SARS 2022/23 Annual Performance Plan; with Deputy Minister

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Finance Standing Committee

03 May 2022
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

In this virtual meeting, the Committee was briefed by the South African Revenue Services on its Annual Performance Plan for the 2022/23 financial year.

The Deputy Minister of Finance commended the SARS Commissioner and his team for continuing to implement SARS’s mandate during this trying time. He was concerned about taxpayers’ compliance levels being unacceptably low. He highlighted that illicit activities and tax crime remained a huge challenge as this eroded tax morality and undermined the work of the government. He informed the Committee that the conflict between Russia and Ukraine represented an emerging risk and COVID-19 remained a threat to the economy. 

SARS emphasised the need for greater compliance and fiscal citizenship, this included making it easy for taxpayers to fulfill their obligations. SARS highlighted the need to maintain partnerships, by engaging with all spheres of government, intermediaries, private associations, the media, and international bodies, such as the World Bank and International Monetary Fund (IMF).

SARS was subject to a number of funding reductions over the last eight years that have become unsustainable. The R1bn additional (R3bn over MTEF period) allocation addressed some of the immediate needs but doesn’t allow for any further investment in required human resources capacity, maintaining and upgrading technology stack, and realising a SMART Modern SARS.

In order to maximise revenue collections in the year ahead (FY22/23) a number of focus areas will guide its work, some are new whilst others are a continuation and deepening of work previously explored: International Taxes with a focus on Transfer Pricing; Trade Mispricing & Undervaluation Fraud; Debt Cash Collections; Illicit Economy including focus on Illicit Financial Flows; Syndicated VAT Fraud and other Tax Crimes; Tax base-broadening through the use of 3rd Party Data (Formal & Informal Economy); VAT on e-Commerce; High Wealth Individuals (Service & Compliance); Voluntary Disclosures and Prosecuting Tax Crimes – e.g. off-shoots from the Commissions.

Members highlighted that the economy needed to grow to broaden the tax base. There needed to be policies that were conducive to growth. That needed to be worked on at a macro level. How the government spent the people’s money mattered. Taxpayers became resentful and reluctant to pay when their money got grossly mismanaged or leaked out of the system and did not find its way to service delivery as it should. As much as there was an obligation for taxpayers to comply with the law, there was a mutual obligation on the government to spend wisely and punish those who ‘stole’ money.

Members expressed concern about illicit tax flows and tax avoidance.

Responding to Members’ questions, the Deputy Minister highlighted that the taxing of online platforms was a global matter, which required everyone across the globe to have some consensus on the matter. South Africa would not take unilateral measures. South Africa was working and would wait on a consensus-based solution. Through that work, such as the G20, there was consensus that the digital economy needed to be taxed. The technicalities of that were being worked on.

Meeting report

Opening Remarks
The Chairperson made brief introductory remarks and welcomed the Deputy Minister.

Introductory Remarks by the Deputy Minister
Deputy Minister of Finance, Dr David Masondo, made brief remarks and introduced the presentation to the Committee. He welcomed the opportunity for the South African Revenue Services (SARS) to brief the Committee on its plans for the 2022/23 financial year. He noted those in attendance representing SARS.

It had been 25 years since SARS was established, SARS had been one of the shining lights of the democratic country. This was key to creating a better life for all. In the 2022 State of the Nation Address (SONA), the President aptly summarised the importance of SARS, having contributed to the improvement of South African lives through the provision of healthcare, education, and social grants amongst others. It had been almost two years of the pandemic, which had impacted the economy, as well as lives lost. Despite this, SARS had collected more revenue than expected, which was helped by the recovery of certain sectors of the economy, especially mining. He commended the SARS Commissioner and his team for continuing to implement SARS’s mandate during this trying time. He was concerned about taxpayers’ compliance levels being unacceptably low. Illicit activities and tax crime remained a huge challenge. This eroded tax morality and undermined the work of the government. There had been gradual improvements in the overall compliance levels together with strategic policy enhancements aimed at broadening the tax base and easing the tax burden on South Africans. The conflict between Russia and Ukraine represented an emerging risk. COVID-19 remained a threat to the economy. 

Presentation of the South African Revenue Services (SARS) APP 2022/23
Mr Edward Kieswetter, SARS Commissioner, presented the presentation to the Committee, along with various members of SARS. The presentation outlined SARS's strategic context from 2020 to 2025, the ‘must win battles,’ a recap of its strategic priorities, performance highlights of 2021/22 and the Annual Performance Plan (APP) deliverables for 2022/23.

The following representatives of SARS presented to the Committee, Mr Johnstone Makhubu, Chief Revenue Officer (CRO) of SARS, Dr Rebone Gcabo, Exco Member at SARS, Mr Khutjo Mabetwa, Regional Director Gauteng North at SARS, Mr Beyers Theron, Acting Chief Officer of Customs and Excise at SARS, Mr Herman Smith, Operations Enabling Head at SARS, Ms Nirala Ramlall, Senior Specialist: Leadership Dealership of SARS, Ms Bongiwe Mabanga, Group Executive: Governance, Risk, Compliance and Quality Management at SARS as well as Ms Adele Labuschagne, Auditor: Customs and Investigations, Junior Board Member at SARS, Ms Mandiza Mbekeni, of SARS, Ms Nadia van Niekerk, of SARS, Mr Marius Papenfus, Group Executive at SARS and Ms Yolanda van der Merwe, Chief Financial Officer at SARS.

The presentation emphasised the need for greater compliance and fiscal citizenship, this included making it easy for taxpayers to fulfill their obligations. SARS highlighted the need to maintain partnerships, by engaging with all spheres of government, intermediaries, private associations, the media, and international bodies, such as the World Bank and International Monetary Fund (IMF).

The revenue performance for the previous financial year (2020/21) was outlined, this included compliance interventions as well as tax and customs audits and investigations. It was noted that going forward the economy was still in recovery and there was significant government debt. Public confidence was steadily improving but there was a long way to go. SARS highlighted that the illicit economy remained a challenge as well as the political environment. Underfunding experienced over the previous years had seriously compromised SARS’ ability to effectively perform its compliance work that gave effect to its legal mandate, and in turn, severely impacted the fiscal integrity of the Republic. The unemployment situation remained a challenge, particularly amongst the youth. SARS highlighted a number of strategic objectives in detail.

The objectives and key results were outlined in detail which included annual and quarterly targets. Various strategic risks were outlined, which included risks relating to lack of compliance; a number of mitigating actions were proposed to address these.

SARS's key focus areas included broadening the tax base, improving voluntary compliance and fiscal citizenship, leveraging resources efficiently, maintaining partnerships, and building integrity within SARS. The current global economic context posed a number of challenges including corruption, low compliance, the need to restore and modernise SARS, and the underfunding of SARS compared to international norms.

SARS was subject to a number of funding reductions over the last 8 years that have become unsustainable. If the 2013/14 grant escalated by CPI, SARS grant allocation for 2021/22 would be R14,7bn, in contrast to the actual 2021/22 grant of R11,3bn (-R3.4bn shortfall for the year). Year-on-year funding increase by CPI from 2021/22 to 2022/23 should be approx. 5.76% whilst the actual grant is only growing at 2.05%. Cost to revenue collection ratio (OECD recommendation of 1.00%): 2021/22 is 0.69% significantly lower when compared to 2013/14 which was at 1.06%. 2022/23 is estimated to be 0.72% and will reduce to 0.69% and 0,62% in 2023/24 and 2024/25. The R1bn additional (R3bn over MTEF period) allocation addressed some of the immediate needs but doesn’t allow for any further investment in required human resources capacity, maintaining and upgrading technology stack and realising a SMART Modern SARS.

Please see the presentation for detailed information, graphs and tables.

Discussion
On broadening the tax base, improving voluntary compliance and fiscal citizenship, Dr D George (DA) said there needed to be more measures than what was presented. There was only so much that was under the control of SARS. The economy needed to grow to broaden the tax base. There needed to be policies that were conducive to growth. That needed to be worked on at a macro level. How the government spent the people’s money mattered. Taxpayers became resentful and reluctant to pay when their money got grossly mismanaged or leaked out of the system and did not find its way to service delivery as it should. As much as there was an obligation for taxpayers to comply with the law, there was a mutual obligation on the government to spend wisely and punish those who ‘stole’ money. If South Africa’s economy was stronger and money was better managed, there would be more money available for SARS as the fiscus would be stronger. These factors all went hand-in-hand, there needed to be more growth and revenue, which would make life easier. The constraints were clear. A lot of work needed to be done – not only by SARS. Very turbulent years followed the 2015 corruption. Had the problems of that era been completely resolved?

He noted that the strategic objective for taxpayers’ perception of tax being clear and unambiguous was targeted at 75 percent – it seemed on the low side given the high standards set for the other targets. On slide 8, it indicated that only 65 percent of individuals were satisfied, which seemed quite low, given innovations. He was aware that it had been a turbulent environment over the past couple of years but he wanted insights into why it appeared to be relatively low. He noted that the ‘demonstrating effects of resource stewardship’ was a well-placed objective – it should be an objective of every government department in South Africa. If departments were mindful of spending funds wisely, the Country would be in a better space overall. It was encouraging that consultants were not being used to develop this.

Mr A Sarupen (DA) stated that in terms of tax compliance, the Minister started off by highlighting the need for SARS to be regarded positively by taxpayers. It could be agreed that the recent troubles at SARS had eroded public confidence in it. He asked that the Committee be taken through what SARS had done in the past year to overcome this more recent legacy as well as to demonstrate that it was clean, honest and effective to taxpayers and how this was reflected in the APP. Did SARS include timeframes for Value Added Tax (VAT) refunds and taxpayer audits in the APP? He had been unable to find this in the strategic objectives. People who performed in any system performed based on the targets set within the institution. Why were the customer satisfaction performance targets not included in the APP? He asked how many individuals were surveyed and what percentage of registered taxpayers were represented.

Ms P Abraham (ANC) asked what the challenge was for the appropriation of funds not being where SARS wanted it to be. She noted Dr George’s argument about why it was not funded at the level that it was supposed to be. She asked that National Treasury respond to this as well. Was it due to limited funding or was Treasury not convinced that SARS was doing what it should be? She noted the recovery of more than R7 billion in illicit taxes. This was much appreciated. She was interested to know what the estimate was of the illicit tax flows, R7 billion was likely a drop in the ocean of what got lost. She highlighted the issue of women leadership – when one spoke of women leadership it was about how women were deployed or appointed. SARS was meeting the policy threshold in employing persons with disabilities but she requested clarity about the appointment and representation of women. 

Mr F Shivambu (EFF) asked what had been done on the issue of tax avoidance. This had been brought up in previous meetings. Tax avoidance was mostly done by resource extractors, such as in the mining sector. What was being done differently at the moment? A lot of the multi-national companies in the mining sector were somehow all involved in tax avoidance. He was specifically speaking about aggressive tax avoidance. How was SARS deriving income from the e-commerce and online businesses – particularly those that traded a lot of goods and services. Was there a mechanism or system for collecting income and company tax? He requested clarity about the software contract and the continuation of that.

Mr Kieswetter responded to the questions asked by Dr George. Clearly SARS needed to avoid developing a long list of what needed to be done which would be uncoordinated and unprioritised. This was not the only work SARS did, the APP was not a complete list thereof but the programmes that were prioritised and tabled before the Committee. The notion of a five-year plan was outdated, today dynamic planning and constant readjustment, alignment and allocation of resources were required. SARS would be alive to changes in the environment. COVID-19 was a case in point.

SARS did not create the economy but needed to work within any given economy and ensure that the fundamental work was done to ensure that every taxpayer who needed to be registered, was registered etc. If that was done well, in any given economy it would produce optimal revenue outcomes. This was demonstrated the year before, where ‘SARS grew the revenue base’ by 25 percent in an economy that would have nominally grown by just over 12 percent. There were some windfalls from commodity pricing, but that was only one of the contributory factors.

Would State capture return? If society did not adequately respond to the period that followed State capture, such as the eroding of social fibre of economic activities, and those responsible were not held accountable – then State capture would return. He could not speak for the whole of SARS or society. SARS would do what it needed to address the issues of State capture in so far as the integrity of its own members. All of the targets were produced in relation to the current state of affairs and the improvement SARS wanted to see within the year. The setting of targets was between a science and an art. If the target was set to low, it did not inspire or stretch one. If the target was too high, people gave up before trying. The target indicated, had jumped from 65 to 77 percent.

A full presentation had taken place with Standing Committee on Finance (SCOF) a few weeks before. From a service to taxpayer perspective, SARS wanted to address the systemic failures that created the need for people to come queue at SARS in the first place. SARS did not want to improve its call centre timeframes – it would be worked on – but there would never be enough call centre agents given the number of calls received. It was about addressing the fundamental inefficiencies or systemic weaknesses that necessitated service intervention.

Of the individuals who filed for tax, 3.4 million were selected for the auto-selection the year before. Auto-assessment meant those individuals were not required to do much more than confirm or edit the assessment outcome provided. Nine out of ten taxpayers accepted the auto-assessment outcome. That was enabled by the use of data and Artificial Intelligence (AI). Those where there had been a change in their circumstances required an engagement with SARS. Home office expenses and changes to provisional taxpayers’ status were examples of changes that required engagement. Often an engagement was seamless, but it sometimes created an irritation for taxpayers. 93 Percent of the taxpayers assessed, were assessed in under five seconds. 85 Percent of them received their refunds within 72 hours if they were not selected. Only 320 taxpayers, less than 10 percent of 3.5 million instances were selected for verification. Half of those selected were continuous and habitual non-compliant taxpayers. In addition, SARS completed 138 000 cases from the prior year which yielded a revenue of R21.5 billion. There had been successful criminal prosecutions relating to VAT contraventions. There was a continuous battle between providing good service while managing the risk to the fiscus. If the risk management work produced over R70 billion in additional revenue, that work needed to continue. He assured the Committee that SARS would continue to refine its risk profiling and case selection to bring about a better balance between risk and service.

Dr Gcabo stated that SARS conducted two types of surveys – one that used the tax register and a public survey, which was totally random. SARS surveyed those who interacted with its services, in particular, to get feedback on the service received. Surveys were sent to 25 percent of the population on the register. It was for individuals, businesses and entities. 4 638 Taxpayers provided responses, this was a normal response rate. This was then compared with the public opinion survey. The outcomes of both surveys were very similar. 

Mr Kieswetter stated that tax avoidance remained a huge challenge for SARS. After his appointment, he had re-established the Tax Committee, led by Judge Dennis Davis to have another look at the areas where there was the highest risk. This would cover aggressive tax erosion practices and transfer pricing challenges. It was pointed out that more needed to be done in terms of VAT administration. SARS had re-established the large business division which was gaining momentum. SARS had established the high-wealth individual segment. In both segments, SARS had seen a measurable increase in compliance levels as well as year-on-year growth in revenue.

He noted the e-commerce question, as reported previously. E-commerce was well-covered by SARS for a number of years through VAT. On imported services, R300 million had been secured and VAT on electronic services yielded R1 billion for the previous year. SARS would continue to work on that. SARS needed to be better connected to the economy. At some point in time, a more comprehensive update could be given about the work at the Organisation for Economic Cooperation and Development (OECD) at the G20 introducing a number of new concepts. VAT was already in the system in this regard. Contributions from income tax were however not coming into the system. The whole issue of a minimum tax level was under discussion. There was a growing consensus at the G20 – about what that level should be.

Mr Makhubu stated that a powerful triangulation of data was achieved through the country payments systems, where SARS collaborated with the Reserve Bank to extract payments made internationally. Through that, SARS was able to pick up non-compliance. There had been engagement on issues of foreign entities supplying vat-able products or services. SARS would continue to ensure that the compliance levels were where they needed to be.

What gave SARS an advantage so far, when it came to tax avoidance, was the Country-by-Country (CbC) reporting. SARS was starting to see in excess of 100 jurisdictions that shared information with SARS on multinationals. This ensured that arm’s length transaction principles were applied when entities transferred to mother jurisdictions or other entities. A number of these cases were seen the year before. The cases were generally quite lengthy, as well as the triangulation of data. SARS was satisfied that there was additional revenue in this area, 345 cases were completed that yielded R11.9 billion. 45 Cases relating to assessed losses were reversed to the tune of R1 billion. Through the CbC reporting and automatic exchange of information leverage was gained in this area, which continued to be an area of focus to build capacity and skills.

Mr Kieswetter stated that the issue was investigated by the Public Protector, the previous Friday the Public Protector’s office issued a report. SARS was currently studying the report and would respond to the Public Protector as required. He would not go into the specific detail of that response as SARS was working through it. When SARS took the decision in the late 2000s to move away from enterprise resource planning administration systems, one of the implications of that, was that it build partnerships with providers to walk that journey. SARS entered into relationships with a number of service providers. One of these provided the service manager, which was the underlying platform on which SARS administered its entire body of tax products. Another service provider provided the interface between SARS and its taxpaying public. The third service provider provided the interface between SARS and third-party partners. After his appointment with the re-clarification of SARS strategy, this included the repositioning of the SARS Information Technology (IT) strategy. SARS had concluded that it could not always remain reliant on third-party providers for that service. SARS needed to develop its internal data and science capability in order to continue the journey on a bespoke platform to administer taxes. One was taken over through an agreement with another company, to limit risks that provided services. SARS was building its own capability within Interfront. Interactions amongst SARS and third-party service providers and other agencies – were being brought in-house. The current contract that dealt with that function had come to an end and would not be renewed. The last service provider was a company responsible for building the underlying service management platform. The IT strategy that was conceived some 15 years before was no longer relevant.

On the deployment of women, SARS was committed to investing in the growth of women, not only in relation to gender-based violence issues but also to progressively advancing women in the organisation. Currently, the women represented in management and leadership positions sat at 49.91 percent. It was as near to 50/50 as one could get and SARS would continue to work on that. The Women in Leadership Development Programme sought to put a spotlight on that so as to continue to create opportunities for women in leadership. Women were appointed in the same manner in which men were appointed. While SARS wanted to transform the organisation, it was believed, that every person regardless of their gender needed to have the competence to do their work, otherwise a disservice was done. He highlighted SARS’s inclusion of persons with disabilities, specifically Ms van Niekerk and her experience.

Deputy Minister Masondo noted the comment made about the relationship between economic growth and tax revenue. This was agreed to. The economy could grow, but it was also up to the ability of the State, through SARS to receive and collect such revenue. He cautioned against making comments on the Budget on this platform, given that this followed a parallel process in which the Committee had been involved. He did not want the Budget process to be undermined. R3 billion had been allocated over a period of three years to SARS. That came against the background of a decline in the funding of SARS.

The taxing of online platforms was a global matter, which required everyone across the globe to have some consensus on the matter. South Africa would not take unilateral measures. South Africa was working and would wait on a consensus-based solution. Through that work, such as the G20, there was consensus that the digital economy needed to be taxed. The technicalities of that were being worked on. France had taken unilateral measures, and there were retaliations, particularly from the United States (US).

Mr Shivambu suggested there should be an approach that could be adopted if the multi-national companies were generating revenue within the borders of South Africa, in relation to e-commerce. He asked for a clearer framework and timelines for the enforcement of the IT capacity. He asked for clarity about the application of the Public Finance Management Act (PFMA) and Treasury regulations when it came to certain suppliers.

Mr Kieswetter stated that the question of OECD versus South Africa had been covered by the Deputy Minister. The current relationship between all the suppliers and SARS had been done in a regular manner within the framework, in terms of the PFMA and Treasury regulations. SARS had followed every requirement and had worked with the Ministry and National Treasury and was currently functioning within an approved provision that had been authorised by National Treasury.

Deputy Minister Masondo appreciated the guidance and comments made by the Committee. The constructive criticism was appreciated.

Closing remarks
The Chairperson made brief closing remarks and thanked those present. He acknowledged the continued improvement in SARS performance. He suggested that the Committee needed to do oversight in the busiest ports of entry, Oliver Reginald (OR) Tambo International Airport, Beitbridge and the Durban Harbour, in the following quarter. The Committee was concerned about the continued in-flow of counterfeit goods into the Country. It was a serious threat to the economy.

The meeting was adjourned.


 

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