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FINANCE PORTFOLIO COMMITTEE
2 June 2004
SOUTH AFRICAN REVENUE SERVICE: BRIEFING
Chairperson: Ms B A Hogan
South African Revenue Service (SARS) Presentation:(4 parts)
SARS Annual Report 2003
SARS reported that it has significantly increased revenue collections from audits and successful criminal prosecutions. It is also effectively combating improper tax planning, customs transgressions and outright fraud. There is more visible and efficient enforcement in the customs and excise areas. An e-filing service has been established. The taxpayer education aimed at increasing awareness of tax obligations has been extended. Much work still has to be done to bring the informal sector into the tax net.
The Siyakha programme has been established. It involves, amongst other, the introduction of standardized business processes for the agency. The programme has resulted in the improvement of the working environment of more than 20 SARS locations and the training of more than 3000 staff in service and functional expertise.
Mr Pravin Gordhan, Commissioner: SARS, briefed the Committee (see presentation document).
Mr E Sogoni (ANC) said that there had been newspaper reports on the taxation of mines. He asked the Commissioner to clarify the situation.
The Commissioner replied that a set of leaders from a particular mining firm publicly said that they could not pay tax. They said that the corporate tax collections that were anticipated would be way off the mark. After consultation it was important to remind mines about the real situation. The situation is that there is a formula that goes back for decades. It was put in place in order for mines to undertake developmental projects and enhance the industry. The effect was that the gold mining industry would pay less tax than would be the case if corporate tax were implemented. Perhaps the time has come for questions to be asked on the impact of the formula and whether or not it is time to review it. The Minister has pronounced that the formula would be looked into on a broader basis to ensure that there is equity in the mining industry. It might be the case that the benefits of the formula have to be spread across the industry or that the formula itself has to be tightened up. In short, mining firms do pay tax. It is only a question of the basis on which they pay taxes. The exchange rate does have an impact on their profitability and this in turn impacts on the kinds of taxes that they have to pay.
Ms R Taaljaard (DA) noted that the Report of Minister Manuel speaks of providing "an appropriate administrative response to the dual nature of the South African economy". She asked the Commissioner to comment on the critical challenge of integrating the informal sector as part of the broadening of the tax base.
The Commissioner replied that the tax gap is a notional one. It would take two sorts of developments to understand the tax gap better. The informal sector is not a major contributor to the tax group. The formal sector is the major contributor as understood in money terms. SARS has just launched an investigation on how to simplify administrative requirements for smaller businesses. The aim is to make it easier for smaller businesses to comply with statutory requirements. It is said that there are a lot of forms to be completed by small businesses. This is not a practical way of encouraging small businesses to participate. Internationally, this is a disincentive. It is hoped that in the coming months there would be a better understanding of what happens in the sector. The aim is to spread the compliance climate as wide as possible without imposing inordinate burden upon people operating at the lower spectrum of the economy.
He continued that the task is to understand what happens in the sector. It could mean different things in terms of how government enters into this sector and intergrates it into the tax net. Various formulae are available. One might look at presumptive tax so as to avoid the complex requirements that one currently has. There is also a transition zone between the sectors and there is very rapid movement across this zone. Moreover, there is a lot of casualization of business. One needs to understand the transition zone. Registration for income tax and depending on the economic climate, for PAYE and VAT, is on the increase. On average, over the last 3 to 4 years there has been a registration rate of between 6 and 14% for the different taxes. This is significant in terms of broadening the tax base.
Mrs R Joemat (ANC) referred to the Annual Report and the Auditor General's Report and observed that SARS exceeded the printed revenue targets. However, the Auditor General's Report raises a concern about the reflection of stale SARS cheques as income. She asked the Commissioner to give the Rand value of the stale cheques so as to enable members to determine the actual revenue collected.
Mr Gordhan replied that he had no figure but the figure is anyway minimal. Normally the call system runs through the batch of taxpayers' accounts and then prints out refund cheques that are then posted. Some people do not present the cheques for payment during a particular financial year. Reflecting them as income is purely how one manages the cheques. It is a particular accounting treatment. If one looks at the financials, it makes no difference to collection figures.
Ms Hogan said that the Auditor General's concern is that they are written as income even before their period expires.
The Commissioner replied that the Auditor General is not raising a concern. He is merely saying that this is how the accounting process was undertaken. The Annual Report only outlines the rules agreed upon between the Auditor General and SARS.
On the tax to Gross Domestic Product (GDP) ratio, Ms Taaljaard said that while there is still a 25% ratio in terms of the Growth, Employment and Redistribution, it seems like the ratio is on the upside. She asked if there would be a breach of the 25% because of the fact that the ratio is on the increase.
The Commissioner replied that this is really a policy issue. The tax to GDP ratio is not off the wall. In fact it is at the modest end of where other countries are. Economic context and the kind of developmental challenges that a country faces determine the ratios. The Minister has been very consistent in sticking to this range and has done so brilliantly.
Ms Taaljaard said that there has been a steady decline on the overall contribution to secondary taxes by companies. It is down to 2% at this stage. She asked if the tax is worth collecting, especially if one considers the impression it creates on the overall corporate tax burden. Abolishing it would have an immediate impact on investor perception of the effect of corporate tax.
Mr Gordhan replied that secondary tax is tax that in some countries one would normally pay upon receiving dividends. In South Africa the person who pays the dividends removes this tax and pays it over to SARS. It is just a perception that it increases the corporate tax burden. It is not true to say that South African corporate tax burden is anything more than the average would be across the world. The tax is a highly competitive internationally. The 2% is very important to collect and at this stage there is no intention to give it up. What is needed is a better understanding that this is not an additional corporate tax but a tax on dividends. It could be collected in a different way but it would still look like the same tax that is collected in any jurisdiction on dividends.
Mr Kosie Louw (General Manager: Law Administration) added that the drop is due to the fact that company profits have gone down. Naturally this affects secondary tax. If secondary tax on companies is abolished then one opens the debate on whether on not to reintroduce tax on dividends in the hands of the shareholders. This was the case prior to 1991. The general rate is not very high as compared to the rest of the world. When comparing South Africa's tax with other jurisdictions, people forget to factor in tax on dividends that a person would have to pay under other jurisdictions.
Ms J Fubbs (ANC) said that with regard to taxation on banking operations, last year SARS raised a concern about the revenue gap that existed in terms of what banks are obliged to pay and what they thought was obligatory. She asked if this problem had been addressed.
The Commissioner replied that the Minister raised concerns over the effective tax rate in the banking sector. Meetings were held with the Banking Council and individual banks where a number of problematic transactions were identified. The unwinding of these transactions brought in R2.5b. It is still work in progress and a lot of lessons were learnt. Credit must be given to the leadership of the banking sector for the way in which they approached the issue. SARS had the benefit of the revenue and banks and their clients benefitted from the legal certainty brought about by this process. The Portfolio Committee on Finance last year passed an Act that allows for the reporting of certain transactions. The guidelines for this are being formulated and would be in place next year.
Mr K Moloto (ANC) observed that the Annual Rreport says that there are concerns about the Tobacco, Gambling, Petroleum and other industries. He asked if any progress has been made to ensure their compliance. On the issue of excise duties, he noted that the duty is levied at the source of the operation. The Annual Report speaks of leakage through the BLNS (Botswana, Lesotho, Namibia, Swaziland) countries. He asked the Commissioner to explain how this happens.
The Commissioner said that there are industries paying less tax than they should do. With the Business Intelligence Unit being established there would be a better sense of what financials should look like in a particular industry. Hopefully models would be established to help identify those not complying with the norms of the industry.
On the question of excise duties the Commissioner said that the duty at the source system has been implemented for three main groups: Liquor, Tobacco and Oil. Excise was probably the most neglected area in SARS. Given the nature of some of those industries they got used to working in a particular way and having things their way. Efforts are being made to beef up current operations in the excise component and meet with industry groups so as achieve a better understanding on how to get better compliance and how to identify culprits. SARS is working closely with industries so as to get a clear sense of what is considered as a malpractice in a given industry. There is a need to be careful not to be used by an actor to get even with another actor. This in turn calls for caution when accepting and acting on the basis of information received from an actor within a particular industry.
Mr V Shabalala (General Manager: Customs) added that excise duties are levied at the source of the operation. It is also true that as the administration gets more effective, more innovative ways of getting round the system are developed. There is a lot of smuggling of cigarettes across borders and such cigarettes are sold at very low prices so it becomes clear that taxes are not being paid. In the oil industry SARS and the industry made arrangements on how the industry should report. There was too much reliance on reports by the industry with very limited auditing of the accounts. This has been changed and the industry is now strictly audited. Their records are not what they are supposed to be. In some cases the movement of products amongst the subsidiaries of a company are not recorded and therefore duties are not paid. In the last months of 2003 some R200m was collected through more focused audits of oil companies.
The Commissioner gave the example of someone who had been diluting whiskey. This meant that he produced more volumes but did not pay duties for the entire volume. Similar things happen with regard to diesel.
Mr B Mnguni asked how much SARS had saved as a result of the introduction of the new electronic systems such as e-filing.
The Commissioner replied that the new system has brought significant changes to the behaviour of taxpayers. Of last years' R303b, some 60% of it would have come in electronically. The aim is to push up electronic payment.
Mr K Jarvis (Chief Financial Officer) added that the objective is to diminish fraud and corruption possibilities. The first objective was to ensure that payment reaches the correct account and that it has a reference. A pilot study on this went very well and the rest of the banks would follow in the next four months. The E-filing offers three to four product types and there is a need to enlarge it to include company returns. This would be piloted in this financial year.
Mr Gordhan added that this offers a better possibility of eliminating some cases of fraud. For instance, cases have been identified where IRP 5 certificates have been cooked up allowing people to claim tax returns.
Ms Fubbs said that the Audit Report highlights that IRP5 certificates are not being reconciled with the payroll. She asked if the new system would accelerate reconciliation. She noted that the report also speaks of certain registers where accuracy needs to be improved. She asked if this problem has already been attended to. Was there any significant amount of revenue that might have slipped through because of the problems with the registers.
Mr Gordhan replied that reconciliations do not really give more money at the end of the year. The registers are just a manual way of keeping a check on what happens in the system. By themselves they do not add any value. There are times when officials might not have completed them. This does not result in revenue deficit of any sort. There has been no revenue slippage as there are adequate controls.
The Chairperson said that this raises the question that if the control mechanism is there but other control mechanisms can compensate for the lack of that control mechanism, then why have it in the first place?
The Commissioner replied that some are legacy issues. Some of the registers are big books that come from decades back and one just has to keep doing them.
Ms Taaljaard asked for a progress report on the review of tax provisions that apply to Small, Micro and Medium Enterprises. She also asked for the role that SARS is playing in the process.
Mr Louw replied that the intention was to concentrate on administration and make it easier for smaller business to comply with provisions.
Mr Moloto was concerned about the debt management strategy. The Annual Report shows a high level of VAT-debt. An explanation is given about benchmarks internationally. He asked the Commissioner to outline the lessons learnt from the debt management system piloted in the in Western Cape. He also asked if SARS is confident that it would reduce the debt level.
The Commissioner replied that today SARS has more staff than two years ago. Over the last 18 months it had experimented on outsourcing some debts using private sector debt collection agencies on a confidential basis so as not to compromise taxpayers' information. The debt management system has also been implemented. SARS is confident that it would reduce the debt. The debt is complex because sitting inside the debt is billions of Rands that needs to be written off because it is uncollectable. The necessary processes of writing it off have not been completed. There is also a huge bundle of debts which relates to cases in which taxpayers have lodged objections or pending appeals. This would appear as a debt because there is nothing that can be done until the process has been completed. There is also a percentage arising out of incorrect records because of incorrect allocations or completion of forms. A process to investigate the debt area has been launched to see how to improve debt collection.
Mr I Pillay (General Manager: Enforcement) added that the debt from March 2002 to March 2003 increased by 43% whereas in March 2003 to March 2004 it only increased by 1%. This means that SARS has began to stabilize the debt book. The actual collection of the debt increased from 2003/04 by 58%. There is still much to be done but this is a good start.
The Commissioner added that the Johannesburg office decided not deal with taxpayers who have a debt of over R1m via phone or letter. Such people would be invited to a meeting and work out a plan in terms of which they would settle the debt. This has proved very successful.
Ms D Ramodibe (ANC) said that in the 1999/2000 budget, R51m was allocated for the upgrading of land border posts. In 2000/01 R50m was allocated for this. A national inter-departmental structure was formed to coordinate the spending. She asked the Commissioner to indicate the present situation at the posts. She also asked if the monitoring risk profile has been improved.
The Commissioner replied that this is a fairly serious problem that presents challenges to SARS, South African Police Services and the Department of Home Affairs. Currently there are 55 land border posts that have been identified and SARS has a presence at 19. There are similar problems at all the posts. There is lack of facilities in many of the posts. A lot of work has been done so as to create a master plan for the upgrading of 19 border ports. Much money has been spent on accommodation for personnel and office space. Plans to physically improve these facilities have already been drafted.
Ms Taaljaard said that of the annual report reflects liens on shares in Old Mutual and Sanlam in respect of amounts owed by taxpayers. In both cases one is talking of large amounts of money. A lien is an imperfect instrument that does not actually guarantee that the surety would be repatriated should the taxpayer continue to be in default.
The Commissioner replied that in the late 1990s both of these institutions were demutualizing. This was a fairly successful exercise because it made people aware that if they do not settle their debts they might lose something. The Income Tax Act does allow for the placing of liens on shares. They have declined quite substantially. What needs to be done is to decide for how long SARS would remain as a shareholder and when to put them in the market. SARS does not want to carry the responsibility of managing the shares. Nobody has challenged the right to hold on to the shares in exchange for the debts.
Ms Ramodibe asked if Customs has the full co-operation of the Department of Home Affairs and SAPS.
The Commissioner replied that SARS works through the governance structures of the government and in this case the Justice and Crime Prevention and Security Cluster. One would like some participation in the economic cluster as well because SARS straddles the safety-economic divide. One cannot see things in straight criminality terms only because there is also the issue of the movement of goods at the same time. SARS is part of the process but there are still some difficulties. SARS has made the necessary investment to ensure that its mandate is accomplished to the optimum extent. More can be done and perhaps it is time to start talking about what needs to be done.
Dr G Koornhof (ANC) focused on the Siyakha Programme. He asked for the reasons for the delay in the Programme and how they would affect divisions within SARS. In the Annual Report, SARS gives a roll out estimate over the medium term in Gauteng Province to be completed by the end of March 2007. He asked for the proposed timeframes for the roll out of the programme in Gauteng and other provinces. He also asked where the offices would be situated.
Dr Koornhof observed that the Strategic Plan does not specifically refer to the Siyakha Programme. He asked why there is no specific mention of the programme.
The Commissioner replied that the process started in 2000. At the end of 2000 and early 2001, the process of implementation started in Kwazulu-Natal and was completed by mid year. They had to make a choice about what happens in the Western Cape. Some of the things that had to be done included listening to Kwazulu-Natal and looking at improvements that could be made, learning from the Kwazulu-Natal case. SARS also had to decide how to handle the people impact so that there is less negativity. The Western Cape had more offices than Kwazulu-Natal. These were some of the delays. The Western Cape happened in 2002/03 and was much more successful than Kwazulu-Natal.
In Gauteng one of the major problems is access to property. SARS is settled as to what it would be doing in Gauteng South. A facility would be created and be ready in 15 months time. Process change would take place between now and the end of the year. Some people would move immediately. It is a kind of a rolling exercise that takes time. Kwazulu-Natal and Western Cape were easy because there were existing buildings. In the next month a decision would be taken on how to approach the Eastern Cape and the Free State. It is suspected that Gauteng would be finished before 2007.
The Commissioner said that the slogan is not quite in the Strategic Plan slogan but there is reference to Siyakha in some of the pages. He apologized for any confusion caused by the omission of the work.
Dr Koornhof asked if SARS regards Siyakha as a strategic outcome. He felt that if it is a strategic outcome it has to be reflected under key performance areas.
The Commissioner replied that it is a strategic outcome. He apologized for the idiosyncratic formulation of the corporate plan.
Mr Malahlela (ANC) said that it was reported that one SARS employee who siphoned a lot of money from SARS, had been arrested. He asked if there are any measures that have been put in place to ensure that similar things do not occur in future
The Commissioner replied that there was R5m involved in this case. This happens even in the private sector. There was a syndicate in operation. Some of the people came from SARS and other from the bank. This is a clear case of IRP5 certificates being utilized to generate income tax refunds. SARS is constantly trying to improve vetting procedures so as to detect if there is something bad that they should know about an employee. SARS is also trying to cultivate a culture where employees do not share their passwords to ensure that the right people have access to the system.
Ms Taaljaard said that it was reported that SARS had made arrangements with the National Prosecution Authority for selected members of SARS to be delegated by NPA to prosecute criminal tax related cases. She asked for the number of people who had so been delegated.
The Commissioner replied that there are not many people. In fact there are only one or two people who are capable of prosecuting such cases. The delegation is in terms of the law and not by special arrangements.
Mr Moloto said that SARS has indicated that they have realized the benefit of monitoring statistics and that the statistics are not accurate. A pilot study was dome in five ports of entry with the aim of increasing accuracy of the data. He asked for a progress report on the pilot studies. He also asked why SARS is interested in administering passenger information.
The Commissioner replied that trade statistics are kept by SARS. They involve the movement of goods across borders. There are a couple of agencies like the Diamond Board that suppply information about the volume of goods that leave the Republic. SARS' responsibility is to get the relevant documents such as the bills of entry. The issue is not really one of accuracy. Some entities hold on to the papers for too long before handing them over to SARS. The problem is further compounded by the fact that the process is paper driven. If one gets the new Customs solution and everything becomes automated across all the border posts, producing trade statistics would become a dream because the system would itself deliver the information to SARS. There would be more progress as more technology is put in place. Sometimes commentators look at a single month's figures. If one looks at it in the context of a few months one gets a more balanced picture. The market is also beginning to understand this.
With regard to the administration of passenger information, the Commissioner said that SARS also checks people who carry goods. If one travels to Bangkok, for instance, one is likely to come back with some items that must be declared.
Mr E Sogoni (ANC) noted that the total procurement spend of SARS is over R1 billion. He asked if previously disadvantaged individuals and companies have benefited from the procurement process. He also asked for information on the composition of SARS staff.
The Commissioners replied that SARS is bringing in lots of new people from all backgrounds. The challenge is to enhance their skills level to ensure that they are empowered to do their job. In 1999 Mr Gordhan became the first black person to occupy a senior position at SARS. SARS is dominated by women but every effort is being made to ensure that it is representative.
Ms Taaljaard noted that last year the Portfolio Committee of Finance had passed amendments to the SARS Act in order to disestablish the Board and to establish Advisory Committees. She asked if any committees had been established yet.
Mr Gordhan replied that two committees have been established so far. These are the Human Resource and Information Technology Committees. The HR committee has in turn established a remuneration committee. The Audit Committee has also been established in terms of the Public Finance Management Act.
The meeting was adjourned.
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