South African Revenue Service (SARS) quarterly performance

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Finance Standing Committee

25 August 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

Key activities for the SARS 2015 programme was an operating model review and an ICT and modernisation review. Objectives included to materially increase revenue, ensure strong control over border posts, and become a customer and employee centric organisation. Customs and excise would be elevated to a key priority area; SARS would regain port control; increase border control, facilitate trade and increase revenue. SARS would address SMME non-compliance and the high net worth individual tax gap; expand the base erosion and profit shifting (BEPS) team, and enforce penalties due on large corporations. Customer service would be enhanced through an effective service channel network. There was to be an increased focus on taxpayer education. The business model would be simpler and better aligned to the core mandate and strategic priorities. IT systems would be aligned with international best practice.

In discussion, there were remarks and questions about the incorporation of Davis Tax Commission recommendations; tax morality; concern about the impact of the economic downturn on revenue collection; mining tax; the customer centric approach; high net worth individuals; tax problems of the emerging black middle class, and intergovernmental relations at ports. The EFF asked what SARS was doing about aggressive tax avoidance, and expressed concern about private role players receiving and delivering containers, yet ignoring customs. The DA expressed interest in the KPMG report on the alleged rogue unit in SARS, and the costs thereof. SARS was advised to follow the format for quarterly reports that applied to all entities, as it was a parliamentary norm. There was interest in digital technology as a means to stimulate economic activity, and the significance of cell phones in that regard. Problems with taxpayer audit queries were brought to the attention of SARS.

Meeting report

The Chairperson noted that presentation documents had been received only that morning, which usually should be available the previous Thursday. The Committee had been told that all sittings would have to be cancelled for the current week, but obtained exemption from media workshop obligations. The SARS Commissioner had to juggle commitments to be able to attend the day’s meeting. It was an unusual circumstance, as the meeting should actually have occurred a week earlier.

Progress report on SARS 2015 programme
Mr Tom Moyane, SARS Commissioner, said SARS had explained at a previous meeting that its 2015 strategic plan was to conduct an operating model review and an ICT and modernisation review. A review was undertaken of SARS governance and decision making processes, and of ICT architecture and technology. The operating model review defined the SARS transformation ambition. SARS would materially increase revenue, ensure strong control over border posts, and become a customer and employee centric organisation. There was a stronger commitment to elevating customs and excise. SARS would regain port control, increase border control, facilitate trade and increase revenue. To maximise taxpayer revenue and compliance, SARS would address SMME non-compliance; address the high net worth individual tax gap; expand the BEPS team, and enforce penalties on large corporations. Customer service would be enhanced by creating an effective service channel network. There would be an increased focus on taxpayer education. Operations would be improved through the establishment of a tax research institute and data analytics. Information services and technology would be improved through installment of fit for purpose IT systems and implementation of global best practice. The SARS revised operating model was approved by the Minister of Finance. The business model would be simpler and better aligned to the achievement of its core mandate and strategic priorities. The SARS core mandate would not change with the new operating model, and the focus on core operations would be maintained. SARS would ensure that all key stakeholders, including SARS employees, would be engaged and able to embrace the changes.

Discussion
Ms T Tobias (ANC) noted that the briefing was related to what had been presented earlier by SARS. She asked if recommendations by the Davis Tax Commission had been incorporated. The Davis Tax Commission had raised issues about multinationals going for lower tax havens like Mauritius. Corporations were abusing the tax system. She commented that carbon tax had to be considered.

Mr Moyane replied that a policy perspective had to be developed for carbon tax.

Ms Tobias wondered about programmes to encourage tax morality. There were practices that were not morally sound, even if legal. A culture of payment had to be fostered. She hailed from the small town of Heilbron. She spoke about young people who in the past had been discouraged from seeking HIV treatment. Treatment lacked privacy and was intrusive because there was a sign indicating “HIV medication”, and long queues. People died as a result. Now there were mobile clinics where people could test themselves, without long queues. In the same vein, public engagement with SARS staff caused embarrassment to some people, as it made them seem ignorant about tax matters. People who were not tax compliant were usually not illiterate people. Tax matters were complicated. Government was being hard on people. SARS should not cause people to develop a negative attitude about tax that saw it as punitive.

Mr Moyane replied that there had to be a national discussion about tax morality. There were issues to be resolved regarding both individual and corporate taxation. Revenue collection had to be underpinned by people who paid through moral and statutory obligation. There had to be a broader debate, and tax education had to be broadened. He agreed that a culture of payment could be fostered through mobile tax units that were not intrusive. In the near future there would be tax kiosks in malls.

Ms Tobias suggested that tax education could take the form of brokering deals with people to make them understand that it was, as Mr Moyane had put it, cool to pay tax. People had to be taxed on the basis of the wealth they had. Incentives had to be considered to motivate the wealthy to contribute more. The Department of Trade and Industry had to come up with creative ideas. There had to be a different tax bracket for the wealthy. It had to be understood that wealth was accompanied by social responsibilities.

Ms Tobias said that mine tax had to receive attention. Mines consumed the largest amount of energy and were responsible for environmental damage. There had to be a radical approach with the rand dropping to R14 to the dollar.

Mr Moyane responded that mining still occupied a central position in the South African economy. There had been a decline, but it was still pivotal. Yet there was no sector that would be treated differently from the mainstream.

Mr A Lees (DA) referred to the SARS customer centric approach. A new business model was being presented. SARS had suffered a scandal around the spy unit. The KPMG report had not been seen. He asked if recommendations from that report had been included in the new business model, or whether it was too recent to be included. The report had been referred to the Minister. It was hoped that it would be available soon.

Mr Moyane replied that SARS primarily dealt with revenue, and the governance and ethics thereof. The KPMG report was not to be viewed as a panacea. There were issues of governance and ethics that had to be resolved in conjunction with other entities. It was difficult to assess the impact on a generating model that was only a few days old. It could not be implemented overnight. The impact of the rogue unit was the province of the Minister as political executive authority.

Mr Lees noted that the KPMG report was commissioned by SARS, and not by the Minister. He asked if there was currently an investigative unit in SARS that had taken over from the rogue unit. He asked if there was any reason why the KPMG report was not released. When would the report be released, and what were the costs involved? He also asked about an effective service and customer centric approach.

Mr Moyane responded that the customer and the trader were the key components in a customer centric approach. 14 000 SARS officials were motivated to treat the customer well, whilst being firm with regards to compliance.

Dr B Khoza (ANC) asked about progress with the Annual Performance Plan. She referred to the impact of the decline and depreciation of the rand. He said it was important to define what a high net worth individual was. She would assume that it was concentrated in the R500 000 to R1 million per year income bracket. The real upper bracket was not being dealt with.

Mr Moyane responded that it was a hard question to answer. Broadly speaking it referred to incomes of over a million a year, but SARS focused on R7 million per year and above. But it was an all-encompassing figure that also included assets like houses and yachts. However, it was important not to lose sight of those below that figure. The very wealthy were prone to camouflage their wealth through trusts.

The Chairperson noted that during the discussion of the Rates and Monetary Amounts Bill, an MP had commented that the emerging black middle class was disadvantaged in terms of taxation, as it was not yet securely established. Huge amounts of earnings had to be paid back. It was not advisable to create categories for special concessions, but categories still had to be considered. Dr Khoza had been lobbied about the matter. The Treasury could be invited to look at the issues.

Mr Moyane responded that there were capital gains tax issues that had to be resolved, related to the emerging black middle class. SARS would establish a think tank to think innovatively outside of existing categories. It was recognised that the prevalence of the black extended family had tax implications. There were capital gains issues related to the black middle class. The emerging black middle class did not profit from property development. A greater debate was needed. SARS would respond by November.

Dr Khoza noted that committee oversight at the Durban port had showed that intergovernmental relations were not strong. There had to be cooperation with Transnet and others, who had to assist SARS. There had to be a coordination strategy, with a single agenda.

Mr D Maynier (DA) felt that the report diverted attention from the real issues. He asked what the revenue targets were, and if they were being met. He asked about a shortfall in revenue collection due to slow economic growth, which could dip below the two percent level.

Mr Moyane replied that there was a substantive quarterly report that included key operational highlights, which would be shared with the Committee. The non-negotiable target for 2015/16 was R1.1 trillion. R202.1 billion was collected in the first Quarter, which was 0.9 percent below the target. SARS performance depended on the economy, and the rand had slipped to R13 to the dollar. The question was whether the R1.1 trillion target was achievable. The mining sector had to be looked at, and sectors of the economy that were closing up. A revenue steering committee was measuring economic performance versus SARS performance. A fully fledged report would be provided at a future meeting.

The Chairperson told Mr Moyane that a formal template had to be adhered to in quarterly reports, along the lines of what the entity had set out to achieve, and what was actually achieved. The Committee secretariat had send these requirements to all entities and the Minister. The Committee had to have a copy of that. SARS had to report on progress with targets.

Mr Maynier noted that for Quarter Two of 2015 there was a shortfall of R2.1 billion, which came to 0.9 percent. He asked what the target and the shortfall were for the first Quarter. The Commissioner had the figures, which the secretary could copy. Figures had to be available for both Quarter One and Quarter Two.

Ms Tobias remarked that there was an established quarterly report mechanism that matched performance to targets, which she suggested that SARS follow. Key performance targets were outlined in government. The in-depth information was used by the Appropriations Portfolio Committee. Sensitivities could be dealt with through the Chairperson beforehand. There were two sections, one related to finance and the other to performance output. The Committee would then be able to check key performance areas, based on the operational model. The Parliamentary Budget Office (PBO) could then be invited for analysis and discussion.

Mr Maynier asked that information be made available for both Quarter One and Quarter Two. The Commissioner had the figures, which the Secretary could copy.

The Chairperson said that he did not agree with Mr Maynier that there had been a deliberate attempt on the part of the Commissioner to evade the real issues of revenue collection. In fact the Commissioner was saying that SARS was doing well in spite of the economic downturn.

Mr F Shivambu (EFF) noted that he had written a letter to Mr Moyane. The Farlam Commission had confirmed that Lonmin Mining had transferred R1.3 billion to a non-existent company in Bermuda. That fact was stated under oath. He asked what SARS was doing to follow up on aggressive tax avoidance. The National Treasury had indicated that more money was flowing to Luxembourg than to Germany. Luxembourg was a known tax haven. There was not much trade going on with Luxembourg. The question was where South African money was going to. The extent and level of tax avoidance had to be known. There were audit companies working for large multinationals that were cooking the books. Top management were aware of anomalies but clean audits were given. There had to be different mechanisms for dealing with the books of multinationals. Practical action on BEPS was hampered because there was no sound legislative framework. Things were fluid. There was lack of agreement about the legality or illegality of tax avoidance. It was an ethical issue. There was no concrete legislation to make profit shifting illegal.

Mr Moyane responded that profit shifting by multinationals to low tax havens was an international problem. SARS had a team that took part in the OECD process and met with the World Customs Organisation. BEPS was taken very seriously. It had a huge impact on the tax base and the tax gap. There was a need to prioritise processes. The taxpayer could not be publicly discussed. With regard to BEPS all taxpayers were dealt with in the same way. Delinquents were appropriately dealt with. Audits of taxpayers had to be dealt with confidentially. He had not received Mr Shivambu’s letter, but would deal with the matter. The SARS BEPS team had an international perspective, and worked with Treasury to analyse players in that space.

Mr Shivambu remarked that there was a private company called SACD that was receiving containers. Customs was being ignored. There was supposed to be SARS officials at SACD terminals, but containers were not being checked. A container from China would only be known to contain items that cost R500 each. Private companies were there for profit, they could ‘receive’ money.

Mr Moyane agreed that customs had to form the first line.

Mr Shivambu asked how cash traders were being dealt with. It was difficult to trace their money, or to determine how much money was being held as cash.

Mr Moyane said trade statistics were a factor of information in the SARS purview. There were areas where SARS had traction. Stats SA and the Reserve Bank could assist, as well as banks. The SARS think tank would address the matter of the cash economy. Officials were sent to Africa to look at models employed by countries like Zimbabwe, Tanzania and Malawi, and how they dealt with cash traders.

The Chairperson told SARS that a formal structure had to be adhered to. All entities had to match goals for the quarter to actual performance. It had to be stated what the plans were, and what actually had been achieved. It was a parliamentary norm. Such a report had to be compiled for the Minister and for Cabinet anyway. It had to be accessible, particularly in the case of SARS, in the current economic situation. The economic downturn placed a stress on revenue. Economic growth was not a SARS responsibility. But SARS had to see what it could do for revenue collection under the current circumstances. Lessons had to be learnt from other countries about tax compliance. It had to be known what percentage of people paid what they owed, and how that compared to the norm for developing countries, and the global norm. Compared to the developing countries South Africa had done well over the preceding years, to up the percentage of people who were paying tax.

The Chairperson noted that before 2009, when the Zuma administration instituted performance agreements with ministers, all entities appeared before Parliament to report on progress toward targets. It had to be stated why targets were not achieved, and what to do about reaching these. The President had said that key performance agreements with ministers would be published on the website. Executives kept certain information to themselves, even in social democracies like Sweden, because it was market sensitive or politically sensitive. SARS could decide what was not to be in the public domain. The Committee could distribute the facts. He told Mr Maynier that the shortfall of R2.1 billion, which amounted to 0.9 percent, was in fact a good performance.

Mr Maynier said that his question was what the target had been.

The Chairperson said that the report had not been written as required.

Mr Moyane responded that a report would be sent that same day. The target for the 1st Quarter was R244 billion. R 242.9 billion was collected. The shortfall was R2.09 billion. Things could have been worse. SARS performance had to be juxtaposed with economic performance. SARS worked with specific targets, dissected in terms of achievement and failure. Risks for Quarter Two had to be ameliorated. There was a commitment to measuring targets and revenue collected on a quarterly basis. High level senior managers met to look at the macro-economic situation. A report would be made available.

The Chairperson reiterated that SARS were doing quite well under the circumstances. He commended a good effort.

Mr Jonas Makwakwa, SARS Chief Operational Officer, said that the impact of the economic situation on revenue collected from mining and manufacture could have been worse. Risks related to PIT had to be reconsidered. R873 million had been saved, which could have been paid out as undue refund. It was not only a matter of collecting revenue, but also of closing gaps. It was not acceptable that funds were siphoned from the State. There would be revenue drives in all quarters of the current year. SARS would push hard to try and limit the gaps.

The Chairperson appreciated that the matter of cell phones had been brought up. He asked if what happened with regard to cell phones and security in the USA was a big story. He had been overwhelmed by what could be done with cell phones, as had been done with ordinary Nokia phones for farmers in Kenya and Bolivia. Cell phones could boost economic growth. Refugees from Syria to Lebanon did not receive bags of maize. They received 20 US dollars every Friday on a cell phone. Corruption could be dramatically reduced. It was not necessary to give money to dock workers, politicians or feudal lords and their indunas. Local revenue could be stimulated. People could buy locally produced products.

The Chairperson referred to the statement that customs and excise contributed 15 to 20 percent of local revenue. He asked what SARS was aiming at in terms of increasing the percentage. He asked how the figure compared to other developing economies.

Mr Moyane replied that increasing the percentage of customs and excise was work in progress. Other developing economies stood at between 20 and 30 percent. Trade facilitation had a major impact. It was possible that the South African figure could increase to between 30 and 40 percent within four years. Customs duties and excise could be measured. It indicated business flow.

The Chairperson noted that the figures did not yet convey the amount collected. He asked that the Committee Researcher monitor the facts. It could be looked at in conjunction with the Department of Trade and Industry. There was scope for collecting more revenue.

Ms Tobias remarked that there had to be an analytical approach, and improved oversight.

Dr Khoza felt that the Committee shared a strategy regarding the excise environment. There had to be relations with other entities. Containers had to be inspected.

Mr Shivambu remarked that SACD received containers that were opened for the first time on the doorstep of shops. Private role players could not be allowed in that space. The State had to be wary. Containers were entering from territories like Shanghai. SACD was preferred because there were no systems. It was quite possible to bring guns into the country. It was a dangerous situation.

Mr Moyane responded that customs and excise was a stepson. It was being elevated. He agreed with Mr Shivambu that gaps had to be closed. SARS had to occupy the moral high ground. The Customs Act granted access to all entries. There had to be stakeholder management, with container movement leakages closed down. Huge amounts of money was being lost. There had to be cooperation with the Post Office, as drugs could be sent by post. Relations with Transnet was of key importance. Customs had to understand what was in containers. The Chinese attache could attest to what left that country. SARS was doing its best.

Dr Khoza remarked that service industries were being treated with kid gloves. Government worked with them. Profit shifting by service industries was possible because there was no product base. Private auditors could pick up on non-compliance and turn a blind eye. She asked what was to be done.

Dr Khoza commended that SARS worked with African countries on the cash economy. It was advisable that SARS strengthen its relationship with banks, who received money. SARS could be instrumental in strengthening the digital economy, so that money could be tracked.

Mr Moyane noted the observations about private services. He agreed that the digital economy could unlock potential. In Kenya it was used for transfers. Cell phones were registered with institutions that were related to the banking industry. SARS had had discussions with the Banking Association of South Africa (BASA) about the matter. The digital economy could unlock the cash economy.

Mr Shivambu remarked that books and music could be bought digitally on I-phones. He asked if that money was being taxed. He asked what SARS was doing about BEPS.

Mr Moyane replied that SARS collected on e-commerce. There was measurement and follow-up.

Ms Tobias said that she was looking forward to an oversight visit to the Lesotho border. The Sothos were clever. The Sothos wore blankets, and one never quite knew what was hidden underneath.

Mr Moyane remarked that customs and excise and BEPS would be major preoccupations in the next quarter. The SARS investigative unit would not resemble that of the past. There were 300 investigators. It was intelligence driven and dealt with illicit trade. SARS needed that capacity. There were audit investigators. It was still early days to assess impact of the KPMG Commission on the operational model. Compliance and governance had to be the central concern. The question was whether the report could highlight some issues and make it public. There were ethical issues involved. Some reports were useful to administrators to do their job. There was taxpayer information useful to the SARS internal process. If the Committee thought that it had to be made public, it could be considered. SARS could not make costs related to the KPMG report public.                                                         

The Chairperson said that the request about costs was not unreasonable. The issue would be discussed with the Parliamentary Legal Adviser.

Mr Lees noted that part of the quarterly report dealt with the improvement of IT. There were problems with e-Filing, as there were letters that could not be opened. Communication between SARS and the taxpayer was good as long as it kept to the norm, but as soon as soon as there was an audit query, it became a nightmare. There was no-one to contact. One would get a call from a call centre and be told that it was not possible to send an e-mail.

Mr Lees asked if SARS was involved with tax education at schools, or whether the Department of Basic Education was asked to include something in the curriculum.

The Chairperson said that he received letters all the time about SARS feedback to taxpayers. People were complaining about lack of contact, especially when there were audit queries.
 
Mr Moyane responded that SARS would look for information about where feedback from taxpayers was lacking. It was frustrating for taxpayers who wanted to comply. He took the point about e-Filing.

The Chairperson asked why a call centre could not receive an e-mail. People with problems had to be able to communicate with SARS, or they might be tempted to turn to devious practices of avoidance and evasion.

The Chairperson advised that the BEPS workshop be limited to the Committee and two other Portfolio Committees. The provisional date was Friday 11 September.

Mr Makwakwa said that SARS could identify which issues to address. During phase two the means to improve customer service would be unpacked. It had to be possible to call a contact centre and state one’s problem. There had to be an open channel, it was not acceptable to have to rely on documents that could not be opened. Revenue collection had to be unpacked. There had to be implementation of measures that would have immediate results. Proper steps had to be taken without delay. SARS would look at services to assess why documents were not sent.

The Chairperson adjourned the meeting.

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