Tax Ombud Annual Report; Insurance Bill: finalisation

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Finance Standing Committee

22 November 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

Annual Reports 2016/17 

The Committee met with the Office of the Tax Ombud on its 2016/17 annual report. It also finalised and adopted the Insurance Bill. 

The Office of the Tax Ombud was established to review and address any complaints by taxpayers regarding a service, procedural or administrative matter arising from the application of the provisions of a tax Act; and to review any systemic/emerging issue relating to the services provided by the South African Revenue Service (SARS) or how it applies tax legislation. The Office recorded progress in various facets during 2016/17. Notably, legislative amendments were effected in January 2017 such that term of the Tax Ombud was changed from three to five years upon the realisation that three years was rather too short a time for an incumbent to make any meaningful impact. Legislation was also amended such that: appointment of staff can now be done without the need to consult the Commissioner; and its Budget was now determined by the Minister as it had been previously paid out of the SARS budget. The Office was also given more powers, enabling it to initiate systemic investigations with Minister’s approval, and an obligation on the part of SARS to provide reasons where it does not implement the Tax Ombud’s findings.

On statistics relating to complaints, the number of formal complaints received increased by 62% from 2 133 in 2015/16 to 3 454 in 2016/17. The number of general enquiries from people seeking various forms of assistance also increased by 165% from 5 904 to 15 658. The top two issues complained about make up 64% of all complaints received, these being: Dispute Resolution and Refunds- 39.51% and 24.90% respectively. The impact on taxpayers was positive as it managed to save entities in distress as some of them were being owed huge sums of money in refunds by SARS. The most serious issues identified by the Office of the Tax Ombud in its work include delays in the payment of refunds; unwarranted placing of special stoppers and delays in lifting such stoppers; using the filing of a new return to block refunds; refunds for one period being withheld while an audit/verification was in progress on another period; use of historic returns to delay payment of refunds; raising “assessments” to offset refunds; assessments that were successfully disputed but refunds still not paid out; requesting further information during the audit; and obstacles regarding diesel refunds. Furthermore, cases whereby: SARS was taking collection steps even where taxpayer had either been granted suspension of payment or had requested suspension of payment and SARS had not reacted thereto; non-adherence to dispute resolution timelines; refunds paid into wrong bank accounts; issuing final demand letters that did not comply with the Tax Administration Laws Amendment Act (TAA) before a third party appointment is done; contradictory information contained in SARS’s standardized dispute resolution letters stood out.

Challenges confronting the Office were discussed. The lack of structural independence was a notable challenge as its establishment in terms of the TAA does not give it autonomy – structurally it is treated as a division within SARS. Hence, the structural independence of the Office must be addressed. Independence is the crux of the Office and no one should doubt it. Furthermore, issues of security and confidentiality were very important. Some people approach the Office, asking about certain individuals, but the Tax Ombud could not say anything as it must treat all information in strict confidence. Also, SARS takes too long to finalize complaints thus failing to adhere to the provisions of Section 20(1). Budgetary constraints were also a significant challenge which debilitated the Office in conducting its work effectively and ensuring a wider reach.

Members pointed out the importance of ensuring that SARS was fulfilling its mandate. They wanted to know if one could say SARS was deliberately withholding refunds to taxpayers in order to boost its collection figures. If that was the case, it could explain the resentment and declining tax compliance in the country. If the estimated R20 billion in refunds allegedly being withheld by SARS had to be paid out by the agency, it could cause a ‘system collapse’, since South Africa already has a budget shortfall of R50 billion to deal with. They proposed that public hearings be held so that taxpayers can report incidents where SARS deliberately withheld the payment of refunds. A Member proposed that the Office of the Tax Ombud should actually be made a Chapter 9 institution, therefore, established in terms of the Constitution to guard democracy. The majority of Members were agreeable to the proposals.

Lastly, the Committee finalised and adopted the Insurance Bill. On the previous day, the Democratic Alliance (DA) had argued that the amendments on transformation changed the scope of the Bill and necessitated that the Committee seeks the approval of the National Assembly in terms of NA rule 286(4)(b) to extend the subject (or scope) of the Bill before proceeding. In DA’s view, the Committee also needed to have further public hearings on these amendments as they did not emerge in the Insurance Bill hearings. The Committee accepted that if the subject or scope of a Bill is substantially changed, the Committee needed to abide by the aforesaid Rule. However, based on Parliament’s Legal Services Unit, expressed on the previous day, and the Committee’s experience in processing the Bill, the Committee was decisively clear: the aforesaid Rule did not apply in this case. The Bill was therefore adopted. Also, the Committee, having considered and thoroughly examined the Insurance Bill, referred to it, and classified by the Joint Tagging Mechanism as a section 75 Bill, reported the Bill with amendments. 

Meeting report

The Chairperson welcomed everyone and acknowledged receipt of an apology from the Tax Ombudsman, Judge Bernard Ngoepe, who could not be in attendance due to unforeseen circumstances.

Office of the Tax Ombud presentation
Adv Eric Mkhawane, CEO,Office of the Tax Ombud, explained that the Tax Ombud was established to review and address any complaints by taxpayers regarding a service, procedural or administrative matter arising from the application of the provisions of a tax Act; and to review any systemic/emerging issue relating to the services provided by the South African Revenue Service (SARS) or how it applies tax legislation. The Tax Ombud also has the mandate to review, (introduced in January) at the request of the Minister or at the initiative of the Tax Ombud with approval from the Minister, any systemic and emerging issue related to a service matter or the application of the provisions of the Tax Administration Laws Amendment Act (TAA) or procedural or administrative provisions of a tax Act.

The Office recorded progress in various facets during 2016/17. Notably, legislative amendments were effected in January 2017 such that the term of the Tax Ombud was changed from three to five years upon the realisation that three years was rather too short a time for an incumbent to make any meaningful impact. Legislation was also amended such that: appointment of staff can now be done without the need to consult the Commissioner; and its Budget was now determined by the Minister as it had been previously paid out of the SARS budget. The Office was also given more powers, enabling it to initiate systemic investigations with Minister’s approval, and an obligation on the part of SARS to provide reasons where it does not implement the Tax Ombud’s findings.

On statistics relating to complaints, the number of formal complaints received increased by 62% from 2 133 in 2015/16 to 3 454 in 2016/17. The number of general enquiries from people seeking various forms of assistance also increased by 165% from 5 904 to 15 658. The top two issues complained about make up 64% of all complaints received, these being: Dispute Resolution and Refunds- 39.51% and 24.90% respectively. The impact on taxpayers was positive as it managed to save entities in distress as some of them were being owed huge sums of money in refunds by SARS. Also, the Office’s outreach programs stretch wide and deep into communities through radio (both commercial & community) TV and print media.

The most serious issues identified by the Office of the Tax Ombud in its work include delays in the payment of refunds; unwarranted placing of special stoppers and delays in lifting such stoppers; using the filing of a new return to block refunds; refunds for one period being withheld while an audit/verification was in progress on another period; use of historic returns to delay payment of refunds; raising “assessments” to offset refunds; assessments that were successfully disputed but refunds still not paid out; requesting further information during the audit; and obstacles regarding diesel refunds. Furthermore, cases whereby SARS was taking collection steps even where taxpayer had either been granted suspension of payment or had requested suspension of payment and SARS had not reacted thereto; non-adherence to dispute resolution timelines; refunds paid into wrong bank accounts; issuing final demand letters that did not comply with the TAA before a third party appointment is done; contradictory information contained in SARS’s standardized dispute resolution letters stood out. Formal recommendations were made on five serious and systemic issues, all of which were positively received by SARS such that the Office had seen a decline in the number of complaints received in relation thereto. The success of these formal recommendations as well as the review of delays in payment of refunds illustrated the necessity of having dedicated Systemic Investigators included in the Office’s structure.

The Office of the Tax Ombud’s financial information was included in SARS Annual Financial Statements and did not appear in its annual report. However, National Treasury had approved retention of surplus in terms of section 53(3) of the Public Finance Management Act, which was to be utilised for staff capacity. The Office has a total headcount of 29 employees, with 65% of the staff compliment made up of Operations and Legal staff. Personnel Expenditure remained the main cost driver (80% of Total Expenditure).

Adv Mkhawane outlined the challenges confronting the Office. The lack of structural independence was a notable challenge as its establishment in terms of the TAA does not give it autonomy – structurally it is treated as a division within SARS. Hence, the structural independence of the Office must be addressed. Independence is the crux of the Office and no one should doubt it. Furthermore, issues of security and confidentiality were very important. Some people approach the Office, asking about certain individuals, but the Tax Ombud could not say anything as it must treat all information in strict confidence. Also, SARS takes too long to finalize complaints thus failing to adhere to the provisions of Section 20(1). Budgetary constraints were also a significant challenge which debilitated the Office in conducting its work effectively and ensuring a wider reach. Absence of a Service Charter and Taxpayer Bill of Rights such as was the case with other countries, and complaints of Management System not bring fully automated were also notable challenges.
Discussion
Ms T Tobias (ANC) proposed that the Office of the Tax Ombud should actually be made a Chapter 9 institution, established in terms of the Constitution to guard democracy. She also identified the need for forensic skills to spruce up its internal capacity and to ensure that it was more effective in carrying out its mandate.

Mr D Hanekom (ANC) pointed out the importance of ensuring that SARS was fulfilling its mandate. He wanted to know if one could say SARS was deliberately withholding refunds to taxpayers in order to boost its collection figures. If that was the case, it could explain the resentment and declining tax compliance in the country.  If the estimated R20 billion in refunds allegedly being withheld by SARS had to be paid out by the agency, it could cause a ‘system collapse’, since South Africa already has a budget shortfall of R50 billion to deal with. Lastly, how was the Tax Ombud dealing with the avalanche of complaints given its capacity constraints?

The Chairperson added that some SARS officials actually told him something similar regarding refunds. He felt Ms Tobias’ proposal regarding making the Office a Chapter 9 institution was worth considering. Also, the issue of illicit finance was a huge challenge. The Committee would seek advice as to whether it was legally tenable for it to bring SARS to a closed session for extensive discussions on the issues being raised.

Mr A Lees (DA) asked, given the Tax Ombud’s experience, what would be SARS’ likely response to the former’s findings. Also, what form of pressure would the Tax Ombud put on the Committee to ensure that legislation to strengthen its independence and capacity is put into place? He asked if issues around late responses by SARS featured prominently as complaints received by the Tax Ombud.

Ms P Mabe (ANC) said the Tax Ombud had to be liberated from the strictures of SARS and Treasury. The sooner Members liberate it from SARS the better. It was an urgent matter as its independence had to be guaranteed. She proposed public hearings be held so that taxpayers can report incidents where SARS deliberately withheld the payment of refunds.

Adv Mkhawane clarified that the Tax Ombud was not saying that SARS is deliberately withholding the payment of tax refunds in order to boost its collection figures. The Office would leave it to the Committee to draw its own conclusions. Some journalists had already drawn their own conclusions. He, however, cited an example where a refund of about R500 million was paid over by SARS just a few days after the end of the financial year. In the Tax Ombud’s view that was just too much of a coincidence. In some cases, the Tax Ombud has had to intervene to save entities in distress. A case in point was a business which was about to close down, because SARS had delayed paying a R10 million refund. Also, the Office had identified a system where SARS would place “stoppers” on a refund, although the taxpayer was entitled to it. For example, a taxpayer would be told to go to a SARS branch and prove his “existence” and banking details. In some instances, the nearest branch would be 200km away – especially in the Northern Cape. And once the person complied, SARS would in some instances still not pay the refund, taking three to four months to pay it out. When the taxpayer phoned to find out about the payment of the refund, they would simply be told by SARS that there is no turnaround time. This cannot be and it should not be allowed.

Another practice of SARS the Tax Ombud objected to was the blocking of refund payments due on a prior tax submission, when a taxpayer files a new tax return. For instance, a taxpayer would file a return and then - before getting his verified return - submit a new return. SARS would then stop the payment of the first refund. The same would happen, where SARS verified one refund and audited another period. SARS would then stop the payment of the refund on the verified return. The Tax Ombud was engaging SARS about this. Legislation does not allow this; it was just a practice it started, and the Office was very concerned about that.
Mr Gert van Heerden, Senior Legal Manager, Office of the Tax Ombud, added that these practices by SARS were not exceptions to the rule. It was not like somebody decides to stop a refund. The (SARS) system generates it (automatically). Another practice the Tax Ombud office was worried about was the way SARS tends to raise “assessments” to offset refunds. For example, while SARS is collecting from a taxpayer – for instance taking money directly from a bank account - the taxpayer might also have made payment in the meantime. SARS would then raise an assessment to try and offset the double payment. What worried the Tax Ombud was that the assessment raised would then be exactly the amount of the double payment. SARS was, therefore, raising a fictitious assessment and not even telling the taxpayer what it was – so not even giving the taxpayer a chance to raise an objection. SARS had admitted that this practice was not proper, and said it will stop it.
Adv Mkhawane said other practices the Office objected to include cases where a taxpayer owed SARS money, but did not agree on the amount and lodged an objection, asking SARS to suspend payment until the issue is finalised. At times SARS would simply not respond to the taxpayer or subsequently, when the taxpayer has a refund, it would equalise and offset that against the debt about which the objection was raised. The Office was monitoring this kind of practice as SARS had undertaken to adjust its system. Lastly, the Office wanted to see SARS adhere to legal procedure before just “dipping into” a taxpayer’s bank account. For instance, SARS was supposed to first send the taxpayer a letter of demand and offer different options for payment.
Adv Mkhawane reiterated that the Office is still subject to the SARS in some ways. This was ironical since SARS is actually the subject of scrutiny of the Tax Ombud. Thus, having the Office of the Tax Ombud become a Chapter 9 institution would be welcome as it would go a long way to ensure its independence and strengthen its mandate and capacity. Another challenge it had was budgetary constraints. It would like to have R6 million more, if possible. Furthermore, SARS does not have an updated service charter available for taxpayers to know what type of service they can expect from the revenue agency. In his view, a taxpayer bill of rights was also needed. The Office of the Tax Ombud was also dependent on SARS for IT services. If a taxpayer wants to lodge a complaint, for instance, it cannot be done online at this point.

Mr van Heerden added that communication with SARS was difficult, because the use of technology had made the agency "a faceless entity". These were all challenges stakeholders needed to look into.
The Chairperson appreciated the comprehensive engagements and indicated that SARS was soon to appear before the Committee and would be interrogated on the issues raised. The Committee strongly believes the Office of the Tax Ombud has a pivotal role to play. 

Finalisation of Insurance Bill
The Chairperson stated that he and the Parliamentary Legal Unit had perused through the Insurance Bill following deliberations the previous day. They were satisfied that everything was in order and the Committee could proceed with the vote. However, the Democratic Alliance (DA) had argued that the amendments on transformation changed the scope of the Bill and necessitated that the Committee seeks the approval of the National Assembly in terms of NA rule 286(4)(b) to extend the subject (or scope) of the Bill before proceeding. In DA’s view, the Committee also needed to have further public hearings on these amendments as they did not emerge in the Insurance Bill hearings. The Committee accepted that if the subject or scope of a Bill is substantially changed, the Committee needed to abide by the aforesaid Rule. However, based on Parliament’s Legal Services Unit opinion, expressed the previous day, and the Committee’s experience in processing the Bill, the Committee was decisively clear: the aforesaid Rule did not apply in this case.

The Bill was therefore adopted.

Committee Report on Bill

Furthermore, the Committee, having considered and thoroughly examined the Insurance Bill, referred to it, and classified by the Joint Tagging Mechanism as a section 75 Bill, reported the Bill with amendments.

The Democratic Alliance (DA) reserved its position on the report and the Bill.

The Chairperson expressed the Committee’s appreciation to all those who assisted with the processing of the Bill including the National Treasury team, civil society stakeholders, the industry and parliamentary staff.

The meeting was adjourned.   
 

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