National Treasury and SARS on their 2014/15 Annual Reports; Audit outcomes by Auditor-General

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Finance Standing Committee

13 October 2015
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Auditor-General of South Africa (AGSA) presented on the audit outcomes for the finance portfolio for 2014/15. Its areas of focus had been the submitted financial statements, financial health, performance report quality, supply chain management, human resource management and information technology. Some auditees had avoided qualification due to the correction of misstatements during the audit process. Non-compliance had been most prevalent in the quality of financial statements submitted. Internal oversight assurance had been provided by the National Treasury (NT) and the Department of Public Service and Administration (DPSA), and independent assurance by portfolio committees, the public accounts committee and the National Assembly.


The top three root causes and recommendations were slow responses by the political leadership, slow responses by management in addressing the root causes of poor audit outcomes, and key officials lacking appropriate competencies. The audit position of the NT had remained unchanged, as it had received an unqualified opinion with findings on predetermined objectives. The Land Bank group and SARS had sustained unqualified audit outcomes with no findings through maintaining and monitoring systems of internal controls.


In discussion, Members were concerned about implementation of action plans. It was asked why there was alleged corruption in the entities, and yet unqualified audit opinions had been received. There were questions about information security.


The National Treasury briefed the Committee on its annual and quarterly reports. Global growth for the year remained subdued. Domestic energy and logistic constraints, and a strike in the platinum sector, had restricted economic growth to 1.5 percent. South Africa’s credit rating had been downgraded because of sluggish economic growth. Core social and economic programmes had nevertheless been maintained. There had been progress in the containment of costs and the composition of government expenditure. The total staff composition was 56 percent female and 83 percent black. With regard to second quarter targets, the overall positive variance was R746.3 million, which was made up of transfers (R669.3 million), and operational expenditure (R77 million).


In discussion, the DA interrogated the NT about what was seen as substantial involvement of the NT in the nuclear build programme. Pointed questions were asked about reports and transactions. There were comments and questions about support to finance institutions; retention of skills at municipal level, the Department of Public Works and government assets, and State Owned Entity core and commercial mandates. There was concern about the depreciation and volatility of the Rand, military pensions, and persistent male dominance in the NT upper echelons.


The South African Revenue Services (SARS) gave a briefing on its Annual Report (AR). The operating context included difficult global economic conditions, slow economic growth, the proliferation of illicit trade, and sophisticated tax avoidance. SARS had exceeded the revised tax collection target of R979 billion by R7.3 billion, with R 986.3 billion collected. Tax revenue had amounted to R808 billion (R5.1 billion above target), and customs to R178 billion (R2.2 billion above target). Tax collected represented a 9.6 percent increase over 2013/14, and represented 25.7 percent of the GDP. There had been an 8.1 percent increase in the total number of taxpayers. Contact centres had assisted 4.6 million taxpayers. Baggage and fixed cargo scanners had been installed, and state warehouses had been upgraded. 138 small business desks had been introduced. Over 400 graduate trainees had been employed. Employment equity with regard to race and gender had improved.


In discussion, IT governance, systems and risks received attention, as well as IT security and user access control. It was urged that the small business desks be expanded. Intergovernmental relations with regard to customs had to be boosted. Under-spending was remarked on. The DA was concerned that the KPMG report on the alleged rogue/spy had not been tabled. Assurance was sought that the current intelligence unit would not mutate into a spy unit. The DA asked about what had been described as a “brawl” at the SARS head office. There was a question about possible abuse of the employment tax incentive. There were comments on personal and company income tax. The UDM challenged SARS service levels.

Meeting report

ntroduction by Chairperson

The Chairperson noted that the Finance Committee had still been finding its feet in the previous year. The Budget Review and Recommendations Report (BRRR) of the previous year had been very general. The current year’s report had to be very precise. The Money Bills Act was relevant to the Finance and Appropriations Standing committees. In writing the report, it had to be clear what was being recommended. The report had to be concrete and precise. It had to be reported what departments had said was needed to be done, and how much money was to be spent. It had to be stated why targets had not been achieved, or exceeded. Value for money had to be determined. Projections for the coming year had to be based on how local government had fared with the spending of money for ward committees, for instance. If there had been a good performance in the previous year, money could again be made available. Philosophical discussion was not in order. Reports received could not be used. The writers were saying that Members were not clear about what they were recommending. A Parliamentary Budget Office (PBO) member and the two Committee secretaries had to see that reports were written according to requirements. Areas where the National Treasury was not spending properly had to be pointed out. The performance for the year had to be looked at.


The Chairperson told the Director General (DG) of the National Treasury (NT) that it was recognised that he had to be out of the country often, so it was in order to have reports presented by a Deputy Director General (DDG). If there was no DDG who could present quarterly reports, such a person had to be found.


AGSA briefing on audit outcomes of Finance portfolio for 2014/15

Mr Hein de Wet, Senior Manager: Auditor General of South Africa (AGSA) and Mr Thami Zikode, Business Executive: AGSA, presented. The AG focus areas were quality of submitted financial statements; financial health; quality of submitted performance reports; supply chain management; human resource management, and information technology. Three auditees had avoided qualifications due to correction of material misstatements during the audit process. Annual performance reports of 58% were reliable and useful, compared to 38% in the previous year. Some auditees had avoided findings by correcting material misstatements during the audit process. Non-compliance with legislation was most prevalent in the area of the quality of financial statements submitted. Information technology (IT) focus areas were security management; user access management; IT service continuity, and IT governance. The oversight assurance role was shared by the NT/Department of Public Service and Administration (DPSA), internal audit, and the audit committee. The independent assurance role was shared by thr portfolio committees, the public accounts committee, and the National Assembly.


The top three root causes and recommendations were the slow response by political leadership, slow responses by management in addressing root causes of poor audit outcomes, and key officials lacking appropriate competencies. Key commitments by the Minister to address root causes included tracking the implementation of action plans towards clean audit outcomes through quarterly reports submitted to the Minister’s office, and the development of a financial reporting framework for consolidation of the whole of government.



Ms P Kekana (ANC) said the briefing had provided an objective view of audit outcomes. There were questions around improvement and regression. The AG was clear about regression issues, notably compliance with the Public Finance Management Act (PFMA). Skills gaps had been identified. The AG had pointed out that action plans had not been implemented. The question was whether action plans could be implemented, and in what areas.


Dr B Khoza (ANC) said that she had a problem reconciling the document presented and the briefing note. She asked about the relation between the two documents. She wondered about concerns related to financial health. Key areas of concern had to be identified. She asked if concern had to be with revenue, or with expenditure. The question was whether trade accounting was being managed well.


Mr A Lees (DA) referred to slide 9. He asked if the three entities that had had material misstatements were the same ones. He referred to slide 13 on information technology focus areas, and asked what the IT services’ risk areas were.


Mr D Maynier (DA) referred to page 10 of the briefing note, concerning the Public Investment Corporation (PIC). A member of the accounting authority and a PIC employee had failed to disclose business interests in contracts, and as a result the PIC had awarded contracts to close family members. He asked for clarification.


The Chairperson referred to the level of cooperation from other entities. The average manager employed in the Finance portfolio could be counted on to be more skilled than in other departments. There was alleged corruption in the entities, and yet audit outcomes were not affected. He asked why corruption was not observed. A sample was said to have been taken of the entities, but there had been corruption in departments and municipalities that had not come to light. He would like to meet with the AG early in the following year. He asked if the AG had looked at what the NT had done regarding action plans. It was not correct to simply dispense money. The question was, who had to say whether the NT was doing what it should be doing.


Mr Zikode replied that action plans were sometimes drafted to avoid AG outcomes. Action plans had to be finalised. The briefing document stated on page 2 who had made material misstatements. When contracts were awarded, and there was a family member who worked for the audit firm, the member had to declare his interest. One had to recuse oneself from influence on the process. Financial health was not crucial in terms of the current account. Financial health questions were related to an inability to pay creditors.


Mr De Wet added that the AG looked at budget management, revenue management, and cash flow management. AGSA was not overly concerned with financial health, unless the entity had cash flow problems. Adequate provision was made for bad debt. The question was how recoverable bad debt was.


Mr Zikode added that IT issues had been referred to on page 11 of the briefing document. There was a trend for the media to be able to access areas which were not supposed to be accessible. Information security was being attended to. When someone resigned, it was impossible to use their password. It was not an issue of great concern. The Integrated Financial Management System (IFMS) would be a good management system for the NT. The question was whether it was suitable for all three tiers of government.


Mr Lungisa Fuzile, Director General: NT, replied with regard to implementation, saying that it was related to how resources were allocated to entities. There were adequate resources and capacity was being built. Several expenditure reviews had been done, which informed deliberations at the level of the Minister’s Committee. Work was being done with the Chief Procurement Officer (CPO) to procure items like furniture more cheaply. The National Executive had to decide where there were areas of negativity. The audit was used as a basis to develop action plans to address challenges. Accountability was guided by the Public Service Act. Relevant individuals were empowered to act against those under them.


Ms Kekana remarked that it was important to bear in mind that allocations had to be based on outcomes.


The Chairperson agreed that the NT could do more by way of using audit outcomes and action plans as a basis for allocation.


Ms Kekana said that there had to be a session with the Department of Monitoring and Evaluation (DPME). That Department was also empowered on the basis of increasing their monitoring of outcomes. An invitation had to be extended. She asked how the Public Service Commission could assist with the monitoring process.


The Chairperson said that it was extremely hard to get hold of other Portfolio Committees. It had taken him three and a half hours to get three committees together. 19 sms’s had been sent to a chairperson, with no reply. 40 e-mails had had to be sent about the issue of where Stats SA had to be placed. He asked if Members could lobby members of other committees. He agreed with Ms Kekana that possibilities for engagement had to be explored. The Standing Committee had maintained that Stats SA had to be under the Ministry in the Presidency. He had spoken to Mr Jeff Radebe and the Minister of Finance, and had written a letter to the Speaker, Ms Baleka Mbethe. As a result, the Finance Committee would not be responsible for Stats SA.


Dr Khoza asked if there was time to resolve and process the issue. It had to form part of the report.


The Chairperson said it would be best if the AG could appear with each of the entities. Three entities had been chosen in the current year. There was less discrepancy in the entities under the Finance Committee. The Land Bank and the Financial and Fiscal Commission (FFC) could be pursued. All reports relevant to the Money Bills Act had to be ready by the following Tuesday. It was worth considering moving the deadlines from September to the end of August.


Mr Maynier urged that the business of the day be adhered to.


The Chairperson replied that the first hour of the day was scheduled for the AG, and that time had been exceeded by only a few minutes. He told Mr Maynier that he was wasting the time of the Committee.


Briefing by National Treasury on the annual and quarterly reports

Mr Fuzile, Director General, and Mr Stadi Mngomezulu, Deputy Director General, presented. Global growth for the year under review remained subdued. Domestic energy and logistics constraints and a strike in the platinum sector had muted gross domestic product (GDP) growth to 1.5 percent. South Africa’s credit rating had been downgraded owing to sluggish economic growth. Core social and economic programmes had nevertheless been maintained. Progress had been made in containing costs and improving the composition of government expenditure.


The Committee was taken through notable activities and highlights for the period under review, according to the programmes of administration; economic policy, tax, financial regulation and research; public finance and budget management; asset and liability management; financial accounting and reporting; international financial relations; civil and military pensions, and technical and management support and development finance.


Under human capital, it was stated that the total staff composition was 56% female and 83% black. Expenditure outcomes were listed, as well as the main reasons for spending deviations. Variances were mainly on transfers, namely the Employment Creation Facilitation Fund and the Neighbourhood Development Partnership Grant. The NT had received an unqualified audit report, with one finding on predetermined objectives. There had been no material findings or material misstatements.


The Committee was taken through a summary of second quarter service delivery targets; second quarter targets’ performance status per programme; financial performance per programme; outcome per economic classification, and significant variances and reasons. The main items making up the overall positive variance of R746.3 million were transfers (R669.3 million) and operational expenditure (R77 million).



Mr Maynier remarked that the annual report (AR) briefing had not touched on the biggest fiscal risk, namely the proposed nuclear build programme. In seven sections of the AR, there had been reference to the substantial work done by the NT on the nuclear build programme. There had been reference on page 93 to a memorandum on pebble bed modular reactors, with regard to training and educational assets. There had been reference to a transaction with the Rosatom Atomic Energy Corporation. He asked for particulars about the transaction. The NT had made recommendations about it. He asked what those were. He asked about the nature of the transaction and whether it had gone ahead or not.


Mr Maynier referred to page 48 of the AR. He asked if the economic policy, tax and financial regulation and research programme had assessed the economic impact of alternative electricity options. He asked if the two assessments traversed the issue of nuclear energy, and what the findings of reports were. He referred to the economic opportunity cost of capital in the integrated energy plan, and whether reports were complete or incomplete, and whether they were classified or not. He referred to page 64, and asked about studies on the feasibility of gas, and regional nuclear or hydro-electricity generating options. He referred to a NT report on nuclear financing options and solutions, and a report on the financing of nuclear options. A report had been presented to the nuclear sub-work group. He asked if the report had been completed, and whether it was unclassified or classified. He referred to page 408, in which there was reference to training on nuclear finance in South Korea. He asked if NT officials had been sent, who had gone, and for what purpose.


Ms Kekana referred to programme 8 (technical support and development finance). She asked about collaboration with municipal programmes, and what the challenges were. Initial engagement with the AG had pointed out gaps in targets. She asked why the NT did not provide support to finance institutions. The AG had had questions about supply chain management. Finance institutions had to comply. The NT template could be helpful. The NT had to make sure that all departments used the same template. She referred to rollovers. Departments and provinces failed to spend, and money was called back. If the template was properly applied, infrastructure grants would not have to be called back.


Ms Kekana said that she did not understand why there were 100% figures in the performance table. The second quarter was halfway through. International Relations lagged behind, while some programmes were overheating. She asked for a column that showed percentages at the current moment.


Ms D Mahlangu (ANC) also asked why some figures already stood at 100%.


The Chairperson noted that the Select Committee (SC) had to look at the previous AR, and ideally at the first and second quarters, to recommend increased expenditures, for instance.


Mr N Kwankwa (UDM) referred to retention strategies, especially in small municipalities. Skills could not be afforded. Small municipalities like Tarkastad could not afford to retain skills.


Dr Khoza referred to performance information in programme 2. She asked if there had been any improvement. What was meant when a target was said to be “partially achieved?” The report reflected well on the NT.


She remarked that although the Finance Committee was not the designated portfolio committee, she was worried about government assets. She asked if the Department of Public Works (DPW) was destined to remain as the main department to manage the assets. Weaknesses had arisen from that. She asked if there could be decentralisation in the future. The DPW took for ever. The issue had been on the table for a long time. The NT could start a discussion on the matter.


Mr Kwankwa referred to human capital (slide 18), where the percentage of males employed was not reported.


Mr D van Rooyen (ANC) asked if the NT needed intervention in asset and liability management (programme 4). There had been guarantees and financial support to State Owned Entities (SOEs). Some entities had to have sound balance sheets. Expenses related to non-core mandates could not be provided for. The commercial mandate tended to be expensive. Finance support had not been sufficient to cover expenses. He asked how SOEs were funded in other countries. In some cases, the public mandate overrode the core function. There had to be a balance between commercial and core mandates.


Mr Van Rooyen asked if action plans could be shared with the Committee. The AG had raised some concerns. The role of the urban network strategy with regard to the Neighbourhood Development Grant had been stated. Some municipalities were not processing applications. He asked if the Neighbourhood Development Grant and the network strategy could be collapsed into each other.


He referred to military pensions. Potential beneficiaries had to be sensitised. Work could be done with the Department of Military Veterans to ensure that members could access benefits.


He said that the high echelons of the organogram still showed male dominance. Although the NT always said that this was being worked on, the Department was still being led mainly by men. Finance remained a male-dominated terrain.


The Chairperson remarked that the current International Monetary Fund (IMF) Chairperson was a woman. Germany, who had the best performing economy, was led by a woman.


Mr Lees noted that the AG had referred to a Public Service Commission (PSC) investigation, and one by NT special audit services. He asked about background to the reports and outcomes.


He said that a figure of R374 million had been cited for the purchase of equity in African Bank. He asked how that related to the establishment of the Good Bank. The curator had said that the SA Reserve Bank (SARB) would take up 50% and the PIC would invest 25% in the Good Bank. He asked if this was real, and could be viewed as equity to be recovered. There had been a R3 billion extension of loans indicated in note 6. The Land Bank had received R500 million and the Development Bank R2.5 billion. The historical investment in the Land Bank was R201 million, and in the Development Bank R200 million. He asked how those loans were to be recovered. He had thought that there would be recapitalisation.


Mr Lees referred to an investment of R13 billion in SAA, which was immediately impaired. He wondered if it was an investment or a bailout. He asked why the current year’s financial statements reflected an Eskom loan as capitalised. The Eskom books stated that R60 billion had been partly capitalised in previous years. He asked how that had happened.


The Chairperson told the DG that the quarterly report was easily accessed, as tables were displayed, but it was still necessary to refer back to the AR. He referred to a comment on the AR by the Parliamentary researcher, Ms Yolande Brown, and asked the NT to kindly respond to it. People spent hours preparing such documents. It was a cross-political party exercise. Ms Brown had found a discrepancy between the targets listed in the annual performance plan (APP), and had questions about the 96% of the final appropriation spent. He asked that the NT reply to whatever critical comments had been made.


Mr Fuzile responded that the NT had ten divisions. Each had a chief director. The NT had to be transparent and inform Parliament about what had been captured in the AR. It was possible that information deemed important by the Committee could be left out. There was a government programme to explore pebble bed reactors, to be employed as small units. It was clear to the NT that it was a useful experiment. If the scale and cost proved too much, information gathered could still be useful in future. There were difficulties with the consideration of the Nuclear Bill as part of the nuclear build programme. The process was in its early stages. The Integrated Resource Plan required that nuclear technology be researched. The government wanted to understand nuclear technology better. A call had gone out from Korea in October 2014 for the sharing of practical nuclear experience. A person whose name could be given privately, had been nominated. That individual was a director, which was a level 13 appointment. The inference was sometimes drawn that sending someone to Korea meant that Korea had an influence on South Africa. There was currently no reason to suspect that. Nuclear reports were classified, which caused a predicament. The NT could speak only in general terms. There had to be decisions about what could not be divulged, in the public interest. There were aspects of nuclear energy that any country with high standards would not reveal. The NT could not respond fully on nuclear energy until decisions had been made about what could be communicated. Financial implications and a costing model for nuclear energy had to be worked out, but even Cabinet could not as yet hear about it. There was a designated sub-committee from a couple of departments, like Energy and Public Enterprises.


The Chairperson commented that the matter had come up before. He had spoken to Fikile Majola, Chairperson of the Energy Portfolio Committee, which had looked at the financial implications. Members could be sent there. Parliament had to look into the matter. The ANC wanted a nuclear cost-benefit analysis. The Committee could not dictate, but if it was discussed in the public domain, costs had to be known.


Mr Maynier agreed that there had to be a meeting with the Energy Portfolio Committee -- but the clock was ticking. The President had stated that matters would be concluded early in the following year. If a meeting with Minerals and Energy was not possible, the Finance Minister had to brief the Committee in the current year about cost implications. The Minister also had to say what could be made public.


Mr Van Rooyen said that if the matter was that urgent, the Committee would mandate the Chairperson to expedite the process of a meeting with Energy.


Mr Maynier urged that the training in South Korea should be aimed at getting to know the level of NT preparedness to deal with nuclear financing.


The Chairperson remarked that it was not possible to decide on financing beforehand. Costing could only follow on decisions about what was to be done. It was not advisable to appropriate the work of other committees. It could be better to create subcommittees within the Finance Standing Committee.. A meeting on nuclear energy could be called. The President and the Ministers had to take the Constitution and the PFMA into account. It was not in order to simply forge ahead with a project of such magnitude. A cost-benefit analysis was called for. It was not acceptable for procurement to proceed without financing being explained.


Mr Fuzile agreed that cost effective solutions had to be considered. Anything that could cost money had to be set in an expenditure framework.


The Chairperson felt it would not be appropriate to call the Finance Minister without the Energy Minister being present. He would raise the matter with Mr Majola.


Mr Fuzile noted that he and Mr Mngomezulu reported to other departments and Chief Financial Officer (CFO) forums. He replied to a question about the retention of skills in municipalities. Financial management had improved the grant for skills development. Over the preceding seven years, newly qualified recruits were support by experienced people. Young people from the locality were selected so that they were motivated to stay.


Mr Fuzile said that South Africa’s economic performance was not immune to what happened globally. People were not buying, and the global economy was not performing well. As to the volatility of the currency, the fact was that other countries were experiencing more depreciation than South Africa. The Rand had not depreciated as much in real terms as the Dollar rate suggested. The depreciation had to be looked at side by side with falls in commodity prices.


He said there were two initiatives with regard to the maintenance of government buildings, with one centered in the DPW. A property management trading entity had been set up in conjunction with the DPW. There had been discussions with the Central Procurement Office (CPO). Maintenance of facilities and schools could be decentralised. Schools had to receive support beyond section 21 requirements. There had to be capacity to deal quickly with unplanned things.


Mr Fuzile commented on the realism of expectations regarding SOEs. The SOEs had not only a commercial mandate, but also a developmental one. Government had to be clear about what was commercial and what was developmental. The NT looked at the framework and tried to maintain a balance. There had to be a more rigorous evaluation of the entities about the commercial mandate. The Development Bank of South Africa’s cost to income ratio was in excess of 62%. After restructuring, it had dropped to below 50%. Most of the money had gone to development. Inefficiency in the name of development could not be allowed.


He said that grants to military veterans had been consolidated and rationalised, together with the Department of Military Veterans.


Replying to gender questions, he said that under stable conditions there were not many vacancies at the DG level. The first Treasury DG was a woman, who had occupied the position for seven years. There had been investigations by the Public Service Commission as a result of whistle blowing.


Mr Fuzile commented on the capitalisation of Eskom. An amount of R60 billion had been invested as a deeply subordinated loan, which meant that interest would be paid only when the entity was able to. It was as good as equity. It remained only in the books of Eskom. The percentage reflected as equity was in the NT books as an Eskom rebate.


Mr Ismael Momoniat, NT Chief Director, said that the Treasury had equity in the African Development Bank and the World Bank. Curatorship of African Bank Limited (ABIL) would continue. Legal action towards creating a Good Bank was proceeeding slowly. There was a guarantee in place, but it was hoped that it would not be utilised. Indicators in programmes 2 and 4 had been developed in accordance with the PFMA. The focus had been on outputs. The NT was inclined to only look at inputs. Tax proposals were soft targets. The NT had to act as if it delivered services. However, indicators were useful when it came to policy. There had to be a focus on desired outputs.


Mr Mngomezulu said that the performance information had stated figures for six months. A target was partially achieved if it amounted to more than 50%. The AG had pointed out that there had been information that was not useful and reliable. It would be aligned with the framework.


The Chairperson asked for a response from the NT to some issues that the Parliamentary researcher, Ms Brown, had underlined.


Briefing by South African Revenue Services on its Annual Report

Mr Tom Moyane, SARS Commissioner, presented. Under key revenue highlights and trends, it was stated that the revised revenue target for 2014/15 had been R979 billion. The total revenue collected had been R986.3 billion. Tax revenue had accounted for R808 billion (R5.1 billion above target). Customs revenue had accounted for R178 billion (R2.2 billion above target). The revised target had been exceeded by R7.3 billion. That performance represented a 9.6% increase above the 2013/14 revenue collection performance. Tax collected represented 25.7% of the GDP. The total SARS taxpayer register had increased by 8.1%. 214 criminal cases had been successfully prosecuted. 13.39% of cargo declarations had been physically inspected, against a target of 11%. Contact centres had assisted over 4.6 million taxpayers. 217 schools had been engaged, and more than 80 000 learners had been involved in workshops. Ten baggage scanners and two fixed cargo scanners had been procured, and state warehouse facilities had been upgraded. 138 small business desks had been introduced. SARS had achieved 16 of the 23 performance targets for the 2014/15 year. Over 400 graduate trainees had been welcomed into SARS employment. Employment equity had improved in the areas of race and gender.



Ms Kekana referred to the AG’s report. SARS was one of the entities overseen by the Committee. SARS was doing well in respect of accountability to the AG and compliance with laws. However, the general assessment showed that there were still two auditing areas in the yellow. There was stagnation related to IT governance and IT systems control. Action plans were needed. The question was how overall modernisation was to be addressed. SARS at times under-performed on some targets, but also over-performed on others. The Commissioner had to talk to the challenges. Tax and customs revenues had to be unpacked. It had to be known which areas had to pay more, and which were cushioned. There had been under-collection in some areas. The question was how to mitigate.


She referred to the 138 small business desks established, and said they had to be closer to municipalities. Unemployed people without means to survive were blaming foreigners. There were people who did not bank or comply with tax laws. The small business desks could ensure that people paid taxes. She appreciated the intervention, but it had to be expanded. Intergovernmental relations at the municipal level had to be strengthened. It had to be known which businesses were registered with SARS.


Dr Khoza congratulated SARS. The IT issue had to be a serious one, if the AG had raised it. It was a risk area for SARS. Management had to look at it closely, especially at security and user access control. SARS could only be as good as general economic conditions allowed. Between February and September of the current year, load shedding had had an impact on companies. There had to be a focus on the resulting under-collection. There had been over-collection in the current year. She asked about prospects for the following year. The situation was not yet stable. She asked about the risks associated with dividends tax.


Dr Khoza felt that intergovernmental relations had to be boosted. There were many players in the revenue stream. Intergovernmental stakeholder relations were somewhat lacking. She asked that the Commissioner provide a breakdown of refunds. Good work by SARS had to be acknowledged. The AG was saying that SARS was performing better, with the only exception being IT.


Mr Lees asked about under-spending on warehouses for Durban, as indicated on page 53 of the AR. There had been reference to R450 million under-spending on capital expenditure, on page 106. In the current year, there was under-spending due to lack of approvals. A possible R800 million had been under-spent in the current year.


He referred to performance bonuses (page 149 of the AR), and said the titles of executive committee members differed in different places. He asked if bonuses drifted through the organisation. Only one incidence of fraud had been mentioned, which went back to 2010, yet the press was full of fraud cases.


Mr Lees noted that the audit committee and the AG had referred to the Sikhakhane Report, which had been made public. The Kroon Report had also been made public. However, the KPMG report had not been tabled in the Committee. SARS had been responsible for the alleged rogue/spy unit. He asked in terms of what legislation it had been run, and whether it had been disbanded or had assumed a different form. He asked if the assumed disbanded unit had been brought on to the books. There used to be ghost entries. He referred to an incident at the SARS head office on the previous Thursday, when the police had been called in. Senior managers had been involved.


Mr Maynier also referred to the “brawl” at SARS. There were key organisational challenges around the alleged spy unit. It was the biggest scandal SARS had ever had to contend with. The question was how it was handled in terms of the KPMG report. He asked what comfort there was to be had, in that there was no existing spy unit. There had to be new protocols and directives to ensure that enforcement units did not mutate into rogue spy units.


Mr Kwankwa asked if the small business desks were proactive. There had been criticism to the effect that they were not. It had been mentioned under key operational highlights that 217 schools and 80 000 learners had been reached. There had been difficulty in getting SARS involved in programmes. He asked how SARS integrated with school programmes. It had been stated that there were 400 graduate trainees. There had to be a breakdown of male and female employees in future. Some of the required SARS skills were scarce in certain communities.


Mr Kwankwa asked if South Africa worked with other African regions on tax evasion and transfer pricing.


Mr Van Rooyen remarked that the current tax amendment law to plug gaps in treaties was not enforced by other countries. If it was not measured, it could not be dealt with. There had to be increased personnel to deal with the problem of lost revenue.


He asked for an update on one-stop border posts, and the status of border patrols.


He referred to changes in the penalty system. Measures dealt with debt as a percentage of revenue. The target was a six percent debt ratio. He asked if internal capacity was adequate for six percent.


Mr Maynier commented on youth employment and the employment tax incentive (ETI). He asked about the take-up of the ETI, as there were difficulties associated with it.


Mr Lees noted that interest on trade and other receivables had increased. With respect to bonuses, there had been a three month remuneration of R1 million. R4.6 million had been spent on contact centres. He asked how satisfaction levels were to be judged.


He said the DG had mentioned that there was a new system for tax clearance certificates. Currently it was once a year. Many taxpayers had monthly tax clearances. He asked what had changed. The cost to tax ratio was good.


Dr Khoza said that she would love to hear an opinion on problematic personal income tax (PIT) issues. There was a thin line between tax avoidance and tax evasion. Companies justified themselves. She asked if the system was being strengthened against that. There had to be equilibrium between company income tax (CIT) and PIT. Legislation had to close the gaps. There had been a global income decline among companies. There had been a negative knock-on, and SARS had become more hard-headed with PIT.


Dr Khoza asked that the Commissioner contextualise remuneration of SARS personnel and performance bonuses. City managers were paid more than a DG, but a city manager had to be the master of everything. The city had to collect its own money. She asked what factors were taken into account, and how they related to international standards. She asked about progress with the modernisation of deregistration.


Mr Kwankwa remarked that PIT was like DNA -- it proved who one was. Businesses were gloating about how taxation was avoided. He questioned the SARS service level. In the previous year, Parliament had stopped paying salaries for support staff members, who then had to take responsibility for registering with SARS. Because the matter was related to political parties, SARS had taken months to finalise it. When it had been finalised, SARS had imposed penalties. The UDM had had to pay, even though SARS had been responsible for the delay. If that could happen to a political party, one could imagine it happening to individuals. Service levels had to be interrogated.


Mr Dumisani Jantjes, Parliamentary Budget Office (PBO) Tax Analyst, noted that colleagues in other countries cited SARS as a good model. He referred to the over-collection in the current year. It was a good sign and showed that SARS was working hard. But it could not be done continuously. If that happened it would cast doubts on the revenue collection model. He asked if access would be allowed, if the PBO should decide to do work that focused on the operating model. He noted that there had been substantial expenditure on infrastructure development. He asked about benefits from expenditure, and whether social and economic benefits could be quantified, so that SARS could say what it expected to gain in revenue services from infrastructure expenditure.


The Chairperson asked to what SARS attributed the R7 billion extra it had raised. The full potential of customs and excise had to be exploited. With regard to base erosion and profit shifting (BEPS) there was a thin line between tax avoidance and tax evasion. SARS had beefed up its staff to look into the matter. A tax expert had told him that BEPS was in fact tax avoidance and not tax evasion. He had previously thought that double tax agreements (DTAs) were a foregone conclusion. Challenges arose when DTAs were not consistent with local concerns. BEPS losses amounted to R150 billion per year. DTA agreements had to be looked at more carefully in the coming year. Regulations could be tightened. A balance had to be found between BEPS and revenue collection, and the need to not frighten away foreign investment.


Mr Jantjes said that Parliamentary oversight of double tax agreements was highly important.


Mr Moyane replied with regard to the rogue unit that had been disbanded in October of the preceding year. It had not been resuscitated by him. The issue had been discussed with the State Security Agency, and there was a memorandum of understanding. The enforcement unit would not mutate into a rogue unit. There was a need to deal with illicit trade and rogue taxpayers. SARS had stopped R78 million from leaving the country. A spy unit would be in violation of the law, and could not be allowed. SARS was applying its mind to the Sikhakhane Report. There had been no altercation at the head office on the previous Thursday. A person had been arrested by the police in connection with a planned scam. The fiscus had been saved R266 million, which had been about to be defrauded from SARS.


Mr Jonas Makwakwa, acting Chief Operational Officer, replied about IT governance. SARS was aware of the issues and engaging with them in the audit committee. IT governance would be strengthened. There was a digital and IT committee to which EXCO members belonged. There were terms of reference and minutes kept. SARS would improve proper governance of IT procurement. A fully fledged office would manage IT. Inroads had been made towards access control. Reports were analysed to make sure people who had to access them could do so. SARS had to be protected from cybercrime.


The operating model review included the identification of high net worth individuals. SARS would be able to collect more as a result. With respect to BEPS, relations with other countries would be improved to coordinate plans. There had been meetings with other Southern African Commissioners about BEPS.


Mr Makwakwa noted that customs duties would be regulated by the new Tax Act. In the past, goods were not cleared at the first point of entry, which was currently happening. There were partnerships with other departments to address the illicit economy. Cash businesses were not paying tax. The small business desks were envisaged as a broader project.


He said that dividends tax was charged on a shareholder, and was collected via the company. SARS’s risk was thereby minimised. There had been R172 million in refunds, of which R15.2 billion pertained to PIT. 36 000 employers had taken up the ETI offer. There had been elements of fraud. An analysis had been conducted to deal with fraudulent claims.


Mr Makwakwa said that there was a dedicated SARS outreach team involved in public training. The Department of Education had been engaged. Gaps with regard to one-stop border posts had been identified. New regulations required continuous compliance with regard to tax clearance certificates. There had been interaction with the Treasury to launch a supply chain management system. Every year, ten million people applied for tax clearance certificates. Debt book challenges centered on payments made into wrong accounts. There was an outsourced debt project. The internal capacity was not sufficient. If someone defaulted, there was a final demand within ten days.


Mr Katiso Tabe, Acting Group Executive: Strategy and Risk, SARS, replied with regard to trainees and gender, saying that there were 60% female and 40% male trainees. Performance bonuses were based on performance agreements entered into. The audit committee and the HR committee were benchmarked according to what other revenue jurisdictions did. It was not done on a commission basis. A middle of the road approach was followed. Officials had to be established in a position before bonuses could be paid.


Mr Franz Tomasek, Group Executive: SARS, dealt with questions about BEPS and transfer pricing. The unit that dealt with transfer pricing was being increased in size. There were extended prescriptions related to transfer pricing, and a BEPS project under the G20. The same penalty system applied to PIT and CIT. Penalties increased the closer it got to outright evasion. In the transfer pricing space, it was difficult to determine what was wrong pricing, and hard to say when it amounted to tax evasion.


Mr Moyane drew attention to concerns raised about the Border Management Agency (BMA) Bill. It would lead to the balkanisation of SARS, with customs going to Home Affairs. SARS was currently beefing up customs. The Bill had to be looked at. The Davis Tax Commission was against customs being moved to Home Affairs.


The Chairperson asked where the Bill currently was. The Committee could not get embroiled in the matter. He had not been aware of the implications. Mr Jantjes and Ms Bridgette Diutwileng, Committee Researcher, had to look into the matter. The Commissioner’s point had to be noted.


Ms Kekana submitted that the issue must be given due consideration. Home Affairs had a lot on its plate, and customs was doing well under SARS. Relevance to SARS had to be argued.


Mr Kwankwa agreed that it would lead to regression.


Mr Maynier concurred that the issue had to be taken up. The Department of Defence had regarded the Bill as unconstitutional. Others also had reservations.


The Chairperson remarked that it did not make immediate sense. It had to be checked soon what the rationale was for Cabinet agreeing to it.


The Chairperson asked that Members give guidance as to recommendations.


Dr Khoza suggested recommendations should cover IT risk issues, access security control, and progress with modernisation.


The Chairperson asked that Members e-mail recommendations by 15h00 on the following day.


The Chairperson adjourned the meeting, and asked Members to remain behind briefly for in-house discussions. 

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