Minister and Deputy Minister of Finance on National Treasury & SARS Strategic Plan 2013

Meeting report

Introduction
The Chairperson welcomed the Minister and Deputy Minister of Finance, the Director-General, National Treasury, the Commissioner of the South African Revenue Service (SARS), and accompanying delegations.

Minister of Finance's overview
The Minister of Finance wondered if it would be in order to begin in the absence of his 'shadow', Mr T Harris (DA), who had been delayed.

It was, perhaps, difficult to talk of a five-year plan when this was the last year of the present administration. Nonetheless, a five-year plan was being presented. Also there was much gloom about the European economic recovery, which was still shaky, although less risky than previously. There were still questions being asked from some quarters as to how Europe's banking union would work. This banking union was supposed to be one of the key pillars of providing assurance to the world that Europe had begun to resolve its problems.

At the same time, it was clear in the last two weeks of meetings, which he had attended, both outside the country and at the World Economic Forum in Cape Town the previous week, that there was a remarkable optimism on the African continent. That optimism was about new resource discoveries. It was about the need for the revenue arising from this resource boom to be spent carefully. There was a report from the former United Nations (UN) Secretary-General to the effect that Africa was entering an interesting phase. The revenue arising from the resource boom provided a new fiscal base for many countries. Secondly there was tremendous interest in the continent and outside the continent in investment in infrastructure.

One of the key points made by the UN Economic Commission for Africa was about the narrative on Africa, and in particular South Africa. In other words, there were so many good things happening. However, the narrative that so many of us were communicating was a very negative one. One of the issues that Parliament, the Executive, and 'our friends from the media' should look at was that this negative narrative was unhelpful. The level of penetration of mobile telephone communications in Africa [compared favourably] with that in most parts of Asia. The per capita increase over the past 20 years in Africa as compared with Asia was one index mentioned.

It was in the context of optimism that one looked at South Africa itself. The message that one received [from the international community] about South Africa was that South Africa had huge potential. It had excellent plans. However, it needed to deliver on them. Pivotal amongst those plans was how South Africa improved its education system and how it undertook the restructuring required to have the economy grow at a higher potential rate of growth.

The National Development Plan (NDP) indicted that the rate of growth should be 5% a year in order to create the jobs that were required in South Africa's own context. The National Treasury's presentation would inform Members how National Treasury connected with the NDP and governmental objectives and what contribution it made to this environment.

The SARS presentation would look at SARS contribution to the fiscal dimension and its contribution to improving tax compliance in this country on a continuous basis as there was still a significant proportion of the population and many visitors to South Africa who were not yet into the level of tax compliance culture that [one had succeeded] in cultivating in large parts of the population.

South Africa's fiscal health and therefore its revenue collection capabilities also depended on more recent trends and developments in relation to global tax compliance – the kind of mechanisms that highly networked individuals and businesses were resorting to.

There was renewed effort globally to tackle what one used to call 'tax havens'. The Group of Seven countries (the G7) wanted to launch a campaign in respect of profit shifting and tax base erosion. The bottom line was that too many big companies were shifting their profit centres to parts of the world where there was either very low tax or no tax implications. Tax base erosion meant that tax planning efforts by professionals in the accounting profession, the legal profession and others, together with the companies, was resulting in an undermining of the fiscal capability of the state. This was a remarkable contradiction at a time when governments in Africa and around the world were being required to ensure that they built up their fiscal capabilities - as the International Monetary Fund (IMF) would say, 'the fiscal buffers'. At the same time the very businesses that advocated building up of fiscal capabilities were those that practised tax evasion and this undermined the fiscus as well.             

National Treasury Strategic Plan 2013/17 presentation
Treasury's aims and objectives
Mr Lungisa Fuzile, National Treasury Director-General, pointed out that National Treasury, in developing the fiscal policy framework and coordinating macro-economic policy, did so in such as way as to ensure that South Africa's economy grew in a way that was inclusive and afforded most South Africans the opportunity to participate and thereby enable the country to achieve a whole host of other objectives including reducing income inequality and poverty.

National Treasury was also responsible for ensuring that the revenue raised from the economy by SARS was shared equitably and used effectively and efficiently. However, at the same time in the desire to raise revenue, it was necessary to ensure maintaining the competitiveness of South Africa's economy relative to other parts of the globe. Also of course it was necessary to promote the efficient use of resources and accountability.
(Slide 2)

Strategic alignment over the medium term
He pointed out that the Strategic Plan presented did not represent a major departure in the strategic objectives which National Treasury had been pursuing informed by the programmes listed in slides 7-8.

He pointed out that National Treasury did not want to pretend that the strategic plan went the full way to respond to the NDP. The Cabinet adopted the NDP only late in the budget process.

The budget process for the next cycle had already started and the first big step would be the medium term budget policy statement (MTBPS) [in October 2013] and then the budget in March 2014.

Going forward, the budget process was going to integrate and respond more directly and fully to the MTBPS.
(Slide 3).

Government's outcomes approach
National Treasury contributed directly to four of the 12 outcomes that guided government's strategic planning framework. These were listed in slide 4. It contributed to them in varying degrees. In some it contributed jointly with other departments, but with others it contributed mainly on its own.
(Slide 4)

Economic outlook – positives
As the Minister had indicated, the global economic outlook was somewhat more positive than it was a while back. There were very good signs of strength in the economy of the United States of America (USA). In fact some would contend that if the USA were to resolve all of its fiscal challenges then it could again become a very important contributor to lifting global growth. However, with that, emerging market economies, such as China and India, among others, were the biggest sources of growth currently. Demand emanated from them, but demand also emanated from the continent of Africa. South Africa stood a very good chance to benefit from this demand.  South Africa's forecast rate of growth was, for this year, 2.7%, accelerating to 3.8% in the outer years. This was supported by interest rates that were at 30 year lows, with gross-fixed capital formation largely by the public sector but also with some return of private sector investment. Although unemployment remained elevated, employment was expected to improve. SARS had over-collected in the past year by R4 billion. This was partly attributable to effective and efficient administration but also to positives in the small and medium business sector which was doing better than previously.
(Slide 5)

Economic outlook – risks
There were some risks, such as the European sovereign debt crisis and systemic banking risks, for example, Cyprus. Oil prices were rising at a time when the currency was weak. This put pressure on inflation.

In the context of slow growth, revenue fell short as, even with the over-collection, revenue was still some R12 billion below what was projected in February. This meant that the deficit outcome for 2012/13 would be marginally higher than what was projected in February 2013 but lower than what was projected in October 2012. This was a positive. Household indebtedness remained high at around 76% of disposable income. One had seen the current account deficit widening in large part because mining outputs had contracted and at the same time prices had softened.
(slide 6). 

Structure and composition of programmes
A list of the National Treasury's programmes
(Slides 7-8; for details, see slides 10-21)

Changes in the organisational structure
He pointed out that National Treasury used to have specialist functions under which fell two big sub-programmes – systems and procurement.

The integrated financial management systems had been moved back to the Accountant General.

National Treasury had created the Chief Procurement Office. The Minister had announced that a Chief Procurement Officer had been appointed. The idea was really to beef up capacity and make sure that government could modernise its supply chain management.

National Treasury had now received formal approval and gazetting for the establishment of the government component which pulled together all the technical support initiatives that had been in different parts of the National Treasury but the bulk of them had now been concentrated under Programme 8: Technical Support and Development Finance as a standalone component.
(Slide 9).  

Programme 1 - Administration
'The Administration does what it does.' It supported the Department in ensuring a high performance culture. It actively promoted the Department's zero tolerance stance to corruption and strove to preserve the National Treasury's strong ethical culture.
(Slide 10; Strategic Plan, page 11; APP, page 9)

Programme 2 – Economic Policy, Tax, Financial Regulation and Research
(Slide 11; Strategic Plan, page 15; APP, page 17)

Programme 3: Public Finance and Budget Management
Three divisions fell under this programme. National Treasury would work with the Department of Performance Monitoring and Evaluation (DPME) to strengthen alignment with budgeting and the strategic outcomes of government.

National Treasury worked with the Department of Health to facilitate the development of the National Health Insurance (NHI) framework financing arrangements and also on social security reforms.
(Slides 12-13; Strategic Plan, page 16; APP, page 24)

Programme 4: Asset and Liability Management
This was a division that responsible for financing borrowing requirements. It interacted with credit rating agencies in such a way as to protect and boost credit ratings. With debt reaching its current levels this was a very important function.
(Slide 14; Strategic Plan, page 20; APP, page 44)

Programme 5: Financial systems and accounting & Office of the Chief Procurement Officer (OCPO)
National Treasury was reviewing its Regulations with a view to areas that needed to be strengthened, such as supply chain management (SCM) or capital budgeting.

The Office of the Chief Procurement Officer (OCPO) was to ensure better working of SCM and to minimise opportunities for corruption and to develop a database to provide information for purposes of analysis to identify when things were going wrong. It was also aimed to ensure efficiency in procurement. The overall objective was to modernise and professionalise supply chain management.
(Slides 15-17; Strategic Plan, page 23; APP, page 56)

Programme 6: International Financial Relations
This maintained relationships with multilateral forums in the interest of South Africa but also of the African continent.
(Slide 18; Strategic Plan, page 27; APP, page 81)

Programme 7: Civil and Military Pensions, Contributions to Funds and Other Benefits
Programme 7 reported directly to Parliament.
It aimed to ensure full automation of payments.
(Slide 19; Strategic Plan, page 31; APP, page 92)

Programme 8: Technical and Management Support and Development Finance
This programme provided assistance to a range of activities in government including the support to renewable energy independent power producers (IPPs). It also supported the Neighbourhood Development Programme for improvement of selected areas. A further major project was the phasing in of the integrated city support grant. The focus was on the big cities as centres of growth in the period ahead.
(Slide 20; Strategic Plan, page 33; APP, page 100)

Programme 9: Revenue Administration
This Programme reported directly to Parliament.
(Slide 21)

Programme 10: Financial Intelligence and State Security
This Programme reported directly to Parliament.
(Slide 21)

Strategic Intent remained largely unchanged
Going forward, there would be a divergence from 'business as usual'. Using the NDP and other government programmes as a launch pad, National Treasury would have to work doubly hard to ensure that the economy achieved higher levels of growth, promote employment. The NDP provided a platform for this by talking of active labour market policies, of which a youth tax incentive was an example, amongst other things, including the youth employment accord that was signed recently. It was necessary to ensure fiscal sustainability and quality of spending. National Treasury thought that much could be achieved within the existing fiscal envelope.
(Slide 22)

Financial Resource Plan for 2013/14
(Table, slide 23; see APP, page 7)

Appendices: Index
(Slide 25)

Appendix A: Human Capital: statistics as at 31 March 2013
Slide 26)

South African Revenue Service Strategic and Annual Performance Plan 2013/17 presentation
The global tax environment
Mr Oupa Magashula, SARS Commissioner, noting SARS mandate of delivering a sustainable revenue to the fiscus as outlined in the Strategic and Annual Performance Plans, said that the Minister and the Director-General had given an overview of the challenging global and domestic economic environment in which South Africa found itself and which continued to place much pressure on SARS and many other revenue authorities around the world to meet the fiscal demands of their respective countries.
These economic conditions of subdued growth were further exacerbated from a revenue collection perspective by the proliferation of sophisticated tax avoidance and evasion schemes, which, as the Minister had mentioned, robbed countries of their rightful share of the tax revenues. At the Group of 20 countries (the G20) summit held the previous month, the tax base erosion and profit shifting were key topics of discussion. These discussions were based on the Organisation for Economic Cooperation and Development (OECD) which highlighted the potential crippling effect that this could have on countries' self-sufficiency.
As the Minister had mentioned also, the previous week in Cape Town, at the World Economic Forum (WEF) on Africa, Oxfam International estimated that illicit financial outflows from Africa, in the form of tax evasion and trade mispricing, by extractive industries, were estimated at a whopping $200 billion each year. One might think that this high risk would be associated with countries that were less sophisticated with less sophisticated financial systems, but South Africa was also highly vulnerable, with the presence of large multinational operations in South Africa's open economy with its tradable currency, together with its world-class systems and large extractive industry of mining and resources. SARS was currently involved with a number of large multinational companies around transfer pricing over the past few years with an estimated revenue loss of over R3 billion to the fiscus. This was only a few of the multinational companies, not all of them. This was just the tip of the iceberg. The upcoming ministerial meeting of the OECD at the end of May was expected to endorse a declaration specifically on this issue and supporting the OECD's development and implementation of an action plan to address base erosion and profit shifting.
Over the medium term revenue was likely to remain under significant pressure, both from economic conditions and because of aggressive avoidance and evasion by both corporate and individual tax payers. (Slide 3; Strategic Plan, page 15)

Strategic outcomes
While SARS might have limited ability to affect macroeconomic change, its challenge was how to respond to those circumstances within its control – namely: How to continue to grow tax and customs compliance?
How to facilitate the conditions for faster economic growth by making it easier to do business with SARS and by speeding the flow of legitimate goods through South Africa's borders? How SARS could do its work in the most cost effective and efficient way possible so as to free up limited government resources for other critical priorities? These were the core outcomes of the SARS Strategic Plan as outlined on page 21 of the Strategic Plan.
(Slide 4; Strategic Plan, page 21)

Strategic Direction
SARS continuous improvement and modernisation programme for the past six years had been the driving force of SARS endeavours to achieve its above objectives. This programme was nearing completion but would continue to underpin SARS strategic approach for the next two years, and in some ways for far longer in that SARS would never be finished with the quest to improve and find ways of enhancing the ways in which it worked and the way in which tax payers and traders interacted with SARS. Using the foundation created by modernisation of SARS environment, SARS would be able to achieve, through its 'right from the start principles' and cooperative compliance approach, a more active and engaged citizenry as part of the social compact between citizens and the state. This was the true essence of SARS compliance model, in which citizens voluntarily met their obligations in an engaged, active, and meaningful way. To do this, each citizen needed to have a meaningful relationship with SARS. This meant encouraging tax and customs compliance from the start, through education, engagement and registration, even before there was liability to tax. It also meant engaging with taxpayers and others as partners in the tax compliance process, including working with corporate boards, which SARS was starting to do quite actively. It had created capacity in the large business centre with the help of Mr Bob Head, the Special Adviser to the Commissioner, who was SARS resident expert on corporate structuring. SARS also engaged industry bodies. It engaged tax practitioners and trade intermediaries and other key stakeholders to advance tax morality. This would require over the next five years an improvement to access and availability of SARS service to all citizens. SARS would do this by increasing the use of mobile technology to allow easy and convenient access to services wherever anybody was. SARS was reviewing its branch footprint to reach tax payers and traders where they were located, and increasing the presence of mobile offices and shared locations for those who did not have access to such technology or chose to interact face-to-face. This was one of SARS most important initiatives. It was aimed to ensure that all taxpayers were in the net by having sight of all economic activity, even when there was no revenue to be derived. This included having sight of all informal businesses. SARS would do this through increased collaboration with other government departments, including the Department of Home Affairs, the Companies and Intellectual Property Commission (CIPC), Social Security, and provincial and local government. SARS would increase its education and engagement of taxpayers and traders throughout their lifetime. It was also SARS' aim to reduce the costs of compliance by providing support to small businesses through a single registration process, in liaison with government departments.
(Slides 5-6; Strategic Plan, pages 21 to 35).

Increased customs compliance – 2013/14 key activities
Over the next year SARS planned to focus on the following key initiatives:

Continue the rollout of the preferred trader programme which would allow traders who had met stringent risk mitigation conditions more rapid movement for their goods. The implementation of a new customs system replacing multiple legacy systems and positioning SARS for decades to come with a cutting edge customs solution.

A review of the process of customs bond stores to enhance the control and movement of goods into and out of bonded warehouses.

The implementation in collaboration with various border management agencies of the One Stop Border Post with Mozambique subject to ratification of the legal framework.

The rollout of a new improved passenger processing system to all ports of entry.

Expanding the deployment of cargo and baggage scanners at border posts.

As part of SARS' Compliance Programme launched last year, SARS had also highlighted tobacco smuggling and the clothing and textiles industry for special attention and intervention over the next five years. The on-going trade in illicit cigarettes in South Africa posed serious health risks to consumers and also resulted in a considerable loss of revenue to the fiscus. SARS would continue to focus strongly on this area during the year ahead including improving the tracking of cigarettes in South Africa to ensure that declared quantities were accounted for at points of entry and exit, and that they were securely warehoused while in transit through the country. SARS would also enhance collaboration with industry experts to develop targeted risk criteria for the detection of illicit cigarettes. On clothing and textiles, significant progress had been made in terms of creating an even and fairly competitive playing field between local and international suppliers in the industry. Key points in the 2012/13 financial year included an improvement in the declaration of clothing and textile imports, after the introduction in November 2011 of a reference pricing tool. There had been a significant increase in the average price of specific items that were monitored against reference prices. The modernisation of the Customs system had resulted in better detection of importers who changed ports of entry in an attempt to avoid the detection of under-declared consignments. Focus areas for 2013/14 included the continued enhancement and sharpening of the Price Referencing tool and continued collaboration with industry to address the entire value chain of textiles.
(Slide 7; Strategic Plan, pages 37-42; APP pages 19-23)

Increased tax compliance – 2013/14 key activities
The voluntary compliance model, based on a balance between service, education and enforcement, would continue to guide SARS' initiatives and programmes for the period ahead to enhance tax compliance.

Priority initiatives over year in this area included:

Targeted compliance interventions in the five high-risk areas identified in the Compliance Programme which were large business and transfer pricing; high net worth individuals and the trusts they used to minimise tax; small businesses; tax practitioners; and the construction industry.

Strengthening risk management for all tax types through, amongst others, enhanced use of third party data.
Enhancing the administrative penalties process, including improving mechanisms for interacting with taxpayers who were in default and improving the collection of administrative penalties through the Agent Appointment process.

It was worth noting that the administrative penalties process was having a significant impact on compliance among individual taxpayers. Since its introduction in 2009 over 560 000 taxpayers had remedied their non-compliance in respect of submitting outstanding returns directly as a result of receiving penalties. During last year’s Tax Season alone, an additional 1.4 million outstanding returns were received which was 25% higher than outstanding returns submitted by the 2011 deadline. This was a very encouraging indicator that the administrative penalties that SARS imposed for  outstanding returns were having the desired effect of improving levels of compliance.

Continuing SARS' outreach programmes to build a culture of fiscal citizenship including registering all South African citizens and all businesses – including those operated by foreign nationals in South Africa - in conjunction with the CIPC, Home Affairs and local government.

Working with other tax jurisdictions and international groups to collaborate on global threats to compliance including concluding agreements on the exchange of information to help identify and address transfer pricing, base erosion and profit shifting.

Improving debt management through the use of credit screening to identify low value, high volume debt.
(Slides 8-9; Strategic Plan, pages 42-46; APP, pages 23-29)

Increased ease and fairness of doing business with SARS – 2013/14 key activities
SARS would this year modernise the Corporate Income Tax (CIT) process including simplifying the ITR14 return and automating the process. The new ITR14 income tax return for companies was released last week. The return was a dynamic electronic return which meant that it grew according to the company’s needs and key parts of the form were pre-populated so where the old IT14 return was a minimum of six pages, most micro and small companies now only needed to fill in a few minimal fields depending on their turnover and income. The form had built in validation and assistance to help taxpayers complete it. This new return was a quantum leap forward in simplification and in helping to assess companies and identify compliance risk.
Secondly SARS planned to introduce a single registration process for corporate taxpayers for all tax and customs types. This would have a major impact on reducing the administrative burden for businesses in terms of tax and customs registration. SARS was collaborating with the CIPC on this project to further facilitate easier and more convenient business registration. Then SARS planned to further modernise the VAT process including the development of a software application based on the popular e@syFile application to help businesses complete and submit VAT returns.

SARS was also well advanced with the transformation of the Tax Clearance Certificate (TCC) system as announced by the Minister in his Budget speech. The new process would address a number of shortcomings of the current TCC, namely that taxpayers needed to collect their printed TCC at a branch, that it was susceptible to forgery, and that it did not account for on-going compliance. The new process would allow taxpayers to obtain a tax compliance status electronically via eFiling, which would show their compliance status and allow them to rectify any instances of non-compliance for themselves. Last year SARS issued over 460 000 TCCs at its branches. In future these taxpayers would be able to manage this process for themselves without ever having to visit a branch.

Finally SARS was also enhancing its various electronic interaction channels for taxpayers. Earlier this month SARS launched a completely redesigned SARS website, which had received very positive comments from users.
(Slide 10; Strategic Plan, pages 46-50; APP, pages 29-32)

Increased cost effectiveness, internal efficiency and institutional respectability – 2013/14 key activities
SARS would continue to collaborate with other government departments and agencies to achieve synergies and efficiencies including supporting the Department of Home Affairs on its modernisation and working with the CIPC to develop and implement the single registration process. It would combat corruption and fraud by implementing a new investigations and prosecutions management system, enhancing its vetting process and raising awareness internally around ethics and integrity. It would ensure that its people continued to perform at their peak by optimising the SARS Academy to ensure its people had the necessary skills to meet the ever-changing needs of the organisation.
(Slide 11; Strategic Plan, pages 50-52; APP, pages 32-34)

Measuring SARS performance
SARS continued to strengthen the alignment of its performance management approach to that of government’s planning, performance monitoring and evaluation approach. SARS held itself accountable against clear, objective and specific targets for each of these outcomes as per the annual and quarterly targets published on pages 38 and 39 of the Annual Performance Plan.
(Slide 12; Strategic Plan, pages 54-57; APP, pages 38-39)

Expenditure estimates over the medium term expenditure framework (MTEF) period
(Table, slide 13; APP, page 17)

Projected human resources capacity
(Bar chart, slide 14; APP, page 17)

Resource plan
SARS was working within a constrained budget environment in which its projected Treasury allocations for the next three years were R9.53 billion for 2013/14; R9.98 billion for 2014/15; and R10.3 billion for 2015/16. In percentage terms these represented below-inflation increases for each of these three years as follows: 4.2% this year; 4.7% next year and 3.5% in year three. Along with interest and other income which was primarily commission from the Department of Labour for the collection of Unemployment Insurance Fund (UIF) and Skills Development Levy (SDL), SARS' projected expenditure this year was R9.84 billion. SARS' estimated head count was also expected to stay constant at 14 800 employees over the current and next financial years before declining by approximately 2% during the 2015/16 year. The Commissioner concluded by saying that SARS hoped to lead by example. (See Commissioner's Address document; Strategic Plan, pages 59-60 and Erratum)

Discussion
Mr D van Rooyen (ANC) was tempted to ask about the overall spending of the National Treasury as the custodian of the nation's purse, but he would focus on spending patterns in Programme 3. One was concerned that municipalities' financial management capacity was not improving as expected. Therefore one had to question the efficacy of these interventions. Was there adequate spending to ensure that municipalities were adequately capacitated to deal with issues of financial management? In some of the provinces one could not see any progress. In fact, according to the assessment of the Auditor-General of South Africa (AGSA), many municipalities were not performing well.

He asked about supply chain management with reference to Programme 5. As a strategic objective was it appropriate to strive to minimise corruption rather than to eradicate corruption? He was not convinced that this was the right strategic objective because the government was committed to ensure that corruption was eradicated.

It was also very disturbing that as part of the supply chain management strategic objective, there was no prioritisation of economic empowerment and transformation. It was not cited anywhere in this strategic objective. One was looking to the SCM system to come in as a tool to empower the people but also as a means to transformation.

With reference to the AGSA's take on the National Treasury's performance, the AGSA had raised concerns about National Treasury's oversight role and also about its non-compliance with laws and regulations. How would this strategic plan assist to address these key concerns as raised by the AGSA?

He asked SARS about human capacity. He had been following with interest articles about cases that SARS had been pursuing concerning employees. Some of these cases had been dragging on for a long time. How were these cases impacting on the performance of SARS? At the same time, he appreciated that SARS had been doing well in terms of its targets. It was necessary for the Committee to obtain an update on cases that were being pursued with its own employees.

He asked about an issue that concerned the Commissioner himself. This was a serious issue and the Committee should be briefed about these alleged accusations, 'if they are about you', as, at the end of the day, it was the Committee that would have to come to the Commissioner's defence, more especially as SARS was one of the best performing institutions.

He had not captured anything in the presentation about SARS' role in building taxation capacity on the African continent. He recalled that SARS had seconded staff to participate in the new tax forum established for the African continent. Was SARS still pursuing that particular direction? What had SARS committed to this in its Strategic Plan?

Mr T Harris (DA) thought that the Committee was confused about the status of the youth employment tax incentive, that used to be called the youth wage subsidy. He referred to the answer that the Minister had given in this year's budget briefing on how there was a package of incentives coming and that the National Economic Development and Labour Council (NEDLAC) had produced an outcome that one had seen a few weeks previously in the youth employment accord. He would be interested in the Minister's comment on it. He perceived a two-track process. National Treasury was pushing on with the tax incentive that it had first announced three years ago, while NEDLAC was and the Economic Development Department (EDD) had tabled a completely separate set of ideas which he, Mr Harris, thought were relatively weak He was puzzled that the youth employment tax incentive was not included in the youth employment accord. In the briefing the previous year the Minister had told the Committee that he preferred the consensus route. If National Treasury sought to follow the consensus route, but now there were two separate documents, it appeared that there was not a consensus route. It would appear that National Treasury should implement the youth employment tax incentive. Was it possible to include it in the tax laws? What was the implementation date of the youth employment tax incentive? The original model was meant to cost R5 billion over three years. What was the actual tax loss associated with the youth employment tax incentive? Many will have heard concerns about the number of senior managers who had left National Treasury. In the past year 25 senior managers in levels 13 and 14 had left. This appeared to be a serious exodus of skills. Why were so many senior managers leaving? What was the plan to replace those relatively scarce skills? What did it say about the culture of being able to retain skills at SARS? There had been this long delay in the South African National Roads Agency Limited (SANRAL) project. Yet there was a huge debt position taken by that parastatal. How was this debt being serviced given that there was no money being made from e-tolls? One of the main concerns expressed by credit rating agencies when they downgraded South Africa last year was that …..

The Minister interrupted on a point of order. He thought that questions were to be directed to the Strategic Plan and the presentation.

The Chairperson asked Mr Harris to confine himself to the Strategic Plan and the presentation.

Mr Harris said that he believed that the downgrades were mentioned in the presentation. (National Treasury presentation, slide 14, bullet point 4).

The Chairperson asked for the slide reference.

Mr Harris did not have it to hand at that moment.

The Chairperson therefore asked Mr Harris again to keep to the Strategic Plan.

Mr Harris said that, on page 7 of the Annual Performance Plan, the compensation of employees at National Treasury was reported to be up 15%. Was that appropriate given the belt tightening that the Minister had called for across government?

One thing that was referenced in the SARS presentation last year, but which he could not find this year, was the compliance costs per company, which was estimated at R63 000 per company last year. The Committee had thought that to be quite high. Had there been any movement on that figure? Had there been any research to update that figure?

On page 12 of the SARS performance plan, it was an echo of last year – the idea that corruption had replaced crime as the number one concern for South Africans and this compromised the willingness to pay tax. The Committee probably shared his frustration that SARS kept identifying this, but there did not seem to be any movement. What had changed? What did SARS do about a situation where a perception of corruption was compromising tax payments? Would we hear this every year.

Most Members received many queries from members of the public on the VAT registration and tax clearance certificates, as they were frustrated by both processes. If one did not allow businesses to register for VAT and did not give them their tax clearance certificates, then one was cutting off economic growth before it started. He liked the idea of the automated tax clearance certificate. Would it not be much simpler to allow businesses to operate and then for SARS to follow up with the taxpayers on tax clearance? On the VAT registration side, it had to be asked if SARS could simply provide the VAT registration certificate and then follow-up after the first claim. His concern was that if there was red tape before businesses could even start operating, there would be a serious constraint on economic growth. Could SARS not be bolder on the reforms in those two areas? He asked what the time frame for the single registration process was.

Ms Z Dlamini-Dubazana (ANC) asked about some underspending the previous year in Programme 1. She hoped that this year the planning would be within the right projection. In Programme 2 National Treasury had identified growth and job creation. Had National Treasury any amendment or addition to accelerate growth and job creation as it was a national agenda item? She would love to engage with the Department on the implementation process of the carbon tax. With reference to Programme 3, she was aware that provinces did not have sufficient capacity as was mentioned by Mr Van Rooyen. However, it would be much better to use the monitoring tool as one had not discussed how the Department monitored those incentives for the grants. In connection with bridging the funding gaps in the provinces National Treasury was talking about the census outcomes. It was also necessary to look at the profitable share outcome of that 2011 census, because that would give us a proper population density and by so doing assist the Department to allocate the proper spending to a particular district. In Programme 5 National Treasury had highlighted another critical point, which was financial management capacity development in all three spheres of government. However, the Committee had been hearing about it for a long time, but now it was time to ask about progress, in particular on the data base. As to SARS, with reference to the increased customer compliance and the movement of goods in and out of the bonded warehouses, she was still waiting to see the disposal policy at the Durban port government warehouse. She was aware that the local business people were not involved in the disposal of those goods. If the local people did not benefit from that opportunity which had been given by the government, this was a problem. Was SARS reviewing the situation? She also asked about the cargo and the baggage scanners at Durban which were good but expensive. Was it possible to have similar scanners in the border posts despite the budget constraints?

Mr N Koornhof (COPE) referred to Programme 3 and observed that the vacancy rate in the civil service was almost 300 000. Had National Treasury included that in its projections? Would it make sure that only those posts were filled that would make a difference to service delivery? It was also important to be sure that posts were not simply filled to say that there was lower growth in unemployment. This could seriously impact on projections. On Programme 4, he saw for the first time that the debt was projected to be R1.7 trillion. It was slightly lower in the budget speech. Was it higher now? Was it still stable at 2.8% of gross domestic product (GDP)? He asked SARS for any information on the one stop borders initiative. Was anything planned in the next five years for Beitbridge? If not, why not? North of South Africa, its neighbours were growing at a rate of between 7% and 8%. It was necessary to have trade with them that was as seamless as possible. Thus Beitbridge was a very important hub for South Africa in terms of business.

However, SARS had gone too far in creating a seamless event at Waterkloof, [where a private plane had landed but no customs officials were present to receive it].

At this point there was laughter.

The Chairperson said that he had not seen any reference to administered prices.

Mr D Ross (DA) said that he was not going to speak about then in this meeting, but he did invite Member to listen to his speech on them in the energy budget vote debate that afternoon.

He asked about the carbon tax. When a South African delegation had addressed the European Parliament earlier this year, there was consensus among the African nations  in favour of a carbon tax. He had taken the opportunity to caution against the carbon tax because of the unintended consequences that it might have on the economy.

The second issue of the visit to Brussels was the partnership agreements. The delegation had seen the termination of the agreements and the dates thereof as proposed by the European colleagues with regard to quotas and duties. South Africa's preferential access to the markets might have an influence. What influence would that have on South Africa's current account and steering the ship in terms of the deficit?

He had been receiving excellent service from SARS, and, in particular, from Mr Barry Hore, SARS Chief Operations Officer, and Mr Mark Kingon, SARS Group Executive: Business Operations, on tax queries. These were queries that he sent out in the morning, and by the evening the problem was solved.

He asked about the intervention by which there was withholding the funds from municipalities. Had the intervention worked? There had been a 70% audit disclaimer rate in terms of municipalities in the Free State. Could not National Treasury make a proposal on the appointment of the chief financial officers (CFOs) in order to bring in the necessary competence? Could the interventions be broadened to all municipalities to bring order to financial management at local government level?

Responses
Local government (Mr Van Rooyen and Mr Ross)
The Minister reminded Members, as he had for the past two weeks to overseas audiences, that South Africa had been a democracy for only 19 years. In 1994 the government had inherited, for example, 18 departments of education which had to be unified. In the Eastern Cape there were two homelands plus many other administrations that had to be unified. Also local government was not part of the multiparty negotiating process. It followed two years later. The elections for democratic local government took place later. Building capacity and what the NDP calls 'a capable state' which includes capable local government institutions is a decades-long process, and if you look at other parts of the world, a centuries-long process. Developed countries today were grappling at a different level and in a different form with the question of education for example, and health systems and health delivery, and public services more generally. So it was important to keep some perspective and, perhaps as a Committee, following what Mr Van Rooyen and Mr Ross were saying, to have some discussion at some stage on what it meant to build a capable state. Also what were the purposes of building a capable state? A capable state meant capable people as well, who were not plentiful in South Africa. Also building a capable state meant making the right political decisions or making the right decisions at a senior political level to hire people who had the right skills. The mood in the country was changing. He had had interactions in the past with a few mayors and so on, and these interactions had indicated that employing the wrong people with the wrong skills for important jobs like the CFO whether in a department or in a municipality could become costly. There were also information technology (IT) and other weaknesses. For example, some municipalities did not have integrated financial management systems. The bigger ones had been able to introduce enterprise technology systems, but the smaller ones had not been able to do so.

Possible written response to follow
He would ask the Director-General to add some data, as there was much work done to train different people within the municipal management structure, including councillors themselves. One could give the Committee further details.

Efficacy of the interventions (Mr Van Rooyen)
The Minister thought that there was gradual improvement in performance, on the one hand, in the realisation that there was much more to be done in order to manage capable municipalities.

The question of withholding certain funds: did it work?(Mr Ross)
This also related to the question of withholding certain funds. The Minister replied that it worked. Where there had been non-compliance and where the money had been withheld, municipalities readily complied ultimately. Within its limited capacity the National Treasury was going to intervene much more in areas where there was a lack of judiciousness in the deployment of public funds in order that those who were involved in these matters became more accountable and what they did became more transparent. National Treasury had intervened in the matter of a housing tender in Limpopo. The [tender] process had been flawed, and, in such instances, National Treasury would not tolerate it, and had so intervened.

SCM and eradication of corruption (Mr Van Rooyen)
The Minister replied that the ambition should be to eradicate corruption. Perhaps he had sent the wrong message by using the word 'minimise'. The intent was to fight corruption wherever one found it within National Treasury's limited capability. However, corruption was not a National Treasury issue, or a departmental issue, or even a social issue. Just as tax compliance was made a social issue and one had changed the tax compliance culture, although one had to continue to change it as otherwise it would come back, in the same way one had to fight corruption wherever found. Members of the Committee needed to speak out much more loudly than they currently did across party lines, against corruption apart from making speeches or pointing fingers.

Not prioritising economic transformation and empowerment (Mr Van Rooyen)
The Minister replied that Mr Van Rooyen had seen in the slides the immediate objectives of turning around procurement management rather than all the procurement issues. There was already legislation which addressed transformation and economic empowerment. National Treasury would continue to enhance these where it could, although this legislation could not be the only instrument, although it was a very important instrument.

The AGSA's findings on non-compliance(Mr Van Rooyen)
(Referred to the Director-General)

SARS cases dragging on (Mr Van Rooyen)
(Referred to the Commissioner)

Matter related to the Commissioner (Mr Van Rooyen)
The Minister replied that he had appointed two people establish the facts. He was informed that they were about to conclude their work. He was hoping to have a meeting with them shortly. Therefore he was not going to comment further on this matter at present.

Taxation capacity on the African continent (Mr Van Rooyen)
(Referred to the Commissioner)

Youth employment tax incentive (Mr Harris)
The Minister replied that the DA was a signatory to the accord package. He quoted from it. There was no two track process. There were no two different documents. There was now consensus that there could be incentives. Legislation would be prepared. He quoted from President Zuma's address on Freedom Day, 27 April. The facts spoke for themselves.

Senior managers who had left National Treasury (Mr Harris)
The Minister said that this was an overstatement, but the Director-General could explain further. Level 13 was the director level, not quite senior management.

SANRAL (Mr Harris)
The Minister understood that there was legislation that was making its way through the NCOP. Thereafter there would be legal certainty. E-tolling had been made a political issue because of next year's elections. He deplored reckless comments and campaigns. The Director-General would comment on the figures.

Corruption and tax compliance (Mr Harris)
The Minister alluded to British parliamentarians and their expenses. He assured Members that corruption would be combated wherever it existed. The Commissioner could add further.

VAT registration and TCCs (Mr Harris and Mr Ross)
The Minister replied that the reason that VAT registration had to be tightened up over the past five or six years was that if one took the last year's figures, some R139 billion was refunded in VAT. This was 10% of the total collected in VAT. If one had a loose VAT registration system, as witnessed in the earlier years, this encouraged all kinds of behaviour to set up enterprises purely to obtain VAT refunds. Then as soon as the VAT refund was obtained, a person would close down the enterprise and create another one. It was a difficult question how to create the correct balance between facilitating the creation and operation of a small business and ensuring protection of the fiscus at a time when revenue was not all that abundant. It was better to ask if, in practice, there were things that one could do to lighten the burden but not create an additional leakage to the fiscus. The same applied to TCCs.

Growth and employment (Ms Dlamini-Dubazana)
Ms Fundi Tshazibana, National Treasury Deputy Director-General: Economic Policy replied that from National Treasury's analysis, it was known that there was a very high elasticity between growth and employment in South Africa of between 0.4 and 0.7.  The elasticity meant that for one unit of gross domestic product (GDP) growth, one would get between 0.4 and 0.7 people employed. Once one had the growth figure, then the constraint issues in the economy were quite important, so the skills constraint was quite an important factor. It was known that for one highly skilled person in South Africa one could hire two unskilled persons. Therefore it was quite important to deal with the skills issues. Also there were some structural issues. It was known that the agricultural sector absorbed a great many more people. Therefore if there was more growth in agriculture, there was scope for employment of many more people. National Treasury would be happy to come back with a full presentation on growth and employment.

The carbon tax (Mr Ross)
The Minister replied that the carbon tax was one of those difficult matters where one sought to maintain a balance. South Africa had given commitments to the global community that it would reduce carbon emissions and do its share to fight global warming. The carbon tax could be one of the ways to change behaviour. On the other hand, it was clear that the carbon tax would impose certain burdens on businesses and might reduce South Africa's competitiveness. So National Treasury had put a second discussion document into the public domain. National Treasury officials would brief the Committee subsequently on the discussion document.

Grants and the census population  (Ms Dlamini-Dubazana)
(Referred to the Director-General)

Government customs warehouse and bonded warehouse (Ms Dlamini-Dubazana)
The Minister clarified the distinction between the two.

Vacancy rate of 300 000 and implications for the wage bill (Mr Koornhof)
The Minister replied that National Treasury worked with figure for vacancies that were funded. He agreed that the new people hired must be in front line services and not administrative staff.

Waterkloof (Mr Koornhof)
The Minister would not treat it as a question for now.

Economic Partnership Agreements (EPAs) (Mr Ross)
The Minister replied that Minister Dr Rob Davies, Minister of Trade and Industry was dealing with this issue. It was now a much more peaceful process that it might have been a little while ago. One did not want anything that minimised exports.

Capacity in municipalities (Mr Van Rooyen)
The Deputy Minister replied that National Treasury had identified, and made recommendations to Cabinet on  a causal relationship between the unfavourable audit outcome and the level of skills, particularly at the level of CFO. There were startling revelations as to there had been breaches of the Public Finance Management Act (No. 1 of 1999) (PFMA) requirements and Treasury Regulations  in making appointments.  Also the turnover of CFOs and the number of acting appointments was a concern.

Resignations of senior officials (Mr Harris)
The Deputy Minister replied that National Treasury prided itself on producing the skills that other departments and institutions found useful.

The Director-General summarised his answers.

Capacity in municipalities (Mr Van Rooyen)
The Director-General said that local government had gone through a series of reforms, including amalgamations, which had the unintended consequences of making it difficult to build capacity. At the same time, oversight could not be taken to the extent of completely taking charge of local government. One could not pretend to run municipalities from Pretoria. National Treasury had published the competency requirements, in particular, for municipal managers and CFOS, that had taken full effect this year. This had necessitated that some office holders were required to upgrade their skills or find other jobs. Also for several years National Treasury had been running an internship programme with  local government. This programme was intended so that local government could find young people newly qualified in finance accounting and other relevant fields and give them jobs for a while, pair them up with experienced persons, and have them attend courses to obtain qualifications accredited under the National Qualifications Framework (NQF). In addition to defining the job specifications for CFOs,  National Treasury had gone as far as to develop standardised structures in order to assist municipalities in achieving success in their financial management. None of these things would work in an environment without accountability. However, it would not work for National Treasury to intervene by making direct appointments as this would amount to micro management.   

The AGSA's findings on non-compliance(Mr Van Rooyen)
The Director-General referred to an issue that was not as consequential as people made it, but it could be. This was the case of three employees who had not declared their business interest interests. Now National Treasury was instituting a system to ensure complete compliance.

Resignations of senior officials (Mr Harris)
The Director-General replied that National Treasury was privileged in that it was able to retain its senior people and also enable talented and qualified young people to rise in the organisation. All the DDGs in the room had risen through the ranks, several from the rank of deputy director, and at least one had jointed as an intern. He was proud of this and one needed this perspective. At the same time, one could not hold people against their will. From time to time one would lose good people. It was a natural phenomenon and sometimes it was in the interests of an individual to move on. It was certainly not the case that the Natural Treasury was falling apart.
 
The Chairperson asked the Director-General to summarise to a greater extent.

The debt question (Mr Koornhof)
The Director-General replied that it was a moving thing, depending on one's focus for growth.  Very importantly, the debt service cost figure did not carry much meaning. In an instance where a significant proportion of one's debt, say about 36%, was inflation-linked bonds, and where interest was capitalised, one could get that figure very close to zero, but debt could actually be rising.

Employment in the National Treasury
The Director-General replied that it would not increase significantly. The National Treasury would try to reduce the 9% or 10% vacancy rate at senior management staff (SMS) level. However, there might be some attrition but staff would be replaced as soon as possible.

Vacancy rate of 300 000 and implications for the wage bill (Mr Koornhof) 
The Director-General replied that National Treasury expected employment in government to increase only by 1.8% on average over the next three years. This was the existing budget. He could foresee a situation in which departments would employ people for which they did not have a budget. Parliament would not allow that to happen.

SARS cases dragging on (Mr Van Rooyen)
The Commissioner replied that SARS had almost 15 000 employees who handled altogether almost R1 trillion. At the same time SARS had dedicated capacity in the form of a unit for anti-corruption and security. This unit had about 150 people and could detect fraud and react immediately.

SARS up to now had been able to dismiss all employees identified in misappropriation. Internally SARS could not be faulted in dealing with such cases. However, it faced a challenge in criminal cases, as such cases, referred to the justice system, took longer to resolve.

African Tax Administration Forum (ATAF) (Mr Van Rooyen)
The Commissioner replied that SARS had started the ATAF process in 2009. It was no longer in SARS' Strategic Plan because ATAF was now a multilateral standalone organisation. It had 36 members. It had held over 35 successful technical events and had capacitated over 600 tax administrators on the continent.  It had also facilitated mutual agreements on information sharing, and it was about to facilitate joint audit of seven African countries.

Compliance costs Mr Harris)
The Commissioner replied that the compliance costs were still the same. Corporate Income Tax (CIT)  had been modernised and the IRT14 form was much simpler especially for small businesses. It was hoped that this would reduce the cost of compliance, especially for small businesses.

Perception of corruption (Mr Van Rooyen)
The Commissioner replied that the Minister has spoken about this. The Commissioner noted that there were independent studies of taxpayer behaviour, which provided feedback to SARS.

The single registration process (Mr Harris)
The Commissioner said that it depended on the technology platform, on whether the CIPC platform  was  ready to talk to SARS' platform and to the Department of Home Affairs' platform. It was this architectural base that one needed to get right.

Mr Barry Hore, SARS Chief Operations Officer, added that SARS was working with the CIPC on single registration and had already shared data. Single registration was first and foremost a SARS project which aimed to have seamless integration with the CIPC for product registration. The SARS project would be ready in the second quarter of the 2013/14 financial year, but depended on the technology and integration work with other agencies.

One stop borders  (Mr Koornhof)
Mr Kosie Louw, SARS Chief Legal and Policy Officer, replied on one-stop borders.  SARS had had two informal discussions at an official level to establish a one stop border post with Zimbabwe. Based on what it had learned from the one stop border post with Mozambique, SARS had made considerable progress in developing a template legal agreement.

VAT registration (Mr Harris)
The Commissioner replied that the Minister had already responded adequately.

Disposal policy (Ms Dlamini-Dubazana)
The Commissioner replied that SARS had a policy and would provide it to the Committee. SARS preferred to distribute Illegal or undervalued textiles seized, if usable and compliant with the South African Bureau of Standards (SABS) standards to charities according to certain criteria rather than to auction such goods. On the other hand, SARS burned such goods as illegal cigarettes. SARS destroyed illegal drugs and guns according to the appropriate protocols.

The Chairperson apologised for the time constraint.

Minister's concluding remarks
The Minister regretted that there was not more time to answer more questions. National Treasury and SARS' strategic plans reflected the right kind of focus. It was important to change the South African narrative. If one considered the economic narrative, South Africa was a great destination for investment. Despite political differences, and upcoming elections, it was necessary to demonstrate that South Africans had confidence in their  own abilities to take the South African economy onto a new trajectory, and that they could speak a language which allowed the debate of different views, but which projected a national positive narrative. This would be crucial to what we projected outside. People read what [politicians and the media] said, and how they said it, and the way in which it was reported. Perceptions were far more important than facts. A firm was accused of 'kowtowing' to government. This was astonishing. If one could save a couple of thousand jobs by sitting around a table, how could one be accused of 'kowtowing'? Should not labour, business and government sit together? Taking a big number and reducing it was a formidable success for negotiations. That [misreporting] was part of the negative narrative.  It was necessary to ask what was wrong with our reporting. Why should bosses and workers be enemies? Both were crucial to the success of an enterprise. He appealed for a shift of mind-set.

The Minister undertook to provide additional information in response to some of the questions within the next two weeks.

The meeting was adjourned.