National Treasury & SARS 2017/18 Annual Report; with Minister & Deputy Minister present

Meeting report

Opening remarks
The Chairperson welcomed everyone particularly Minister Mboweni to Parliament. He congratulated him on his appointment but also lamented the departure of his predecessor. Members would have different views on Minister Nene’s departure, but wished him well too. The circumstances under which he had to go were regrettable. He offered to resign and in an accountable government, that should not be unusual.
 
Mr D Maynier (DA) welcomed and congratulated Minister Mboweni on his appointment, adding his party would hold him accountable. However, the Committee must warn the Minister that since even he admits that he was being “recycled”; his honeymoon was going to be rather short.
 
Mr Tito Mboweni, Minister of Finance, thanked the Chairperson and the Committee. He hinted that he would appreciate it if the Committee gave him the opportunity to get his bearings straight for the unenviable task before him. He looked forward to working with the Committee. He shared the Chairperson’s sentiments about his predecessor, but the country had to move on. He hoped the Committee would be nice to him until the end of the year. There is something known as the maiden years. He hoped Members will grant him pleasant maiden years.
 
The Chairperson identified key focus areas the Committee hoped the Minister would deal with. Government needed to take decisive action to mitigate the impact of economic decisions such as the one percentage point increase in the VAT rate introduced at the beginning of the year and recurrent petrol price increases. The Committee was very ill at ease about the VAT increases. The voices of civil society, labour and business on this matter had been heard. The Committee would not want to be seen as party to an exercise that strings the country along. There have to be meaningful concessions. He also stressed that an urgent and meaningful intervention was needed to soften the blow of decisions which pushed the cost of living up for South Africans. He added that Members would be unapologetic about their opposition to illicit financial flows, base erosion and profit shifting. The Committee would engage further on these issues with the Minister.
 
Annual Report presentation by National Treasury
Mr Mondli Gungubele, Deputy Minister of Finance, said having analysed Treasury’s departmental performance, particularly from the Auditor-General’s vantage point, the Ministry derived comfort in that there was nothing untoward, despite the various findings. The findings were mere discrepancies relating to the alignment with the AG’s technical requirements. Treasury remained committed to improving on its audit outcomes, given its role in holding other departments and entities accountable for their supply chain management.
 
Mr Dondo Mogajane, Director-General, National Treasury, took the Committee through the 2017/18 National Treasury Annual Report. Economic growth post the 2008 crisis has been disappointing, negatively affected by a weak global environment and domestic constraints such drought, low commodity prices and policy uncertainty. Contraction of public finance was placing stress on the ability to finance public services, threatening the affordability of planned expenditure. Notwithstanding the aforesaid, National Treasury remained steadfastly committed to ensuring fiscal sustainability. Treasury was working together with all sectors of government in ensuring that regulatory and structural reforms that enhance growth are put into place. Included under note 26 in the Annual Financial Statements is the Irregular Expenditure of R369 883 million out of a total of R769 214 million, which resulted from a misplaced 2014 memo signed by the Accounting Officer. Since the memo approved by the Accounting Officer was located after the audit report was issued after i.e. the ‘events after the reporting date’ period, the adjustment will be processed in the 2018/19 financial year through the normal condonement process.
 
The National Treasury vote spent a total of R39.8 billion in the 2017/18 financial year which equates to the 98% of the R40.5 billion appropriated budget, including mainly the transfers to SARS amounting to R10.2 billion; R10 billion to the South African Airways (SAA), R5.5 billion to the New Development Bank (NDB), amongst others. On fruitless and wasteful expenditure, there was a R67 million payment for technical support to Oracle on perpetual software licenses relating to the IFMS project. Of the R769 million irregular expenditure, R369 million was as a result of a memo approved by the Accounting Officer in 2014 for implementation of the Municipal Financial Improvement Programme (MFIP) which could not be located during the audit. It had since been located. R347.5 million related to contracts for the legacy systems i.e. the Transversal Financial Systems which were extended without testing the market.
 
Virements
In 2017/18 financial year a total of R265.9 million virement was processed which is made up of  R100 million shifted to Programme 10 to the Secret Service, R50 million to SARS and R109.3 million for the Common Monetary Area (CMA).
 
Saving
A total of R470.1 million saving was achieved mainly from Programme 6 -NDB, derived from favourable exchange rate on payment date.
 
Cost containment measures and under-spending
Due to the implementation of cost containment measures and departmental efficiencies, a saving coupled with an under-spending of R221.4 million on various programmes mainly Programme 5 relating to the Office of the Chief Procurement Officer (OCPO), Programme 7 Political Office Bearers, Compensation of Employees, and others were achieved.
 
On remedial action on findings raised, fruitless and wasteful expenditure with regards to the software licenses, which was under investigation, had since been concluded. Corrective steps will be taken once all processes per the AGSA’s guidelines on fruitless and wasteful expenditure have been concluded. Various irregular expenditure incurred were being investigated by the internal audit unit as required by the guideline. The ones that have been completed indicated that work was performed as expected and value for money was achieved. Condonement process was in progress and corrective steps will be recommended for approval. Further, a dedicated committee established last year continued to oversee the implementation progress of the Audit Action Plan in order to ensure timely resolution of the audit findings. The Chair of the committee reports to EXCO and the audit committee on the progress made on resolving these findings, and controls in place to avoid repeat findings.
There were various initiatives that had been implemented to tighten controls and prevent recurrence of audit findings.
 
Discussion
Mr A Lees (DA) referred to impairments of SAA’s assets which now amounted to R23 billion. He asked whether there was any value left in the airline’s books. The explanation for irregular expenditure was understood. However, has anyone been held accountable for it? On the irregular expenditure of R369.9 million, said to have resulted from a misplaced 2014 memo, and that the adjustment will be processed in the 2018/19 financial year through the normal condonement process, what would happen if the condonement is not successful? What was the status of the application? He asked if Eskom would be monitored closely as it continues pushing borrowings up through a R600 billion debt plan and how Treasury hoped to enforce transparency if the utility’s loan from the China Development Bank were being kept under wraps. Was Treasury in a position to shed light on the loans’ terms and conditions? What approach would Treasury take towards state-owned enterprises which over-extended their access to debt markets to fund their operations at the expense of the fiscus?
 
Ms D Mahlangu (ANC) said the expectation was that Treasury should lead by example given its role in holding other departments and entities accountable for their supply chain management. It was concerning that Treasury, of all departments, was failing to comply with supply chain management regulations and the Public Finance Management Act. The AG’s finding should be taken seriously and people should take responsibility. Heads should roll and effective and appropriate steps should be taken to address the irregularities. She suggested the Committee take a resolution that there be monitoring of progress in the implementation of redresses by Treasury.
 
Ms T Tobias (ANC) referred to the R347.5 million related to contracts for the legacy systems i.e. the Transversal Financial Systems which were extended without testing the market. How this project was handled was problematic, especially given Treasury is taken as the model department. The AG’s material findings had to be taken seriously. She was uncomfortable with Members asking about the terms and conditions of the loans entered upon between government and China.
 
Mr Maynier said there had been a deliberate attempt to defang Treasury for the last decade. The institutional strength of Treasury should be restored. He asked what plans were in place to fill Treasury’s apex positions. Was there a sense of urgency in the filling of the 25 managerial vacancies? The VBS scandal occurred because there was a criminal enterprise in operation. It was public record that VBS was taking illegal deposits since late 2016. He suggested that the government had weak regulatory systems and asked what action would be taken against those implicated and to prevent this from happening again in future. On the Public Investment Corporation (PIC), there was an intention to hold a commission of inquiry- which was initially supported. Three months later, there has been no inquiry and its terms of reference appear to exclude the credibility of PIC investments. He asked for an update on this.
 
Ms P Nkonyeni (ANC) expressed disappointment in Treasury’s performance as reflected by the AG’s audit report. The Committee ought to monitor progress of Treasury’s remedial action. She asked if Treasury’s economic policy division still has enough capacity following the disbandment of its partnership with the Economic Research Southern Africa (ERSA).
 
The Chairperson asked about the loan from the Chinese bank, why its terms and conditions were still being kept private and whether this was consistent with South African law and public finance management guidelines. The China loan had not been discussed.  He asked Treasury to give the Committee a reason consistent with South Africa’s laws and regulations why the terms of this loan were allowed to be kept secret? It could very well be above board, but it needed to be explained. On VBS, the Committee should decide when to call the Reserve Bank as well as Adv Motau to appear before Committee. Treasury had to be exemplary but to be fair to them, they have greater magnitude and scope as compared to other departments. Also, the Committee must strongly urge the President to declare the terms of reference of the PIC inquiry.
 
Mr Mogajane, in response, said Treasury still believed it was in a good state, despite the aforementioned concerns. The R769 million in irregular expenditure is a serious issue and Treasury should not be in this space. Treasury should be a model of excellence to other departments and entities. He reiterated that at least half of that was related to one memo that had already been sent through. The memo was only found [with the necessary approval] by the former director general after the reports were finalised. Half of that could have been addressed the right way. Since the memo approved by the accounting officer was located after the audit report was issued after the events following the reporting date, the adjustment will be processed in the 2018/19 financial year through the normal condonement process. The Department of Public Enterprises had its own insights into the finances of Eskom and other entities. He acknowledged that it is only right that South Africans know the terms of the loan from China. Treasury would furnish the Committee with the rest of the responses in writing.
 
Deputy Minister Gungubele added that a recruitment exercise to fill apex positions within Treasury was underway.  On the PIC, there were two levels to the probes: one in relation to certain individuals- of which a report was expected soon; and the broader inquiry which was in the hands of the President. 
 
Minister Mboweni said the government will provide more details on how it plans to deal with the fallout from the VBS scandal when he delivers the medium-term budget policy statement (MTBPS) next week. It was clear that regulatory authorities had been let down by both internal and external auditors who turned a blind eye to the looting spree, which affected several poor municipalities and the elderly who had deposited their savings in the doomed bank. While he understood the concerns of the Committee, the relationship between China and South Africa was sensitive and critical to the country’s many ambitions, but complicating the situation. He understood the concerns that the Committee has regarding the loan, in light of what is happening with another African state which has gotten into an arrangement with China. However, China are our friends. It is very difficult to set rules when it comes to friends and money, but he was sure that the transaction will be handled very responsibly. He condemned auditing firm KPMG for signing off on the financial statements of failed VBS Mutual Bank even though, according to a South African Reserve Bank report, it was clear that it had a shortfall of about R1 billion. When you have a big auditing firm failing us in the manner that this one has, that is a serious concern. In this case, both the internal auditors and the external auditors, in cohorts with management, failed the country. It seemed to have been part of the heist. The central bank had capacity for onsite inspection, at some of the big banks it used to have onsite inspectors. Looking overall at the VBS experience, the central bank has to be very mindful of what they could do in terms of inspections. He hoped that, in line with the call by Adv Motau, there would be criminal proceedings against those who caused the failure of VBS through a brazen scheme of paying bribes to solicit deposits. Political parties must act against their members found to have benefited from the fraud scandal. A preliminary report on PIC- giving some indications about what needed to be done- would be made available in due course.
 
Annual Report presentation by the South African Revenue Service (SARS)
Mr Mark Kingon, Acting SARS Commissioner, presented the 2017/18 Annual Report. Major highlights included: 6.3% revenue growth year on year, with GDP growth of 1.3%; 94% filing compliance; 93.63% returns assessed within the first 24 hours of the receipt cycle; 17.2 million tax returns were submitted in 2018 (2017: 16.6 million). Total revenue accounts collected for the year, comprising taxes, levies, duties, fees and other monies collected, amounted to R1.3 trillion (2017: R1.2 trillion). These funds are transferred to the National Revenue Fund on a daily basis. Total revenue from the rendering of services, other income, and interest received, amounted to R554.7 million (2017: R1 191.2 million). In 2018 National Treasury transferred R10.2 billion to SARS (2017: R11.2 billion). Total expenditure for the year, made up mainly by employee costs of R7.5 billion (2017: R7.2 billion), amounted to R10.9 billion (2017: R10.8 billion). Executive remuneration amounted to R36 million (2017: R32.2 million).
 
SARS was making significant progress in dealing with the illicit economy and has established an illicit economy unit that is currently dealing with 58 cases. He referred to the recent arrest of two officers who were attempting to facilitate trade in fuel where the duties had not been paid; the amount involved was about R3 million. Primary concerns in the illicit economy are tobacco and fuel. Under-collection of taxes on fuel negatively impacts the Road Accident Fund. The clothing and textiles sector is also a concern, not only because of the under-collection of duties but also because of the importance of protecting jobs in the economy. Drugs and currency leaving the country continue to be major areas of concern. SARS, which processes some R2 trillion per annum, is a target for fraudsters, and fraudulent claims amounting to R2.7 billion were prevented. He referred to the employees at the coalface who deal with these matters on a daily basis, often without recognition, and said it was important for him to salute them for the work they were doing.
 
On personal income tax (PIT), SARS observed outstanding compliance behaviour where 3rd party data was used to drive compliance and made it easier to comply. The best example was PIT Filing Season for non-provisional taxpayers, where tax returns are pre-populated with information received from banks, employers, medical aid schemes as well as insurance companies. On corporate income tax (CIT) compliance, SARS continued on its journey to clean-up its register and was working with the Companies and Intellectual Property Commission to align on the rules and processes for de-registration at both institutions. However, due to anomalies which include fraudulent registrations and illegitimate attempts for de-registrations, as well as uncertainty around economic activity of some companies, SARS took a conservative approach and decided not to conclude this process until a higher degree of assurance is obtained. It was discovered, for instance, that companies classified as inactive for CIT purposes, submitted VAT returns for purposes of obtaining refunds. SARS subsequently published new rules in the Government Gazette for CIT Filing, which became effective 1 April 2018.
 
Mr Kingon said they could not afford mess-ups at SARS. SARS is an important organisation for the country; it had to do what is right and correct in every circumstance. Recognising the current difficulties faced by SARS, they were going in the right direction, but are facing choppy seas.
 
Discussion
Ms Mahlangu welcomed the presentation and noted the AG’s findings on SARS as presented before the Committee recently. Performance bonuses were paid without the Minister of Finance’s approval, with irregular expenditure paid in relation to performance bonuses amounting to R4.3 million. SARS also incurred irregular expenditure on two contract renewals amounting to R104 million because it had not implemented National Treasury’s new rules in time. She wanted to know about the steps being taken to deal with these irregularities. Entities should understand their obligations and learn from past mistakes.
 
Ms Tobias said there had to be convincing explanations as to how misstatements and irregular expenditures came about. She asked whether there were security measures in place to protect staff appearing before the Nugent commission.
 
Mr Lees noted the recommendation by Adv Motau in relation to VBS- that tax issues should be referred to SARS. Had this been done by the Reserve Bank? What happened with the CCMA constructive dismissal case involving Mr Jonas Makwakwa?
 
Mr Maynier asked if there was an intelligence unit within SARS or if there was a SARS unit within the intelligence department.
 
The Chairperson asked why the Adrian Lackay case was withdrawn. There was a lot of confusion about this in the media. Some Members were ill at ease about the decision to take Mr Lackay to court in relation to the letters he wrote to Parliament.
 
Mr Kingon, in explaining the irregular expenditure incurred, said SARS dropped the ball and could not plead ignorance. The seriousness of the irregular expenditures was well-understood. The services rendered under the contracts provide value, and SARS was in the process of having this expenditure condoned. SARS was also in the process of dealing with the Tax Ombud’s finding on refunds. Ten cases have been dealt with, and a new system that will end the problems experienced with stoppers on refunds was being put in place. In addition, the value-added tax (Vat) and Diesel refund accounts would be split. SARS had halted all non-core litigation in order to focus on its core mandate. SARS was still trying to shorten queues at branches by focusing on improved service delivery in other areas. He expressed optimism that ultimately taxpayers should be able to self-service and not have to contact a call centre or visit a branch. The primary building block of good compliance is good service: If SARS serves better there will be a more compliant tax base. SARS was trying to get on top of its data and understands where the risks are. While there are concerns about the IT system, this aspect was misconstrued in the press; the SARS system was not going to collapse. Two critical IT issues are eFiling and the IT infrastructure. The current eFiling platform was reaching the end of its cycle and will be replaced with Html5 for the 2019 tax year. The IT infrastructure has to be refreshed, and SARS was currently running on Windows 7, and new equipment will have to be installed so that it can run on Windows 10. This will be done on a phased-in approach over a number of years.
 
Mr Kingon said SARS had scrapped various litigations that it got sucked into in recent years. On the existence of a rogue unit at SARS, he did not have any reason to believe one existed. However, SARS could benefit from intelligence capacity aimed strictly at uncovering and targeting tax non-compliance on a large scale. He made it clear that he would distance the revenue service from previous legal and governance troubles and return its focus to core functions. Mr Lackay won a court order against SARS at one point in time and hence it was in SARS’ best interest to move on. Legal reasons would be given on why it was decided that the case should not be pursued further. On the Makwakwa matter, information received was that he had asked for condemnation for late submission, and that was turned down by CCMA.
 
The Chairperson asked for a written response that would clarify matters, particularly on the case involving Mr Lackay. The Committee will meet with Treasury the following day. He appreciated the engagements and wished them well.
 
The meeting was adjourned.