National Treasury & SARS on their Quarter 4 performance

Meeting report

Briefing by National Treasury on 4th Quarter Performance 2016/17
Ms Silindile Kubheka, CFO, National Treasury, stated that National Treasury’s quarter four budget amounted to R28.5 billion with the bulk of it going towards revenue administration, financial intelligence and state security, and international financial relations. A variance of R252.6 million was realised. The main contributors to the R252.6 million under-spending were transfers (R152.4 million) and operational expenditure (R100.2 million). These main contributors included R57.3 million surpluses on Jobs Fund grant disbursement- the funds transferred to the Jobs Fund Partner were not fully spent and had to be returned to Treasury; R32.1 million under-spending on the Neighbourhood Development Partnership Grant (NDPG) direct grant- funds were withheld as the Mbombela Municipality did not spend all funds transferred in November 2016; R32 million under-spending on Special Pensions due to a decline in membership as a result of attrition and members opting for Non-Statutory Forces (NSF); R27.3 million saving which was mainly the funding which was earmarked for the resolution 3 of 2009 within Corporate Services of R12.5 million which was not approved nor implemented. R33.3 million saving was realised from various items mainly due to the implementation of cost containment measures on items such as, amongst others stationery, training and travel costs.

National Treasury identified under-achieved indicators and why they were not achieved. Under corporate services, 0.5% savings on goods and services expenditure was realised against a 5% target, owing to service providers not being in a position or unwilling to negotiate prices as a result of stressed economic factors as well as recently introduced OCPO travel framework limiting departmental level negotiation on travel and accommodation. On tax and financial sector policy, 116 economic policy analyses, research, assessments and advice on macroeconomics including government policy proposals were developed, against a target of 420. Under-performance was attributed to restructuring of this area of work, having ended daily reports and reduced the number of monthly reports to better align needs of principals to available resources. Under public finance, 277 monthly expenditure feedback to departments was realised, against a target of 480. Underperformance was attributed to delays in addressing queries by departments, such as not providing feedback within the stipulated 15-day period and delays in addressing technical errors in the reporting template. Also, posts were frozen as part of a host of measures to reduce expenses.

Mr Stadi Mngomezulu, DDG: Corporate Services, National Treasury, took the Committee through National Treasury’s responses to the Committee observations and recommendations arising from the report of the Committee on Budget Vote 7. The Committee had asked Treasury to brief it on how exactly the Minister was going to address the downgrades. Treasury noted that the recent downgrades were driven by: low growth reflecting policy uncertainty and slower progress with structural reforms; weakening of South Africa’s institutional strength (in particular, the National Treasury); and weakening governance and financial position of state-owned companies, and rising exposure from contingent liabilities. Interventions aimed at addressing the rating weaknesses would result in higher economic growth, restore fiscal policy certainty and the strength of the National Treasury as an institution; and address governance and financial weakness in SOCs thereby reducing contingent liabilities’ exposures.   

Discussion
Mr D Maynier (DA) asked Treasury to explain how the recently gazetted Mining Charter would fast-track economic and investment growth. The consensus position was that it would do the exact opposite. Also, he expected detailed updates on every single performance review for indicators from Treasury presentations.

The Chairperson replied that detailed updates being requested by Mr Maynier were under the Appropriations committees’ purview. Also, Members had to be realistic; the huge admin load would not allow for such comprehensive coverage. The Committee was not a super-committee.

Mr D Hanekom (ANC) acknowledged that Treasury’s performance was good. However, the choice of terminology such as ‘not achieved’ was sticky- ‘not achieved’ could mean poor performance, but it did not necessarily mean poor performance. Treasury had to make it clear why particular targets were not being met. On the responses to the Committee’s observations and recommendations, the reasons given for downgrades were hopelessly inadequate. The downgrades were serious and the analysis on their causes needed to be serious. It was public knowledge that the downgrades followed the removal of the former Minister of Finance. There was need for objectivity so as to address the concerns. Also, what was government doing to address policy uncertainty? There was need to analyse why institutions are as weak as they are. What sort of remedial action would be needed? The Committee needed to know what was actually being done. He asked for reassurance that the CEO initiative convened by the Minister of Finance would be up and running.

The Chairperson agreed with Mr Hanekom that Treasury’s responses were not adequate. Also, the Committee was not happy that the Financial Sector Transformation Summit was not taking place this year. He asked for an indication as to when it would be held.

Mr A Lees (DA) asked about contingent liabilities with regards to South African Airways (SAA). Has SAA applied for any form of assistance or bailout from Treasury because that had an effect on contingent liabilities? It was disappointing that the Chief Procurement Officer position was still vacant. It is a critical position and the Committee needed some reassurance that it would be filled soon.

Mr F Shivambu (EFF) pointed out that National Treasury, in its written responses, referred to Mandatory Audit Firm Rotation (MAFR) as a complex issue. He sought clarity on its position on the MAFR- this would assist Members in framing discussions clearly. What was the position of National Treasury on the recently gazetted Mining Charter? When was Ms Dudu Myeni, SAA Board Chair, leaving SAA? National Treasury should know as it was given the mandate to oversee SAA. What was the attitude of National Treasury on the Public Protector’s remedial action on changing the mandate of the Reserve Bank?

The Chairperson indicated that Treasury could not be held to account for other departments or entities that were not performing. It was not fair. Also, Members were not opposed to the MAFR but there was need for a buy-in by the big players, and to ensure that an overhaul does not hurt the poor and vulnerable.

Mr Mngomezulu replied that the filling of vacancies was long overdue. It was the Minister’s priority to fill Treasury vacancies. Interviews for the Chief Procurement Officer were expected to be held by the end of June. In response to Mr Hanekom, he acknowledged that objectivity was key; however, some issues were better left to politicians. It was very important that the CEO initiative continues to convene; the Minister expressed his commitment to the process upon assumption of duty in March. On MAFR, given that National Treasury was accountable to the Ministry, it did support the stance taken by the Minister and believed continual engagements were necessary. National Treasury believed consultations should continue to avoid unintended consequences.

In response to Mr Shivambu, Mr Mngomezulu said National Treasury had not received any formal report from the Public Protector- Treasury would make decisions based on formal reports. On when Ms Myeni was leaving SAA, that would better be left to the governance of boards. Also, SAA had not approached Treasury. If SAA approaches Treasury, the Committee would be made aware as part of the due process.

The Chairperson said some questions had to be left to the political authorities - the Minister and his deputy. He asked Treasury to shed more light on the FICA implementation process.
 
Mr Mngomezulu indicated that only two provisions would require implementation and operationalisation after the 1st of October. There are provisions of the FICA that took effect upon the signing of the Act. Other provisions would require consultations and an implementation roadmap was in place.

Mr Maynier made reference to ‘a mysterious departmental forum’ in the print media, to presumably coordinate the implementation of FICA provisions. It was ‘mysterious’ because there was no provision in law for same. What was the purpose of the forum and what authority did the forum have in law.

Mr Mngomezulu said Treasury’s understanding was that the interdepartmental forum was administrative rather than authoritative. Treasury would ensure the full implementation and success of the process and comprehensive response would be furnished in due course.

The Chairperson indicated that it was well within the executive and Treasury’s powers to set up interdepartmental forums. There was no legal basis to oppose such decisions.

Briefing by South African Revenue Service (SARS) on 4th Quarter Performance 2016/17
Mr Hlengani Mathebula, Chief Officer: Strategy and Communications & Enforcement, SARS, explained that in executing its mandate SARS had to balance between the three levers of service provision, education and enforcement. Despite a tough financial year, largely owing to slow economic growth margins, the quarter four financial highlights were indicative of prudent financial performance by SARS. R325.3 billion worth of revenue was collected in quarter four, with a deficit of R0.3 billion against a revised estimate of R325. 6 billion being realised. This was attributed to lower import VAT than revised estimate by 2.8%, mainly due to rising costs of imports, combined with weak domestic activity; lower Personal Income Tax, against revised estimate by 0.8% due to weaker than expected PAYE payments and PIT provisional payments as well as higher than expected PIT refunds; lower customs duties than revised estimate by 13.1%, mainly due to rising costs of imports; lower Specific Excise Duties, by 0.7% due to lower revenue from cigarettes and tobacco.

On organisational performance, SARS was committed to increased Customs & Excise compliance through modernisation and alignment of excise processes and systems. SARS acknowledged cybercrime as a global threat and continued to be vigilant. It was on track to improve border management and continues to work in close partnership with the Department of Home Affairs.

Illicit financial flows
Dr Randal Carolissen, Group Executive: Revenue Analysis, Planning and Reporting, SARS, presented the entity’s illicit financial flows strategy as per the Committee directive in March. He pointed out that illicit trade is a major and growing problem worldwide. It involves money, goods or value gained from illegal and generally unethical activity. It encompasses a wide variety of illegal trading activities such as: – human trafficking, illegal trade in natural resources,  various types of intellectual property infringements and trade in certain substances that cause health or safety risks, smuggling of excisable goods, and trade in illegal drugs among others.

Illicit financial flows from South Africa are substantial but difficult to measure, and widely divergent estimates exist. SARS was working on addressing the challenge at different levels. At the strategic level, inter-governmental consensus through trilateral agreements with Statistics SA and South African Reserve Bank; SADC Commissioners’ General Forum to address Multi-National Corporations (MNC) below Organisation for Economic Corporation and Development (OECD) threshold;  agreements between SARS, Internal Monetary Fund and US national treasury to assist regional capacity building in transfer pricing existed. Also, SARS has an established structural focus to deal with illicit finance through internally end-to-end multi-functional teams.

Operationally, SARS was responding to illicit financial flows through a review on its workforce plan to create a focus for capacity building for high level auditors and experts in customs valuation, trade mispricing, transfer pricing, and taxation of High Net Worth Individuals (HNWI) and Prominent Business Individuals (PBIs). Risk management focus entailed a comprehensive review of the statutory and regulatory controls, with specific attention to mineral products and precious metals.

In conclusion, outcomes from operational interventions had been satisfactory, with ample room for improvement.  Controls to curb illicit financial flows required a lot of sophistication and cooperation.

Discussion
Mr Maynier asked for an update on the current status of the investigations into Mr Jonas Makwakwa. Has SARS received any preliminary reports and when was the final report on the matter expected? The understanding was that the information sharing window between international tax authorities would open in September. Which division within SARS would be responsible for administering same, and what systems have been put in place to prepare for the event? 

Mr Shivambu said the Constitution empowered Parliament to conduct oversight on government departments and entities. He asked about the reported R70 million tax refund to the Gupta-owned company, Oakbay, and the alleged interference by the Commissioner. How did the Commissioner intervene and on what basis? In most instances, when Members make enquiries about tax related information, SARS would cite provisions on the Tax Administration Act to the effect that SARS could not share taxpayer information. However, accountability to Parliament took precedence over legislative provisions. He sought clarity on the cases referred to the National Prosecuting Authority (NPA) by SARS. What was SARS’ interpretation of the recently passed Border Management Bill? What legislation was available to deal with aggressive tax avoidance and transfer pricing? How was SARS’ engagements with the Financial Intelligence Centre and SARB in fighting against illicit flows progressing? Members were aware that SARS had been accused of being the weakest link in the engagements.

Mr Lees asked if the Commissioner had lodged a complaint against the Davis Tax Commission as declared during previous engagements. He asked about the SARS Commissioner’s Paris trip. Was it true that the Commissioner was booked into the Marriott hotel and refused to stay in there, and had to be rebooked into a different hotel at the last minute- leading to a loss in public funds? Also, could SARS confirm that their new garden cost R3 million.

Ms Kekana said the Committee had proposed engagements with the Office of the Tax Ombudsman. Was there any progress? She asked if the Department of Higher Education and Training could rely on SARS in ensuring the recovery of student loans and sustainability of the National Student Financial Aid Scheme.

The Chairperson said the Committee understood the SARS policies but action was needed. SARS was improving and seemed more focused but outcomes were not being seen. Also, SARS had to come up with a position on issues in the public domain. Bearing in mind the constitutional rights of individuals and taking into account Parliament’s determination to fight corruption, there was need to strike a balance and for Parliament to deal with the attendant issues. He urged Members not to make sweeping statements and level unverified allegations against SARS.

Mr Mathebula said SARS took the work of the Committee very seriously. In response to Mr Maynier, he confirmed that a report on the Mr Jonas Makwakwa matter had been finalised and handed to the Commissioner and the Minister had also been briefed. SARS was following the recommendations of the report in as far as internal processes were concerned. There were numerous aspects on the matter. The criminal aspect was being handled by the Hawks and was not under the control of SARS.

The Chairperson interjected that SARS would have to contact the Hawks pursuant to the aforesaid matter, and submit a written feedback to the Committee within two weeks.

Mr Mathebula said the second aspect on the matter was the internal disciplinary process. SARS was looking into dealing with the matter in July. The August deadline set by the Committee could easily be met. In response to Mr Shivambu, he said SARS did not decide whether to prosecute or not to prosecute- it was up to the NPA, and that was the limitation. However, 332 cases had been handed over to the NPA in the last quarter, and 174 of the cases were successfully prosecuted. Also, section 6 of the Tax Administration Act required SARS not to disclose taxpayer information, whoever it may be, but there were exceptions stipulated by the Act.

The Chairperson asked what would be wrong in SARS reassuring the Committee that the Commissioner did not interfere in cases, outside of his legal authority.

Mr Mathebula said in the absence of a particular narrative that would be a useful way of asking the question.

Mr Shivambu pointed out that legislation could not override the constitutional obligation of SARS to be accountable before Parliament. There must be mechanisms to deal with the issue. How would Parliament hold said individuals and companies accountable when crucial information was being withheld? Parliament was being incapacitated in terms of holding the State accountable for its actions. The issues did apply to the Guptas and other individuals as well. He suggested a closed meeting between SARS and Members.

The Chairperson added that it was the right of Parliament to know about issues in the public domain. It was the right of Parliament to ask for some clarity from SARS. The Committee might have to explore the possibility of appropriate amendments that protect the rights of individuals, ensure that SARS is effective and efficient, and take international norms and standards into account, to deal with the issues expeditiously.

On the newly constituted Border Management Agency, Mr Mathebula indicated that SARS was not a policymaking but an implementing agency. Treasury would issue directives for SARS to implement. He was not aware of the complaints to the effect that SARS was not being cooperative during illicit financial flows discussions with other stakeholders. He invited further details on same to be made available, so that the matter could be attended to.

In response to Mr Lees on the Judge Davis complaint, Mr Mathebula said he said he was not aware whether a complaint was lodged against Judge Davis. He was not privy to the issue of the Commissioner’s visit to Paris and SARS would submit response in writing. In response to Ms Kekana, he clarified that investigations by the Office of the Tax Ombudsman were not SARS investigations. How they would be handled was unknown. However, SARS has been cooperative with furnishing all information required for the investigations. He was not aware that SARS had been approached by the Department of Higher Education and Training; however, it was prepared to assist any department, to the extent that its resources permit.

Dr Carolissen indicated that SARS was in the process of boosting its operational capacity amid challenges around illicit financial flows. SARS was dealing with transfer pricing guided by OECD practices.

SARS said upgrades to office garden involved enlarging its parking lot and sprucing up the path for the visually impaired among other developments. The drive was part of SARS’ real estate development strategy.

The Chairperson commented that information from SARS was quite comprehensive. However, Treasury could do better.

The meeting was adjourned.