harris recalled a presentation according to which 4.5% of South African taxpayers paid 38% of the tax revenue. The equivalent statistics (slide 21) showed that 8% of taxpayers paid 54% of revenue. He wanted to confirm the figures.

Dr Carolissen replied to Mr Harris that it was a matter of cutting and slicing the different tax categories. SARS would confirm the figures for him. Also the tax tables were available in Excel format and could be downloaded from the SARS website.

Commissioner Magashula added that the statistics that Mr Harris had mentioned of 8.8% paying 54.7% of assessed tax applied to people who were registered taxpayers. One of the focus areas of the compliance programme was wealthy individuals and the abuse of trust. There was one wealthy taxpayer with 11 trusts around him and he applied for a tax clearance certificate to externalise R200 million to some other tax haven. That person, in the last five years of his returns, had declared only income of R211 000. There were those who were wealthy and supposed to contribute their fair share to the fiscus but were not doing so. Their income together was around R50 billion. About 2 000 or so had been identified and would be followed to make sure that they paid their fair share. Those people who were already complaining that their tax burden was high, and were threatening to take their business overseas, were those who had the most complicated and aggressive tax avoidance structures. Their declarations were inconsistent with their lifestyles.

Mr Harris repeated his comments of the previous day on the fragility of South Africa's tax base.

Dr Carolissen said that the fragility of the tax base was a question of demographics. If everyone left the country one would be left with no economy. SARS could do a sensitivity study for the Members.

Ms Z Dlamini-Dubazana (ANC) asked for figures on the collection of revenues from the sales of plastic bags. How were these sales monitored?

Mr Deon Breytenbach, Executive: Revenue Analysis, replied that the collections of the levy on plastic bags had increased significantly. The levy itself was low – only R0.03 came to the fiscus, and an increase would hardly change the behaviour of shoppers because they were paying so much for the bag itself – a total of R0.35, of which R0.32 went to maker of the bag.

Dr Carolissen said that Tax Statistics was originally intended for academics and others to make their own interpretations. So the Commissioner had challenged the delegation to provide its own story line, and it had chosen the global economy. Also, as SARS gathered statistics on employment, it would be able to make a meaningful contribution to the employment debate in the country, as all employers were now required to register everybody, irrespective of whether they paid tax or not. The Tax Statistics also offered SARS and National Treasury the opportunity not to remain reactive, but to be proactive in policies.

If the GDP of a country contracted, the changes in tax revenue were much more volatile (slide 7). In other words, if the GDP declined, the tax revenues declined more. If the GDP recovered, the tax revenues recovered faster. It was also important to understand how the different types of tax revenue reacted to changes in GDP. Thus Tax Statistics sought to further the understanding of the interplay between taxation and the economy.

The larger companies were relatively resilient and retained quite considerable cash reserves to weather the economic downturn. They had also introduced cost-cutting mechanisms, which affected their value chain downstream. The smaller and medium companies, which supplied these bigger companies, appeared to suffer badly and were still battling, as could be seen in the number of liquidations, though these were beginning to stabilise now. 

At the time when the economies of South Africa's trading partners contracted, South Africa's revenue collections grew by 9.1%. It was due to the lag effect that South Africa contracted a year later. The lag effect was introduced through the companies reporting for CIT, since they reported at the end of the year. The CIT was thus responsible for most of that contraction.

Mr Harris asked if the 'what if?' scenarios on growth could please be calculated and sent to the Committee.

The Chairperson concurred with Mr Koornhof on SARS' work and observed that the Committee did not do justice to SARS' strategic plans. The Committee should offer SARS a separate day rather than present together with National Treasury. There was a direct relationship between the level of unemployment and the increase in the registration of companies, but hundreds of these were not active and had been registered by young graduates who had lost hope of employment. Such young people might then look for a tender. The real rate of inflation was probably higher than indicated by the official figures. For the many who held weekly season tickets (valid Monday-Friday only) it was cheaper to stay at home than to go into work on Saturdays. Such issues needed to be examined by several departments together.

The meeting was adjourned.