Nugent Commission: National Treasury & SARS briefing, with Deputy Minister

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Finance Standing Committee

24 November 2020
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

Finance: Standing Committee on Finance

In this virtual meeting, the Committee was briefed by National Treasury (NT) and the South African Revenue Service (SARS) on the progress with implementing the Nugent Recommendations. The final report of the Nugent Commission was published in 14 December 2018, and contains 16 main recommendations, made-up of 27 sub-recommendations. Ten of the 27 recommendations fall under the domain of NT, in which 1 recommendation pertains to procurement policy and the remaining 9 pertain to the governance of SARS. SARS is responsible for implementing the remaining 19 recommendations. Amongst these recommendations, 14 have been completed and the remaining 5 have varying degrees of progress.

National Treasury reported that the Ministry of Finance is responsible for the implementation of the Nugent Commission’s recommendations regarding the governance of SARS. This includes the legislative environment and policies within which it operates. The recommendations primarily aimed to correct past infractions, halt poor governance practices and prevent any future recurrence of SARS’ decline. The long-term objective is to establish a robust organisational and decision making culture for SARS. The presentation highlighted the envisaged timetable for implementation of the recommendations and policies.

SARS informed the Committee that the Commission’s report contains findings on how SARS has been deliberately weakened since 2014, and the resulting challenges in leadership and the decline in revenue performance, employee morale and public confidence in the institution. The focus is on how to prevent abuse and make governance right, hence the recommendation to establish an Inspector General office. Amongst the recommendations that have already been implemented, is the removal of the previous SARS Commissioner, and appointment of a new Commissioner following a more transparent process as well as the review of the procurement process and the appointment of a new Chief Procurement Officer (CPO). The remaining 5 recommendations that are in the process of being implemented by SARS relate to the seizing of SARS, Information Technology and the Gartner Contracts, the legal costs and expenses incurred by SARS for litigation, taxpayer affairs and the resignation of senior employees. In line with the recommendation to evaluate employees in supernumerary posts, SARS will take active steps to recruit former employees to those posts. SARS acknowledged and apologised unreservedly for the damage done to employees and former employees during the period under inquiry.

A Member said Parliament should look into possible legislative interventions for the transparent appointment of a SARS commissioner.

Members asked about which authority would oversee the functions of a Commissioner: a board or inspector-general; SARS’ ability to address tax avoidance; SARS’ funding problem and declining tax morality and compliance across the country, and its impact on SARS’ credibility.

The Committee raised concerns around the recruitment of former employees and its alignment with the labour laws of the country. Members were concerned that it would give rise to accusations of unfair appointments, and potentially deny young people and disadvantaged groups an opportunity of recruitment.

Meeting report

The Chairperson welcomed everyone in attendance and explained that the purpose of the briefing was to attend to the Committee’s concerns regarding how the recommendations of the Nugent Commission are being implemented and synchronised, as well as its concerns with the declining tax revenue and the recent downgrading by rating agencies.

The Committee Secretariat noted an apology from Mr N Kwankwa (UDM)

Briefing by National Treasury
Dr David Masondo, Deputy Minister of Finance, explained that the continuous downgrading means the cost of borrowing will become higher, therefore, more debt-service costs.

The final report of the Nugent Commission confirmed instances of maladministration and mismanagement at SARS between 2014 and 2017. Treasury is doing its best to implement the recommendations, however, it is of the view that it needs to go beyond the recommendations to ensure SARS becomes one of the best revenue collectors in the world, and recover the ground lost in the past. The Governance and oversight of SARS is the responsibility of the Minister of Finance, therefore NT is responsible for the implementation of the Nugent Commission’s recommendations regarding the governance of SARS. This includes the legislative environment and policies within which it operates. The Commissioner of SARS is responsible for governance within SARS and the recommendations aligned to this, such as restoring collection capacity and stabilising the agency.

Mr Ismail Momoniat, Head: Tax & Financial Sector Policy, NT, stated that the final report of the Nugent Commission was published around 14 December 2018 and presented to the Committee in February 2019. The previous Commissioner of SARS was suspended in March 2018 and was, therefore, removed by the time the Nugent recommendation was received. He pointed out that the interview process for the Commissioner was transparent and conducted with integrity. It was agreed that Media agencies were not allowed into the interviews.

He elaborated on the aims and recommendations of the 2 previous Commissions, the Margo and Katz Commissions. The Nugent Commission made several proposals related to procurement matters, organisational design & staffing, operational matters, reputational damage and governance matters. The final report contained 27 specific recommendations, which primarily aimed to correct past infractions, halt poor governance practices and prevent any future recurrence of SARS’ decline. The long-term objective is to establish a robust organisational and decision making culture for SARS. The Nugent principles on governance are to restore trust and tax morale, diffuse decision making powers and oversight, and restore the fundamental link between tax admin and fiscal policy. The focus is on how to prevent abuse and make governance right, by establishing an Inspector General office. The inspector would look at, for instance, how SARS is handling large settlements and whether the settlements are fair to the country. Another recommendation was the removal of the previous Commissioner, and the appointment of a new Commissioner following a more transparent process, which has already been done. The Commission also recommends legislative provisions for a mandatory advisory Executive Committee, including Deputy Commissioner(s). He highlighted that the Commission is not in favour of an oversight board, differing with the Davis Tax Committee.

Mr Momoniat pointed out that Treasury had committed to publishing a discussion document by June 2020, which was unfortunately overtaken by the urgent work in response to Covid-19. There has been progress on the work, and earnest engagement on the work between NT and SARS. He presented Members with the envisaged timetable for implementation of the recommendations and policies.

(See presentation)

Briefing by the South African Revenue Service (SARS)
Mr Edward Kieswetter, Commissioner, SARS, stated that the work required in rebuilding SARS is much more than the recommendations of the Nugent Commission. The implementation of the recommendations is important, however, it is not sufficient. The project SARS is currently engaged in is significantly more than Nugent. He elaborated on the Commission’s finding on how SARS was deliberately weakened since 2014, and the resulting challenges in leadership and the decline in revenue performance, employee morale and public confidence in SARS.

The Nugent report contains 16 explicit recommendations, broken down into 27 sub-recommendations. Ten of those recommendations fall under the domain of NT, in which 1 recommendation pertains to procurement policy and the remaining 9 pertain to the governance of SARS. SARS is responsible for implementing the remaining 19 recommendations. Amongst these recommendations, 14 have been completed and the remainder have varying degrees of progress. He elaborated on the recommendations that have been implemented, such as the review of the procurement process and the appointment of a new Chief Procurement Officer (CPO). Additionally, the Compliance and Integrity Units have been re-established, and a Focused Investigations Unit (FIU) has been established.  The FIU is mandated to investigate and audit matters associated with the illicit economy and matters arising from the Zondo Commission.

The Commissioner elaborated on the progress of implementation for the remaining 5 recommendations related to the seizing of SARS, Information Technology and the Gartner Contracts, the legal costs and expense incurred by SARS for litigation, taxpayer affairs and the resignation of senior employees. He highlighted that in line with the recommendation to evaluate employees in supernumerary posts, SARS will take active steps to recruit former employees to those posts. SARS has acknowledged and apologised unreservedly for the damage done to employees and former employees during the period under inquiry.

He highlighted the wider approach being taken to rebuild SARS, in order to restore institutional integrity and rebuild public confidence and trust. SARS has proposed that its intelligence gathering powers be expressly confirmed and circumscribed in the new SARS Governance Framework that is being prepared by National Treasury. This matter will be addressed in the proposed new SARS Governance Framework. The recent withdrawal of the Report of the Inspector General for Intelligence further confirms SARS’ position in this regard. Regarding the status of the KPMG and Sikhakhane Reports, SARS has notified the authors that it does not place reliance on the reports as well as the employees concerned. Lastly, the Commissioner presented the Committee with SARS’ strategic vision for 2020-2024, highlighting its strategic intent to develop a tax and customs system based on voluntary compliance, and its newly implemented organizational arrangements.

The Commissioner raised concerns around the underfunding of SARS and elaborated on the impact of underinvestment in the agency, such as the loss of irreplaceable skills and inability to cover operational costs. He pointed out that this would undermine the country’s revenue collection abilities in the future.

(See presentation)

Discussion
Mr F Shivambu (EFF), stated that SARS’ presentation smuggles in the narrative that the appointment of the current Commissioner was transparent. It was not transparent as he was appointed by a secret committee, which included Mr Trevor Manuel, who has a vested interest in the outcome of the process. There is currently a litigation process to prove that it was not transparent. Members of Parliament should look into possible legislative interventions for the transparent appointment of a SARS commissioner, such as Parliament’s involvement in interviewing and selecting a suitable candidate.

He raised concerns regarding the lack of clarity on the reporting lines of the Commissioner. He suggested legislating a board that will oversee the functions of the Commissioner, instead of an individual inspector general. He highlighted the issue of SARS’ lack of ability to address tax avoidance and transferred mispricing, which erodes the tax base. No believable plan has been presented on how this is being addressed. The Committee was promised a special presentation on tax revenue collection in e-commerce, which it is still waiting for. He pointed out that Members understand the of multi-national nature of it, however, what are South Africa’s proposals to the multilateral space, to deal with the issue?

What does SARS achieve by recalling the Sikhakhane and KPMG reports on the rogue unit? There is a court case to contend that the Sikhakhane report is still legitimate, as the SARS rogue unit, which illegally spied on people for political agendas, did exist at some point. The withdrawal of the reports will not disprove the existence of the rogue unit.

The Commissioner replied that he would not comment on the appointment of the Commissioner. The functions of SARS are set in law and requested that any evidence of wrongdoing in SARS be submitted to SARS. if SARS does not act on it then it is complicit, however, until such a time, SARS will continue to do its work without fear, favour or prejudice. It serves no purpose for SARS to harbour criminals. The Commissioner gave the Committee his unequivocal commitment to only be aligned to his prescribed mandate in SARS.

He agreed that more can be done about transfer pricing and international taxes. SARS has completed and is finalising a report on the work it has done in the last 12 months, to identify areas in which there is huge revenue leakage. SARS has also designed a compliance programme that identifies all areas of non-compliance. Revenue collected from those activities to date is over R90 billion. SARS has conducted 53 base erosion and profit shifting audits, from which it raised 6 million assessments last year. To date, it has raised 3 billion assessments. The Commissioner assured Members that SARS is doing its best to address the issue, and will continue to report to the Committee on it. SARS has requested to present on aggressive tax planning, non-compliance and illicit tax activities next year, after the release of the Davis Committee tax gap report.

Mr Momoniat replied that the issues around the Board of appointment and the inspector general are not mutually exclusive. There are pros and cons to all the proposals, and so the policy paper will address it. The issues around the approaches are not specific to South Africa, as globally, the evolution of tax collection agencies comes with challenges to ensure there is no abuse.  A revenue collection agency needs to have the trust of a country; otherwise tax morality suffers. The many years of the capture of SARS have severely undermined tax morality. People should raise allegations in the right forums. There are pros and cons to having an open interview process. One needs to look at the implications, as any process will not necessarily give the best candidate. He agreed Parliament should look into appropriate forms of transparency and accountability. He argued that the appointment process of the current Commissioner was the fairest in the appointment of a SARS Commissioner post-1994. 

Mr G Skosana (ANC), asked how the recommendations from the reports and the Nugent Commission would be synchronised. How far is the process of appointing an inspector general? Is it part of the recommendations to be implemented next year?

The Nugent Commission made 16 main recommendations made-up of 27 sub-recommendations. Ten of the recommendations fall under the mandate of NT, meaning the remaining 17 should be under SARS’ mandate. However, the Commissioner stated that 19 recommendations fall under SARS. He asked for clarity on why SARS has 2 additional recommendations falling under its authority. 

He asked if the proposal to recruit former SARS employees will not compromise the institution’s integrity, and asked if the process will be aligned with the labour laws of the country. Will it not give rise to accusations of unfair appointments?

The Commissioner agreed that recruiting former SARS employees does have its risks, however, SARS will always be mindful to balance its needs, the capability of individuals and unintended consequences that may arise. SARS needs to follow its conviction in this matter and will follow the law, whilst maintaining its best interests.

Mr Momoniat replied that the state still has to legislate for positions like inspector general, which it hopes to do next year. Once legislation is enacted, then appointments can be made, which is likely to be in 2022. There are appointments that can be made without specific legislation requirement, like some of those in the recommendations. He thanked Mr Skosana for pointing out the double counting and explained that some of the recommendations overlap and require responsibility from both institutions.

Mr G Hill-Lewis (DA), expressed confidence that SARS is slowly heading in the right direction. He requested more information on the exact nature of the funding problem, given that the MTPBS explicitly contains an additional allocation to SARS. He asked both SARS and NT to comment on the trend of declining tax morality and compliance across the country, and its impact on SARS’ credibility.

The Commissioner replied that one must look at the funding trend. In 2013 funding to SARS was reported as R9.5 billion. In subsequent years it was R9.4 billion, R9.3 billion, R10 billion, R10.2 billion, R9.8 billion and R9.5 billion. The R1 billion increase over two years in the Minister’s 2019 October report gets lost because the 2013 base is no longer correct and it was never corrected. The increase to SARS in nominal terms is almost flat and in real terms is actually negative. The baseline has to be reset and then get funding back to at least 1% of the baseline.

SARS has seen the declining levels of compliance in specific areas, such as multinational companies (MNCs), among employees, and a general slip across all taxpayer types. SARS is continuing its analysis on this to come up with a more systemic correction, however, it first has to create moral persuasion by clarifying and giving certainty around what obligations taxpayers have. Secondly, SARS is working to make it easier for taxpayers to fulfil these obligations, hence it has launched 30 additional applications this year to assist taxpayers.

Mr Momoniat argued that the process is still the best way to allocate funding. He highlighted that the country is going through a rough patch and so there is a shortage of funds. Treasury has heard the Commissioner and is currently engaging with SARS on the underfunding issue.

Mr Momoniat stated that no revenue collection agency can operate without intelligence capability. Intelligence not in terms of spooks, but intelligence used in the business environment. For instance, the financial intelligence centre produces information on suspicious financial transactions. Judge Nugent commented that such a function is not illegal. This does not mean specific activities undertaken may not be illegal, therefore activities should then be assessed for legality.

Deputy Minister Masondo stated that the question around the appointment of the SARS Commissioner has been raised before and Treasury has responded to it. The appointment of the SARS Commissioner was aligned to the current rules and regulations on the appointment of a Commissioner. The new proposals on the appointment of a Commissioner are a matter of internal debate. Treasury will have to return and present the Committee with its discussion paper on this issue.

Deputy Minister Masondo replied that NT is meeting with the Commissioner this afternoon to discuss the funding issue further. He agreed that funding SARS is important, however, SARS is not the only institution faced by challenges. Treasury understands that investing in SARS is investing in the state’s revenue generation abilities. He pointed out that government is seriously constrained at the moment. He added that the recent visit to the KwaZulu-Natal port, revealed that there are so many agencies of government that require information on the movement of goods at the port. Government is looking into a single-window platform to allow importers and exporters to obtain such information, and such a project will require creative funding solutions, to reduce the burden on SARS and make government more efficient.

Mr Hill-Lewis requested NT and SARS to comment on the results of the National Income Dynamics Study Coronavirus Rapid Mobile (NIDS-CRAM) Survey, and the concerning numbers for taxpayers.

The Commissioner replied that he is not aware of the recent NIDS-CRAM survey results. However, the concerns on the contraction of the tax base is a concern SARS shares. SARS will update its report on this issue as it updates its figures. SARS believes the current tax base is underrepresented and it is an area of focus.

Mr Shivambu requested the Deputy Minister to clarify his point regarding multiple agencies at the ports of entry. He stated that he was under the impression the Border Management Agency (BMA) resolved that issue after the BMA Act was passed.

Deputy Minister Masondo stated that Mr Shivambu is correct about the BMA. However, the Act does not provide systems; it simply provides the legislative framework. He explained that the single-window platform is the realisation of a system to accommodate information on goods declarations, for all interested parties.

The Chairperson stated that SARS should follow due process in recruitment and do things in a proper manner. Recruiting former employees has deeper implications given the painful background of job reservations for certain races during the apartheid era. The system of recruitment should not deny young people, who are adversely affected by unemployment, opportunities to be recruited. Government has deliberate policies to affirm women and previously disadvantaged people. The Committee will be looking at the recruitment process closely, to ensure it aligns with national policy interests. It is a good initiative, however, it should not undermine the above-mentioned groups.

The Chairperson raised concerns around tax information on Mr Mzwakhe Mbuli, the artist, being published in a media article in October. He requested that the publishing of tax information in the public domain be stopped. SARS and client information should be confidential. The publishing of tax information gives the impression that SARS is being used to fight political battles.

He acknowledged SARS’ efforts to improve governance, and added that it should do more to enhance its strategy of revenue collection. The Committee will follow up on the presented time lines for the implementation of the recommendation.  The main interests are the improvement of SARS’ governance and improving revenue collection in the country.

Closing remarks
The Chairperson, in closing, announced that there is thanked everyone in attendance.

The meeting was adjourned.
 

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