SARS & National Treasury on their 2013/2014 Annual Report; Audit Outcomes: AGSA briefing

Meeting report

Auditor-General of South Africa report on National Treasury 2013/14 audit outcomes
Mr Hein De Wet, Senior Manager at AGSA, said that the Department had received an unqualified audit opinion. With regards to compliance with legislation, there were eight audits with no findings and five with findings. He spoke to the quality of submitted financial statements, performance reports and supply chain management. The most common root causes were a slow response by management and key officials lacking appropriate competencies. He said the Integrated Financial Management System (IFMS) was littered with challenges. The Committee could play a role when interacting with the Department on this project because how money was spent could come under public scrutiny. The Committee could check on the usefulness and reliability of the information provided for the performance management framework with reference to the pre-determined objectives of the Department.
 
Ms Bridgette Diutlwileng, a Committee Researcher, said the information on some of the targets reported on were insufficient or inadequate and therefore one did not know at what stage the programmes were. This spoke to the reliability and usefulness of the information. In some programmes the whole budget was spent but not all the targets were achieved which raised questions of receiving value for the money spent. Some Treasury documents were not in compliance with its own guidelines. Questions on management oversight, action plans and inefficiencies were raised by the AG. She said there were a few investigations under way and the Committee should be briefed on the investigations.

Mr Dumisani Jantjies said there was a note by the AG on the annual financial statements on supplementary schedules. He wanted more information and also why they were audited. What material errors were there and what measures were there to avoid making such errors?

National Treasury on its 2013/2014 Annual Report
Mr Lungisa Fuzile, Director General of Treasury, said the recovery in the global economy remained fragile with improved US growth offsetting weaker EU growth. Emerging markets were growing more slowly and global rates and volatility in currency markets was set to increase. South Africa was vulnerable to these movements because of high fiscal and current account deficits and a reliance on foreign saving to finance investment. In addition there was intermittent supply side disruptions caused by electricity constraints and strikes. The economy would contract by 0.6 per cent in the first quarter and this meant confidence in the economy remained weak.

The current account remained above 6 per cent as import growth outstripped export growth, in part due to local supply disruptions and higher relative cost of imports versus exports. Inflation was at 6.4 per cent with high wage settlements and a weaker rand exposing a risk to an increased inflation rate. Investment has been supported largely by government and state-owned companies. SA’s sovereign credit ratings came under pressure in 2012/13 and were downgraded by the major credit rating agencies and debt rose in line with the wider budget deficit.

He spoke to the major achievements of the Department. Substantial progress had been made in finalising the ‘twin peaks’ legislation and significant progress had been made to assist over- indebted households and to encourage increased savings. Legislation was passed to encourage employers to provide more jobs to the youth. There had been significant progress with the implementation of the Infrastructure Skills Development Grant.

He said the vacancy rate had been impacted by the establishment of the Office of the Accountant General which had created 62 new posts. R5b out of the total R9b Jobs Fund had been allocated. Non statutory forces pensions, belonging to the military wing of political parties, was a difficult area and continued to be so because pensions were paid to people coming from systems where there was not perfect record keeping which opened itself to opportunists trying to take advantage. It was investigated by the Special Investigating Unit (SIU) but problems still arose. He said ICT governance had been a difficulty and the AG’s conclusions were in fact based on an internal Treasury audit and that there had been difficulties in dealing with the findings. There had been delays in the procurement of ICT equipment and the process was taking longer than it should have.

IFMS was a big project to provide government with integrated financial management systems which warranted a separate presentation in late first half of following year by which time the procurement processes would have run its course. Performance management information was a new area for all, including the AG, so it was important to approach it with circumspection. How did one express quantitatively things that were qualitative in nature because there was a danger of suffocating objectives through numbers. Treasury had met with DPME and the AG to hold workshop to check whether the Department was still on track on the bigger objectives given the reforms of the system. This also related to issues such as that of the amount of budget spent vis a vis targets attained.

Mr Michael Sass, Accountant General, said consolidation of accounts was a problem for most countries in the world. The problem was that there were different accounting frameworks for national and provincial departments on the one hand and for their entities on the other. The entities were on the accrual framework while national and provincial were on a modified cash solution. It was not easy to move to accrual accounting because there were other role players involved. Treasury was talking to the Accounting Standards Board and to the AG in seeking solutions and they were close to a solution that would satisfy everybody.

Discussion
Dr D George (DA) questioned the audit process interaction between the AG office and the Treasury and asked what feedback the Department received from the AG. He wanted feedback on the briefing note on human resource management. Did the AG check during the audit whether there were ex gratia payments made and also how would the AG know that payments were made?

Ms P Kekana (ANC) said the Minister had made a commitment to operation clean audit and a commitment to clean governance in all spheres of government. There was an action plan yet the AG report indicated that there were still recurrences of issues despite the action plan. She said the training of 26 chartered accountants would assist in this regard if it was spread over the three spheres of government.
 
Mr D Van Rooyen (ANC) wanted more clarity on the disbursement alluded to regarding the jobs fund. Were they projected disbursements and what lessons were learnt in the process? He was concerned regarding the return on investment of these funds and was this within the scope of Treasury. He asked what the issues were regarding special pensions. Why was Treasury struggling to develop a clear action plan regarding the AG ‘s concerns? The Committee had previously also asked for an action plan.
 
The Chairperson asked what state the Treasury and other departments were with regards to a coherent implementation of the NDP. Given the role of the Treasury, what was meant by the term ‘radical economic transformation’. He wanted to see Treasury moving towards a better understanding of this term. He acknowledged Treasury’s performance and the unqualified audit. He wanted an overview of where the economy was. He said problems in performance reporting had to be resolved. As performance reporting was good for Parliament. He said Treasury had developed a performance-reporting template which they themselves were not meeting. He said the issue was not whether targets were being met but whether the targets yielded the outcomes that was sought. He agreed with Treasury’s request for more time regarding the IFMS and this report should now be completed in the second half of the following year. He agreed with the Minister that the vacancy rate should not be approached mechanically. He said the action plan had to be done and be submitted by early in the new year. The Committee agreed to institute quarterly reports which could be brief. He wanted to know at what point discussions with NEDLAC and other interested parties were with regard to the issue of retirement reform. Were they going to defer it?

Mr Fuzile said would be able to talk more freely in a week’s time. Regarding the NDP and MTEF, he said Treasury played two roles and had important macro economic instruments at their disposal, fiscal policy and the policy framework of monetary policy. It had tried to signal in the budget how the budget was adjusting to give expression to the NDP. In the following week details would become clearer.

Regarding Dr George’s question, he said Treasury worked well with the AG. Treasury would develop an action plan and bring it before the Committee.

Mr Ismail Momoniat, Treasury Deputy Director-General: Tax and Financial Sector Policy, said they
would be meeting the Committee the next day on the matter of retirement reforms.

An official said the commitments to the Jobs Fund increased from R3.5m to 5m. Disbursements did not reach their target and the Department was lagging behind in implementation. The Department was not looking for a financial return from the investments but rather a return in the form of job creation.

The Chairperson asked what the job creation target was.

The official said it had resulted in 150 000 jobs.

Mr Van Rooyen said there should be constant interrogation of this fund.

Ms Diutlwlileng noted that there were irregular and fruitless and wasteful expenditure amounts of less than R1 000 which were condoned. There was R9m in irregular expenditure because of not following Supply Chain Management (SCM) processes and cautionary warning letters were issued.

Mr De Wet said that when the report was given to the management team, the auditor’s response was given to the management’s response. There were however deadlines and cut-off dates for the submission of audit evidence.

On Dr George’s question, he said there was a sampling methodology and the AG could also ask Treasury to supply information on ex gratia payments made by management.

Dr George asked if any evidence of ex gratia payments was found.

Mr De Wet said he would have to refer the matter to the management team as he was not the engagement partner for the SARS audit.

Ms Kekana suggested Treasury could benefit from the codes of good practice of the DPSA.

Mr Fuzile said Treasury would look at DPSA’s IT governance framework as it was regarded as one of the best. He said the SCM matters were not hidden. One was an error in the slight overpayment of interest amounting to R1 000. Irregular expenditure of R9m was result of the appropriate level of approval not being obtained. There was no theft or flagrant flouting of rules and he was comfortable condoning the issue but had issued cautionary letter to the staff.

The Chairperson, regarding patterns of expenditure, asked what was happening regarding minimum competencies of CFOs in municipalities.

Ms Kekana said there was an MFMA requirement to report to provincial and national departments on how municipalities were dealing with recruitment with reference to basic qualification standards.

Mr D Ross (DA) said there was a problem of municipalities being unable to pay for their bulk supplies. A sustainable solution was needed because whole communities were being cut off, including paying consumers. Municipalities were not responding to letters and documentation from Treasury regarding this. He wanted the Committee and Treasury to discuss the issue and recommended that interventions be made under section 216(2) of the Constitution as was done in the Nala municipality in the Free State. Another possibility was the Local Government Equitable Share be paid directly to bulk suppliers like Eskom and the water boards from the proportion allocated for the poor. He said 80% of municipalities’ budget went on salaries and only 20% on services.

Mr Fuzile said that when competency regulations were published for staff to attain requirements, five years was given to allow staff to improve their qualifications. Now no new people were being appointed without having qualifications for the job. Local Government budget and expenditure figures were derived from data sourced from Stats SA but cobbling the data together was challenge. A draft report was close to being published. He appreciated the suggestions around the non-payment issue but some of the suggestions could create greater difficulties.

A Treasury official said they were aware of the problems of the Free State municipalities and were looking at not only what short and long term measures they needed to introduce but also how to hold municipalities more accountable, given that they had challenges in the management of their finances.

South African Revenue Service (SARS) on its 2013/2014 Annual Report
Ms Kekana asked if an amended or updated strategic plan or annual performance plan had to be presented to the Committee again.

The Chairperson said the secretaries needed to find that out.

Mr Tom Moyane, Commissioner-Designate of SARS, spoke initially on challenges faced in the public domain this year that were not in the Annual Report.

He said SARS has reported to Minister Nene, and through him to the Committee, about the allegations involving a taxpayer and a former senior SARS employee (Mr Dawood Seedat). He was confident that SARS’s processes were not in any way influenced. The Financial Services Board (FSB) had announced publicly that the FSB’s own investigation and an external audit by the Auditor General found no evidence of a breakdown of internal controls within the organisation. The FSB expressed its confidence that neither it, nor any of the entities it regulates, has suffered as a result of any actions of Mr Seedat.

A senior SARS investigator, Mr Johan van Loggerenberg was initially investigated by an internal SARS panel of review for allegations of impropriety. Although the panel of review did not prove any wrongdoing or breaches of the law on Mr Van Loggerenberg’s part, SARS appointed Adv Muzi Sikhakhane to lead an external committee of investigation into the complaints against Mr Johann van Loggerenberg to safeguard the integrity of SARS and trust in SARS. Mr Van Loggerenberg was placed on special leave. That committee was to conclude its investigation and present its findings to the Commissioner within 45 days of being established, unless compelling circumstances dictate otherwise. The committee findings will be made public.

On the allegations against SARS of the existence of an alleged covert intelligence unit within SARS, he emphasized that SARS did not and never had any power or authority in law to conduct covert intelligence operations. SARS would not condone any rogue activity of this nature by its officials and would take decisive action if any credible evidence was found where the law was breached in the past.

SARS had received an unqualified audit from the Auditor General, with no emphases of matter for both the own accounts and administered revenue audits. This was the first time SARS has had an entirely clean audit. SARS collected R900 billion which represents 26% of South Africa’s GDP. Personal Income tax was the biggest contributor at 34.5%, VAT was 26.4% and Companies Income Tax contributed 19.9%. Base Erosion and Profit Shifting (BEPS) continued to be a threat to tax bases globally and was an on-going concern. SARS had launched a pilot project with Swaziland and Mozambique to establish an IT network linking regional customs authorities, as the first step in developing an international customs network.

The Customs team placed an increased focus on clothing, textiles and tyres, all areas of especial interest to the domestic economy which needed protection from illicit imports.

Considerable effort has been put into the VAT modernisation process and to making submissions easier. There was a 0.7% decrease in VAT returns filed on time. Compliance among VAT vendors remains a worry.
The average processing time for VAT refunds was 31.7 working days compared to a target of 21 working days. This was mainly due to increased scrutiny of “old” returns submitted in the current year, and instances where refunds were held back because of investigations. This had some adverse impact on small businesses.

The SARS Large Business Centre had raised assessments against aggressive tax structures for strategic reasons but they were as no assets existed in the structures. They were not written off as they were under dispute, in law, currently.

Debt as a percentage of total revenue was not yet in line with international trends when compared to other revenue administrations around the world. However there was a positive downward trend towards the target of 6%.

The Tax Clearance Certificate (TCC) process has been substantially transformed to make it taxpayer-driven and easier to use. SARS received over 785 000 TCC requests last year, placing a significant burden on both SARS branches and the back office processing systems.

SARS developed a formal structure for communication with the Office of the Tax Ombud (OTO). The OTO functioned independently from SARS and reported directly to the Minister of Finance. The OTO received complaints from the public on service-related matter and conducted an overview on the fairness of SARS’s processes and its treatment of taxpayers.

Total staff at the end of March 2014 was 14 137. The staff attrition rate was slightly higher than the previous year and net staff turnover was -3.97%. SARS continued to prioritise employment equity. Both black and female representation at top management level had declined slightly since 2011. The SARS EE plan prioritised the appointment of Africans, in particular women, in the next two years.

Discussion
Ms T Tobias (ANC) urged the Commissioner to follow the statutes when following up contraventions. She said a clean audit did not mean that SARS had achieved its targets and SARS had to collect as much as it could from companies. It was SARS, not Treasury, that generated revenue. She said negotiations in trade bilaterals had to keep in mind base erosion as it was actually profit shifting and that there was an element of tax avoidance by companies. She said there was also an element of ignorance of tax by business.

Dr George wanted confirmation that the Committee would receive a copy of the report Mr Moyane had spoken about. He asked whether Mr Magashula had received any ex gratia payments on leaving SARS.

Ms S Nkomo (IFP) asked how much revenue was targeted for collection. She wanted more information on the tax education awareness campaign. How serious was SARS on BEPS and what effect would it have on SARS’ collections? She asked if the information on the introduction of the Tax Administration Act would be fully incorporated as part of the public education.

Ms Kekana wanted to check on how many ‘acting’ positions there still were. She wanted more information on the progress of the one stop border posts project. If SARS wanted to increase revenue collected, it had to look at things like cigarette and other smuggling and the use of cargo scanners to combat it.

Mr van Rooyen said the employment equity plan was important and noted that there had been a decrease in female representation at senior management level. What was SARS’ skills pipeline strategy, especially regarding school leavers? He wanted to know about SARS’ outreach to rural areas in relation to their employment equity and training programmes. He noted a high level of resignations. What were the reasons given by people leaving SARS? Was the SARS investigation regarding Mr Van Loggerenberg because of the newspaper report in the Sunday Times or was it instigated before the newspaper report? What was the level of severity of corruption at SARS? The tax site offices appeared not to be working and he wanted a breakdown of the cases.

The Chairperson said SARS’ turnaround times were very impressive. What was the global norm? He asked if revenue departments elsewhere had an intelligence component and that Cabinet may want to apply its mind on the possible establishment of such a unit.

Ms Tobias said that the Committee should discuss the matter first before it was even raised at Cabinet.

The Chairperson said the issue needed to be addressed.

Mr Moyane said illicit trade had a huge impact on revenue collection and SARS would be deploying all resources within the constraints of its budget.

Ms Sunita Manik, Group Executive: Large Business Centre (LBC), said BEPS was launched in September 2013 after the financial crisis of 2009 saw significant erosion of many countries tax bases, given the modern global digital world which made activities, such as money being taken off shore, very mobile. Supplies chain units had also changed and were now situated across the world. Seven of fifteen action points were due for implementation the current year with the balance due the following year. Within this, profit shifting and transfer pricing was being looked at. The LBC did audits which could take 18 months to complete but resulted in billions of rands revenue collected.

A SARS official said, with regards to how SARS targets were set, that SARS did not set targets. It was a process driven by Treasury's economic assumptions and SARS estimates were reviewed. This was presented to Treasury and the SARB at the revenue analysis working committee meeting where estimates were evaluated and the consensus view presented to the budget office which then forwarded it to the ministers and then the Cabinet.

Mr Gene Ravele, Chief Officer: Tax & Customs Enforcement Investigations, said the illicit trade in tobacco was an area a lot of resources were put into. The biggest problem was domestically produced cigarettes where excise duty was not paid. Licensed manufacturers were manufacturing illegally after hours. Smuggling had shifted to other border posts because customs had focussed on Beit Bridge border post.
 
Regarding the one stop border post issue, there had been delays in translation into Portuguese of documents by the Mozambicans. SARS was also getting the SA and Zimbabwe IT systems to interface.

Mr Van Rooyen asked if SARS were winning the customs battle.

Mr Ravele said they were. They were tackling the biggest cigarette-manufacturing players of which there were six. SARS were cancelling some of the licences and had raised R 29m and tightened licensing and registration policies and vetting. Currently there was no law that a counting machine had to be functional when manufacturing took place. This was being factored into regulation

Ms Tobias said illicit trade was shifting the goalposts.

Ms Elizabeth Kumalo, Chief Officer: Human Resources, said finding skilled personnel in IT and internal audits was a challenge and even when recruited they were subject to being poached. She said some of those who left were people who had contravened rules and who resigned.

Ms Kekana said SARB had a strategy on staff retention that SARS should check.

Mr Van Rooyen said SARS should focus on recruiting school leavers.

Ms Nkomo wanted more information on the breakdown of the term ‘so many professionals’.

Ms Tobias asked what programmes were in place to create an enabling environment such that a female commissioner of SARS could be realised in her lifetime.

Ms Khumalo said the error on employment equity in the report had been corrected.

Mr Ivan Pillay, Chief Officer: Strategy, Enablement & Communications, said that SARS did not make ex gratia payments.

He said the Davis Tax Review Committee would be talking to the tax design issues raised and he would not comment.

He said a high number of people were dismissed for corruption being 90 in the last three years and that SARS had a zero tolerance policy.

He said SARS were in the top two or three 3 in the world regarding turnaround times.

He said they did have outreach programme to reach schools in rural areas and mobile tax units were used in rural areas.

The Chairperson asked if other revenue collection agencies had an intelligence unit.

Mr Pillay affirmed this and said some had it because it involved customs evasion like cigarette smuggling by organised crime. World customs agencies openly talked about intelligence capabilities.

The Chairperson asked whether SARS interacted with other intelligence units in SA if they were not allowed by law to have their own unit.

Ms Nkomo wanted to be informed when mobile units went to different provinces

Mr Pillay said the information on the mobile units were on SARS website

The meeting was adjourned.