Hearings of Annual Reports of SA Revenue Services and the National Treasury

Meeting report

FINANCE PORTFOLIO COMMITTEE
19 October 2005
HEARINGS OF ANNUAL REPORTS OF SA REVENUE SERVICES AND THE NATIONAL TREASURY

Chairperson

SARS Scorecard
SARS Performance scorecard for 2004 2005 (as per 2004 - 2007 Strategic Plan)
SARS 2004/05 Annual Report: Erratum
SARS Annual Report
National Treasury PowerPoint presentation on Annual Report
Treasury Annual Report: Part 1
Treasury Annual Report: Part 2
Treasury Annual Report: Part 3

SUMMARY
The Committee was briefed on the Annual Reports of SARS and the National Treasury. SARS had managed to collect R354, 98 in taxes. The total tax revenue had increased by 76, 3% from 1999/00. It had collected 998, 398 more outstanding returns than in the 20003/04 financial year. South Africa was faced with enormous challenges in the field of customs and trade. It had regularly seized undeclared currency from passengers traveling through Johannesburg International Airport. Cigarettes and tobacco smuggling was a very big issue. It had also recorded huge savings resulting from better audit processes. R1, 3 billion would have been lost had the audits not been done properly. One of the challenges that had emerged since the 9-11 attacks in America related to the securing of trade between South Africa and Southern Africa and the United States of America.

The issues raised by Members included the following:
- how SARS managed to have a huge overrun particularly in relation to income tax.
- Whether the South Africa tax burden was comparable to international levels.
-. Whether it was correct that Mr B Kebble had not paid tax for 11 years and why no action had been taken against him despite the fact that he had an R88 million reported asset base.
- Whether revenue estimates were based on poor decisions?
- How the writing off of debts impacted on SARS's budget.
- What SARS was doing to increase security at land border posts and airports.

One measures of success of the Treasury's policies had been that it had begun to cross the 4, 1% barrier in terms of growth. The economy was beginning to generate more jobs. Treasury had improved access to financial services for the poor. It was still doing a lot of work on the retirement industry reforms.

Members raised the following issues:
- The Development Bank of South Africa (DBSA) was taking projects beyond the Southern Africa Development Community (SADC) even though the founding legislation had confined it to SADC.
- Whether the BEE and PPP initiatives be improving the living and economic conditions of the people.
-Whether Treasury had any intentions to intervene in the affairs of the Road Accident Fund.
-How Treasury saw greater liberalisation impacting on the competitiveness of the Rand.
- Whether Treasury planning to amend to the PFMA so that it could be aligned with the MFMA?

MINUTES
Presentation by the South African Revenue Services
Mr P Gordhan (Commissioner) thanked the Committee for the opportunity to come and account before it. He congratulated the Chairperson for his appointment as the Chairperson of the Committee. He said that SARS aspired to an impartial, independent, consistent ands fair administration. It sought to retain community confidence and reduce administrative burdens and cost to the taxpayers. It had managed to collect R354, 98 in taxes. The total tax revenue had increased by 76, 3% from 1999/00. Personal income tax had increased by R12, 48 billion from the previous year whereas company tax increased by R9, 92 billion from the previous year. The cost of collection was R4, 311.7 and translated to 1, 215% of the revenue. It had collected 998, 398 more outstanding returns than in the 20003/04 financial year. It had also introduced a new debt management system. The establishment of the Special Tax Units in conjunction with the National Prosecution Authority had resulted in 248 successful prosecutions during the financial year.

A major initiative for the year under review was the upgrading of the National Call Centre (NCC), which significantly expanded and improved its capabilities. Call centre operations were presently routed through two inbound operations (Western Cape and KwaZulu-Natal) and an outbound call centre in Gauteng. SARS normally made outgoing calls for the purposes of collecting debts and outstanding returns. SARS had received a large number of service requests. For instance, it received 43, 101 service requests through e-mail. There had been an increase in the e-filing subscription. SARS's accounts would become more accurate as more and more people turned to e-filing.

The Commissioner said that SARS had a large Business Centre in Johannesburg and regional offices in KwaZulu Natal and Western Cape. The Centre catered for income tax but would soon cater for all taxes. The tax clearance certificate was one area that was creating a fair amount of burden for SARS and small businesses. SARS was looking at ways to re-engineer the process or even undertaking a policy shift. Currently anybody who would like to apply for a state tender had to have a tax clearance certificate (TCC). SARS was exploring the possibility of only the short-listed candidates receiving the certificate.

He said that South Africa was faced with enormous challenges in the field of customs and trade. One of the challenges that had emerged since the 9-11 attacks in America related to the securing of trade between South Africa and Southern Africa and the United States of America. This had resulted in South Africa entering into an agreement with USA customs on container security initiative. Since then the World Customs Organisation (WCO) had confirmed the WCO Framework of Standards which imposed certain obligations relating to the way of exportation and importation of goods took place. For instance, South Africa should be able to electronically supply export data 24 hours before goods leave a port. The World Trade Organisation might soon come up with rules on customs administration, which every country would be obliged to implement.

SARS regularly seized undeclared currency from passengers traveling through the Johannesburg International Airport. This currency was handed to the Reserve Bank and the perpetrators subjected to tax investigation. Cigarettes and tobacco smuggling was a very big issue. SARS had recorded huge savings resulting from better audit processes. R1, 3 billion would have been lost had the audits not been done properly. Businesses would have been able to claim loses of up to R5, 6 billion were it not for better audits. A number of returns were still outstanding but SARS was making progress in this regard.

SARS had received an unqualified audit report for Administered Revenue for the year ended 31 March 2005. It had also received an unqualified report for Own Accounts.

Discussion
Mr B Mnguni (ANC) said that there was a lot of information in the Annual Report and supplementary documents given. He thought that the report and the scorecard would follow the programmes outlined in the 2004/07 Strategic Plan. It was difficult to follow the Annual Report because if did not talk to the Strategic Plan.

The Commissioner replied that there was a link between Strategic Plan and the Annual Report but one was not necessarily going to find it on a word by word basis. This was one of the reasons why SARS had provided two Scorecards to the Committee. The Scorecards illustrated that delivery was in line with what SARS had promised.

Mr I Davidson (DA) said that the SARS had ascribed the R21 billion overrun to better than expected economic performance and better administration. He said that, as an ordinary citizen, he would not congratulate SARS for collecting so much revenue but, as a legislator, one should congratulated SARS on their achievement. The GDP growth forecast for 2004/05 was quite similar to what had been achieved. It was difficult to understand how there could be such an overrun particularly in relation to income tax. The issue was the accuracy of the estimates that government worked on. He assumed that there was some form of interaction between SARS and National Treasury on how to make the estimates. There was an article in the Financial Mail that looked at the total tax burden of individuals in South Africa. He asked if there was any sort of international comparison on the total tax burden.

He said that there were 16 427 Large Business Companies (LBC) companies. There were also 8 454 active "potentially real" companies and 1 952 contributing companies. The number of non-contributing companies stood at 6 502. He asked if the number of non-contributing companies represented a potential extra source of income and how real was this. The Bret Kebble affair had recently been in the news. He asked the Commissioner to comment on the fact that there was no tax return rendered since 1993. Was this correct and why was there no action taken against him despite the fact that he had an R88 million reported asset base. It had been reported that some amounts had been paid. He asked how much had been paid and how much was still outstanding. The public had the right to know why the gentleman had not paid tax for 11 years.

The Commissioner replied that citizens got more tax caps in the event of SARS collecting more revenue. The issue of the estimates had been raised a number of times before. There were a number of forces at play. The first was the economic performance, particularly of the consumption side. Over the few days there had been a number of media reports about the house prices stabilising and beginning to cool off in terms of percentage increases. There was a concern about the debt level. There was also a concern in the retail sectors on whether the consumption patterns would continue into the next three or four months. The economy was still "pumping". The second factor was compliance. Was there a different mindset that was beginning to emerge in South Africa? Were South Africans more compliant than before? The answer was ‘yes’ and the investment that the government had made in SARS and what SARS had been doing in terms of service delivery and enforcement approaches were beginning to bear fruit. More South Africans were submitting their tax returns. Compliance was a certainly factor because one could have a very active economy but an unsatisfactory tax-GDP ratio. The third factor was SARS's internal efficiencies which had improved over the years. SARS was not yet the best it could be but there had been some improvements.

He said that the estimates were based on what economists could get as their best guess at a particular point in time. The National Treasury would probably address this issue when it appears before the Committee. The Minister of Finance might also touch on this next week. He did not want to preempt what the Minister might say save to say that there was negligence on anybody’s part or any desire to under estimate. It was true that SARS, National Treasury and Statistics South Africa worked closely with each other. There was a Revenue Estimation Committee that met and determined what the figures had to be. It was a ‘science’ but not an accurate one because it depended on what the economy was doing at a particular time. In today’s circumstance the economy could change in a month.

Mr Gordhan agreed that there were international comparisons with regard to the tax burden. SARS was not over taxing any South African. It was regrettable that the article in the Financial Mail had misled people. For example, it raised the question why South Africa had such a small tax base. It drew comparisons with Brazil, India and other countries. The answer was a historical and political one. South Africa had a small tax base due to its own history. Its history had determined who and to what extent would be allowed to be economically active. The discriminatory practices of the apartheid governments had narrowed the tax base. One could not blame the democratic South Africa for the narrow base created by the past apartheid South Africa. At the moment there was a widening of the tax base. SARS’s responsibility was to ensure that those who became economically active to a level where they had to be within the tax net were within the tax system. SARS should endeavour to understand where the tax gaps were and ensure that its machinery reached all South Africans and made them aware of their responsibilities. It should also encourage people to pay their tax and make full disclosures of their income. The article did not reflect the proper debate or the South African historical context.

With regard to the LBC companies, he said that one could have big number of companies on the register. Some of them might be inactive and others could be the so-called ‘potentially real’ companies. The issue was that when managing tax loses persistently, one could have companies that were alive and operating but presenting themselves in a way that they would have no tax obligations. Recently a tax consultant had been sentenced for helping companies manufacture losses. He could also sell company in which he had manufactured a loss. The buyer of the company would then be able to write off the profits against the loss and end up in a no tax situation. The Business Day had an article about an accounting firm and its activities in the United States. The article said that the firm had manufactured about $11 billion of tax loses as a result of selling tax shelters. This meant that the USA' fiscus was being deprived for many years for such income. Key ex-employees including the Chief Financial Officer were being indicted for criminal charges. SARS would have to be careful when looking at how companies were not making any contributions.

Mr S Asiya (ANC) said that the Committee had assembled to look at SARS's Annual Report and the Strategic Plan. The Hounarable Member had correctly pointed out that the Bret Kebble issue was something that had been in the news. The question was how it fitted into the agenda of the Committee. He appealed to the Member to let the dead rest in peace.

Mr A Moloto (ANC) said that there was a convention in the Committee that it would not discuss the tax affairs of individuals. Those were confidential matters and the Committee was confident that SARS could deal with them. He said that he could raise a number of individual tax issues but it would be unfair to those who were concerned.

The Commissioner replied that it was not a practice to discuss individual taxpayers in Parliament or any forum. Section 4 of the Income Tax and other legislation offered taxpayers the confidentiality they required at they had elsewhere in the world. This was a matter of public interest and had been raised in many different ways with very different connotations. As a matter of principle nobody was exempted from tax or customs laws in South Africa. SARS did not give tax breaks to anyone just because of standing in the society. In order to clarify Mr Kebble’s position, SARS had talked to his legal advisor shortly before his death. SARS had a statement that the legal advisor had made which SARS could issue as a public statement. The statement confirmed that no tax returns had been submitted and that SARS had been working on the matter. It also provided that some of the assessments had been issued and some monies had been paid. It went on to say that the process was still ongoing. Despite all the inferences that had been made, nobody could prove that any SARS officer had not done what was required in terms of legislation.

Dr N van Dyk (DA) said that the Commissioner had once said that South Africa was losing R30 billion annually on tax. He asked what measures had been put in place to deal with this. The Commissioner had reported to the media a 9, 3% increase on the tax base, R12, 5 billion and R10 billion in personal and company tax respectively. It seemed that an amount of R30 billion more to what had been budgeted might be collected this financial year. What could be the reason for this? Did SARS increase its management capacity? Were the estimates on revenue based on poor decisions? He also asked for the reason for the increase in company tax.

The Commissioner replied that the Annual report was an illustration of what measures SARS had taken to narrow the tax gap and to get a better compliance attitude and behaviour. It was a cat and mouse game that every administration faced. Just as SARS blocked a legislative or an administrative loophole, somebody would find something that they could use to beat the system. SARS’s task was to be always vigilant. It was important to create an environment that would disincentivise tax fraud or aggressive tax avoidance. The measurement of tax gaps was an extremely difficult exercise and one that no administration in the world had been able to conquer effectively. Different administrations would develop tools which would give them some notion of what the tax gap could be and then decide on what action to take to close the gap. SARS would also do this from time to time in different sectors in order to understand the risks and attempt to reactively or proactively cover the deficiencies.

With regard to tax collection, he said that South Africa was living in fairly volatile economic times. Fortunately, the economic environment was good at the moment. One day the economic conditions might not be good and SARS would be expected to explain the opposite of what it had achieved this year.

Mr Mnguni said that last year the collection had increased because of the state of the economy and the currency. He asked if there were other reasons for the good revenue collection since the currency had been weaker since the beginning of this year. He also asked the Commissioner to comment on the state of the debt book.

The Commissioner replied that the Minister of Finance would address the issue next week. He did not want to preempt the Minister.

Mr Asiya congratulated SARS on its achievement. It was important for SARS to collect tax. He asked what strategy they were using to deal with tax evasion. The report by the Auditor General had indicated that no strategy was in place.

Mr Mnguni said that the tax base had increased by 9, 3% as of last year. He asked how much revenue was raised from the 9, 3%. The broadening on the tax base should be one of the activities of SARS. The base had grown but at the same time shrunk in some sectors and this was a cause for concern. He asked what SARS was doing about this. Were there any other strategies that SARS was looking at in terms of broadening the base?

The Commissioner replied that SARS had to take the past into account. There was a hugely marginalised population. The compliance culture was very poor and the customs functions were very weak. The tax base was very narrow. The issue was how to approach the society in an economy like that. SARS had learnt a lot from Switzerland and Australia and the lessons were reflected in its compliance model. There was a need to accept that not everybody who was not in the register was a criminal. There was a need to focus on education and persuasion of people to comply with legislation. A large number of people were not aware and there was a need to reach out to them either through the organisation that existed in the communities or at an individual level. Education campaigns had given SARS the approach that enabled it to reach many people within a short period of time. Taxpayers responded to good services. Making it easier for people to comply reduced the cost of compliance and good service made more people to incline more to compliance. This had been proven in both developed and developing countries. Over the last four years more emphasis had been place on good services. Things were getting better but SARS still did not have the best facilities. An administration would not be taken seriously unless there was a strong and visible enforcement arm that was seen to be doing its job. Over the last few years SARS had been able to demonstrate this in a more visible way. One of the issues was that there were very nimble and sophisticated minds involved in tax evasion related schemes. SARS’s job was to create capacity that could fight against such schemes at a legal and technical level. After the Minister’s announcement in 2002 during the budget speech, SARS had demonstrated that it might not have all that it needed but it had what it took to begin the contestation process.

He said that the broadening of the base was not just about getting more numbers but also about ensuring that all income was declared. A lot of work still had to be done on this front. Some people had formal salaries and other income from other sources. The problem was that not all income was being declared. It was important to educate people and make them aware of the risk of not complying with tax obligations. Businesses had to be aware of the risk of not complying in so far as it related to their reputation. SARS had been able to demonstrate that tax risks were not worth taking. There was a report from one of the accounting firms to the effect that companies should not take their tax responsibilities lightly. Company directors and Chief Executive Officers (CEOs) should not treat this as a technical matter to be left to technicians to deal with because non-compliance with tax obligations could have serious financial risks to the company. Tax was not the business of tax managers. CEOs, Chairpersons of the Boards and directors should be responsible for tax matters. Australia had written to CEOs and set out some questions that CEOs and Directors had to ask themselves in order to create awareness on tax issues. It might be appropriate for South Africa to follow this example.

Mr M Johnson (ANC) said that there had been a great achievement especially when one looked at the total revenue collected against the cost of collection. He said that he had tried to advocate for a strong and vibrant consumer movement body. He imagined a situation wherein one would be able to broaden the tax base by engaging some of the formations that existed in the society. From an ANC point of view, one could imagine a scenario wherein one would engage the Congress of South African Trade Unions (COSATU), SANCO and the South African Communist Party (SACP). There was a number of small businesses that were not registered and not paying tax. One could reach out to all such businesses by using the different organisations that existed in the communities.

The Commissioner took the point that there was a number of organisations that SARS could engage in raising awareness. Some of the work was already happening through local organised business and social organisations. He hoped that the Committee would also support SARS irrespective of political affiliations. At the same time SARS would work with all that it had in order to broaden the tax base. This would be work in progress for the next 10 to 20 years but it was important to set the right platform from the start.

The Chairperson asked if the revised assessment arose from incorrect assessments. What percentage of the revised assessments could be attributed to SARS’s errors?

Mr T Marx (General Manager: Operations- Zone 2) replied that SARS did not systematically measure who made the errors. He was of the view that with respect to income tax, 25-30% of errors were on SARS’s part. On the Value Added Tax and Pay As You Earn, the minority were due to SARS’s errors. Some of the errors were due to incomplete and incorrectly completed tax returns.

Mr Mnguni said that last year he had mentioned that there were some teachers who had not received their tax returns. Some of them had little amounts of money due to them. They would like their tax reassessed. He asked how they should go about the process.

The Commissioners said that such people should formally object to the assessment. They should go to SARS offices and fill in a form and the matter would be taken from there.

Mr Y Bhamjee (ANC) noted that 20-30% of the errors were on SARS’s part. He asked if this was too high or acceptable given the nature of the work.

The Commissioner replied that the figure was lower than what it was in the past years. SARS was working hard to reduce errors on its part. The figures were acceptable for now. Some of the errors were very simple errors wherein, for instance, instead of writing three zeros, one would write two or four zeros.

The Chairperson said that from the response given by Mr Marx, it was clear that errors were not systematically measured. He asked if they should not be systematically measured in future.

Mr Marx agreed that there was a need for systematic measurement. SARS measured the revised assessments but not the reasons behind the revision.

Mr Gordhan said that SARS also had quality assurance processes. If a person had done ten assessments, for instance, there would be somebody who would take two out of them and see if there were no errors. The assessor would be removed and given training should errors be repeatedly found on the forms. People were also trained in order to increase their ability and to reduce the number of errors. There was a significant percentage of the revised assessments that were caused by lack of taxpayers’ awareness and tax practitioners who were paid to fill in the returns. In terms of legislation SARS could not correct a PAYE return that had errors on it. It had to return the form to the person who had filled it in. This was to ensure that SARS was not seen to be doctoring something that was a legal declaration. There was lot of work that had to be done to minimise errors from tax practitioners.

Mr Moloto said that the Auditor General’s report mentioned certain weakness in the system. One of them was the incomplete recording of debtors and long outstanding debts that were not properly followed up or written off. He noted that SARS was moving to a new system of case management. He asked if this would address the concerns raised by the Auditor General.

The Commissioner replied that this was one area where there was a lot of legacy processes. There was no proper management system in place in the past. There was an initial system which could not cope with the number of users. The process itself was very cumbersome and needed some refinements. There was also a tendency for staff members to look at the red cherries and pick them in order to boost their performance. This was a wrong kind of an incentive in the system. The policy and procedure for writing off debt was another matter.

Mr I Pillay (General Manager: Enforcement) said that SARS wanted to have a new debt management system in place. The system might be ready in the next financial year. The first phase of the system had been carried out and had improved the process. It was working work well and placed more emphasis on covering every debtors rather than cherry picking. There was also a number of projects that had been rolled out since the beginning of September. SARS has set itself the target of reducing the debt against revenue ratio which was at the moment around 19% to 12%. SARS was of the view that it would reach the target or come close to it.

Mr Asiya asked if the scrapping off of debts would have any impact on SARS’s budget.

The Commissioner replied that the debt factor was built into the equation. Whatever the announcement the Minister would make next week in relation to SARS’s target the end of March 2006 would take the debt into consideration. For instance, SARS would say that it would collect a certain amount of debt. It would be able to go beyond the estimate by getting more efficiency in place. SARS would ask the Minister to consider passing an enabling legislation so that SARS would be able to write offs debts faster and according to prescribed procedure. In accounting terms, SARS was not on the Generally Accepted Accounting Practices (GAAP) system for administered revenue. It had a quasi-cash system and this meant that the debt was not fully taken into account or analysed as part of SARS’s financials by the Auditor General because there was no accrual system with which SARS was accepted to abide. All administration across the world had the same problem. It was a question of where that percentage sat and nobody had been able to effectively bring it under control. There would always be a percentage of taxpayers who would not meet their obligations on time. Much also depended on the administration’s capacity to trace such people once their addresses had changed. SARS was currently spending a lot of money using information contained by the Credit Bureaux to trace people. SARS had also outsourced debt collection to some of the professional debt collectors because they had databases that could help them trace people.

Mr Bhamjee said that the Committee had been informed that the PFMA had no provision for the writing off of debts. It was not a question of speed but whether SARS had been acting within the law in writing off the debts. SARS should carefully look at the whole issue of writing off debts because some people might want take advantage of the procedures.

Mr Nene said that discussions on this issue should be take place when the Committee considers the Revenue Laws Amendment Bill since it was raised during a briefing on the Bill.

The Commissioner replied that there was a need to draw a distinction between undertaking a settlement as opposed writing of the debts completely. There were policies and procedures that ensured that there was no abuse of the discretion that SARS enjoyed.

Mr Asiya was concerned about law enforcement. In Johannesburg International Airport one could walk past the scanners without scanning his or her luggage. He asked what SARS was doing to ensure that goods were scanned before their owners could get them. The Auditor General had raised concerns about scanners. There was a serious security problem and the Department of Safety and Security, National Treasury and SARS should address this issue.

Mr Moloto asked what steps had been taken to address the concerns raised by the Auditor General. On the issue of scanners the Commissioner had indicated that they had gone out on tender and that the project would be implemented by June 2006. He was concerned about the timeframe. It was a long period of time. Was there no way that the period could be shortened given that SARS had gone on tender during the first quarter of 2005? The first scanner would only be delivered in June 2006 and this was more than a year after going on tender. The Auditor General had indicated that there was one scanner in Durban which was not functional for the better part of the year. The report had indicated that there was an increase in smuggling. What could be driving the smuggling despite that SARS was seizing people’s cars and other goods.

The Commissioner replied that he had had the privilege of visiting the sea and air ports of Miami and the Atlanta airport. What was clear was that these areas were referred to as customs control areas and not just security areas. Customs was the premiere agency in those areas. This was not the case in South Africa. One of the issues that had to be resolved in policy terms was what were customs areas in the country and who had jurisdiction over them. The scanner in Durban was a sub-scanner. There were contradictions in various places depending on the situation on the ground. It was a matter that the Board of Control Coordinating Committee should address so that there could be policy clarity in terms of the role of customs. Customs was a very weak entity and there was still a gap between where SARS was and where it was supposed to be in terms of norms that were recommendations within the WCO context.

He said that SARS was not operating at an optimal level but had the basics in place. What was needed now was a second wave of transformation, improvement and modernisation. Improving the visibility and customs control was essential if SARS was to consider itself as a world class customs operation. There was a need for greater visibility on the side of customs and better utilisation of staff who undertook examinations and anti-smuggling activities. The question was how to build capacity in order to get everything in place. In Miami airport one would meet people who had been working there for 15 to 20 years and such people had been appropriately trained. SARS was a fairly young administration in this regard. A scanner should have been bought some time ago. Due to financial constraints, SARS had entered into a Public-Private Partnerships (PPP) process and the process was taking long to complete. It might be better to explore the possibility of using a different approach of buying future scanners.

With regard to the issue of smuggling, he said that the bottom line was that SARS had limited capacity. Customs anywhere in the world never did a 100% examination of anything. It was always a risk-based examination. Intelligence systems dictated where interventions had to be made. The better an administration was experienced and the more data it had collected over time the better it would be able to detect the risky persons. This allowed an administration to do more accurate targeting. SARS was getting there and had the fundamentals in place. He agreed with the Auditor General's view that SARS had to do more targeting. This might entail getting more staff or managing the existing staff properly. Cigarette smuggling in Denmark and Sweden was of horrendous proportions because the excise taxes were very high. The incentives for evading taxes were huge. Cigarette smuggling was not a South African problem and was an even bigger problem in developed countries than in South Africa. With regard to abalone and drugs smuggling, there were some incentives in the market that drove people into illegal activities. SARS's tasks were to build disincentives and to bolster its capacity to track such activities.

Mr L Gabela (ANC) said that the Annual Report referred to an expenditure of R47, 5 million and a further R130 million to be spent over 36 months on infrastructure in border posts. In terms of the assessment by the Auditor General, targets for examinations at customs border posts had not been met and there were still shortcomings in relation to infrastructure. He asked if one was not dealing with a case of mere transfer of money whilst no actual delivery was taking place on the ground.

The Commissioner replied that people were living in horrible conditions in some border posts. SARS was a client of the Department of Public Works and there were plans to develop border posts in a particular way. SARS would find a way of getting more money in order to make the necessary infrastructure changes.

Mr Bhamjee asked if the donations SARS had received from international agencies had had any impact in relation to law enforcement. How dependent was the law enforcement agency on foreign donations? He also asked SARS to explain the process around the writing off of irrecoverable debt.

Mr Mnguni noted that there were people that SARS had sent or would send to Australia for training. He asked what was the duration and cost of the training. How did SARS deal with the retention of the trained staff? Were such people tied by means of a contract to work for SARS for a particular period before moving to another organisation?

The Commissioner replied to the questions by Mr Bhamjee and Mr Mnguni by saying that what was referred to as donations were not donations in cash. These were opportunities to train people, go on a study visit and get technical assistance on a particular issue. The trained people generally remained with SARS. In cases of long-term training, some contractual arrangements were made to tie such people for a particular period.

Mr Louw said that the Chairperson had said that the writing off of debts should be debated when dealing with the Revenue Laws Amendment Bill. The PFMA had enabling provisions that allowed the Minister of Finance to make regulations relating to both the writing off and waiver of debts. It was important to distinguish between a write off and a waiver. The Act only applied in respect of government Departments and did not apply to public entities. This was one deficiency in the Act. There had been attempts to rectify the situation by making regulations to the effect that the Act could also be applied in respect of public entities. It would be better to have an enabling legislation in the tax laws to prescribe the terms and conditions in terms of which a debt could be written off or waived. The write offs referred to in the Annual Report were not permanent. The debt was suspended and SARS could always 'resurrect' it should it locate the debtor.

Mr Bhamjee was not satisfied with the explanation around the process of the writing off of debts. He asked SARS to seriously look at the issue.

The Commissioner said that he would furnish the Committee with a written explanation. There was a lot of confusion around the issue and sometimes SARS was of the opinion that it was writing debts off whilst in actual fact it was not.

Mr Davidson said that the book value of debt was at R66, 04 billion and the total debt collected was R23, 5 billion. He asked what was the age of the debt and how much of the difference was collectable. The number of outstanding cases was a cause for concern. With regard to criminal cases, the backlogs were not decreasing but increasing. He asked the Commissioner to comment on this. With regard to other cases, the numbers were increasing. SARS seemed to be resorting to other dispute and settlement resolution process in order to bring cases down. People in the corporate world were often surprised at the leniency with which they got away simply in the interest of closing cases as soon as possible.

Mr Louw replied that the big distinction between the customs and revenue results was that customs results had a lot of Magistrates' Courts judgements in respect of counterfeit goods. SARS had been successful in most of the counterfeit goods applications. With regard to revenue cases, the success rate was between 60 and 65% and it was internationally comparable.

The Commissioner replied that hopefully nobody was getting away easily. One of the difficulties of dealing with corporate taxpayers was that they were lees than forthcoming with information. They might know a lot about what they had done wrong but would always put less on the table. At times SARS might not be able to detect everything. He was happy that some people had confessed to the Member that they were getting away. He hoped that the Hounarable Member would assist SARS track them down and bring them to book if they had gotten away too easily.

Mr Moloto thought that it had been agreed with the former Chairperson of the Committee, Dr R Davies, that at one stage SARS would introduce General Anti-avoidance Rules (GAR). He asked for a progress report on this. SARS had an impressive record in relation customs related cases. It would be better if SARS could improve its performance in relation to other cases.

Mr Louw replied that the GAR document had been prepared. A discussion document would soon be released.

Presentation by National Treasury
Mr Lesetja Kganyago (Director General), Mr Logan Wort (Chief Operating Officer), Mr Ismail Momoniat (Deputy Director-General: Economic Policy Relations), Mr Phakamani Hadebe (Deputy Director-General: Asset & Liability Management) Ms Najwah Allie-Edries (Deputy Director-General: corporate services), Mr F Nomvalo (Deputy Director General: Office of the Accounting Officer) represented the National Treasury. Mr Momoniat made the presentation. (See document attached).

Mr Momoniat said that the Director General would arrive during the meeting. He could not arrive in time because he had to attend to some issues relating to the Medium Term Policy Statement (MTPS). He said that one measure of success of the Treasury's policies had been that it had begun to cross the 4, 1% barrier in terms of growth. The economy was beginning to generate more jobs. Given the low inflation outcome, the interest rates had been low and this had resulted in robust consumer and producer confidence. Treasury had improved access to financial services for the poor. It was still doing a lot of work on the retirement industry reforms. It was also working on tax related guarantees for the 2010 World Cup. Treasury had managed to table its consolidated financial statements for the 2004 financial year.

He said that Treasury had received an unqualified audit report with no emphasis of matter. The audit and risk committees were functional. Last year Treasury had an annual appropriation of R14, 022 billion and out of this there was R532 million of savings or amount not spent. It had R32, 8 million approved rollovers from 2004/05. Treasury had managed to achieve most of its measurable objectives.

The Director General apologised for arriving late at the meeting. He said that there would have been nothing to table in Parliament next week had he not gone to the Cabinet meeting.

Discussion

Mr Davidson said that the 21% vacancy rate at Treasury was still fairly high. He asked if there was a reasonable level of confidence that the rate would have fallen by this time next year. He also asked which posts were vacant.

Ms Allie-Edries replied that there was always room for improvement. Treasury had filled 209 vacancies in the period under review. It was also in the process of reorganising the establishment and looking at what were the critical business areas. It had also extended its internship programme.

Mr van Dyk said that the 4, 1% growth was not just as a result of sound fiscal policy but also due to stable monetary policy. The South African Reserve Bank must get some of the credit for this. One of the highlights was the introduction of the Municipal Finance Management Act (MFMA). What was happening in practice in relation to financial management was that local authorities were collapsing one after another. How could this be a highlight? Another so-called highlight was the submission of consolidated financial statements. The tabling of in Parliament was one of the Treasury’s functions. Some Departments did not spend their entire budgets or submit their Annual Reports on time despite the fact that Treasury had a responsibility in terms of the PFMA to see to it that Departments complied with the Act. The question was how effective was the budget process. Treasury had no indications of what it was intending to do in order to improve on some of the highlights.

The Director General replied that the late Minister of Safety and Security, Mr S Tshwete, use to say that one should never praise a fish for swimming because it was expected to swim. Treasury had decided to include the highlight because Treasury had not submitted financial statements for a long time. He agreed that it was expected that Treasury should submit consolidated financial statements. The fact that it had not been done for some time suggested that something was not right.

Mr Momoniat replied that programme one dealt with the input that Treasury had to make in order to have the desired outputs. It was difficult to measure outputs and there was room for improvement in this regard. The Treasury was claiming success for introducing the MFMA. There was a very modern and impressive supply chain management process that should reduce corruption if implemented properly. Treasury only did the framework and the implementation was left to municipalities. Treasury was not claiming that municipalities were implementing the Act successfully. In any case they had only started implementing it. There was a need for stronger enforcement powers. The oversight process was very important and one had to look at both the financial and non-financial measures.

Mr Moloto said that the underspending in administration had been attributed to the re-scoping of the document management system project. The problem was this was not reflected under the key output performance measures.

Mr Mnguni said that the report indicated that Treasury had achieved its target under cost effectiveness in relation to litigation. He asked what benchmarks was Treasury using that enabled them to say that they had been cost effective in relation to litigation.

The Director General replied that the problem with litigation was that one could not say when legal action would be taken. One had to wait until court papers had been served and then decide on the best way of dealing with the action. The cost effectiveness of litigation entailed the question what would be the implications to the fiscus and whether it was better to settle out of court. One would also have to weigh the opinion given by legal advisors as to whether there was a reasonable chance of succeeding. Cabinet had instructed that on matters that had fiscal implications, Treasury should go to the extent of defending the action because the cost of failure to defend might run over a period of time and undermine some of the things that government had done in terms of fiscal management.

Mr Mnguni said that it would have been better to have a clear indication of how much Treasury had budgeted for litigation and how much had been spent. This would have enabled the Committee to conclude if Treasury had been cost effective or not.

The Chairperson said that the Director General had indicated that one was not sure if there would be litigation and this made it difficult to budget for litigation.

Mr Bhamjee said that last year's report and this year's report did not seem to talk to each other.

The DG replied that last year Treasury had tabled a Strategic Plan that contained changes to the previous plans. As a result the Annual Report 2004/05 was reporting on the 2004/07 Strategic Plan. The issue of Strategic Plan and reporting had been running for about four years. Treasury was trying to become better with each and every Strategic Plan and Annual Report. A report that had been published in the Beeld newspaper had shown that, qualitatively, the reporting of the public sector was superior to that of the private sector. There were changes due to the quest to improve on reporting. The Strategic Plan of Treasury drew from other certain strategic decisions of the government from the Medium Term Strategic Framework, the State of the Nation Address and the Government Programme of Action. One would realise that every year to the extent that the strategic thrust of the government would change, Treasury's Strategic Plan would also change in order to dovetail with the government's plans.

The Chairperson said that the report had indicated that significant progress had been achieved on the streamlining of procurement and supply-chain processes. The turnaround time had been reduced to an average of 26 days. This meant that in some instances Treasury had gone over 26 days despite the PFMA requirement of 30 days. He asked what was the impact of exceeding 30 days on the average.

Ms Allie-Adries replied that Treasury had always tried to make payment within the 30 days period. It had identified instances wherein it had gone beyond the 30 days period and these were limited to instances were invoices had not been made correctly.

Mr Moloto said that targets kept on moving. Hearings on the Cooperatives Banks and Dedicated Banks Bills were supposed to take place in October 2005. He asked what was the reason for not achieving the target? With regard to assets and liability management, earlier reports of the Department of Communications had indicated that depositor's money was being used for post office transactions. National Treasury had committed itself to assist in the corporitisation of the Post Office. There were issues of corporate governance that emerged as depositor's money was being used. Treasury had injected a lot of money towards the process. The question was what was Treasury doing to ensure that everything run smoothly. The Development Bank of South Africa (DBSA) was taking projects beyond the Southern Africa Development Community (SADC) even though the founding legislation had confined it to SADC. He said that he was very supportive of NEPAD but the problem was that the Bank was acting outside legislation. The guarantee with respect of Saambou was R7 billion, the opening balance was R4, 4 billion and the closing balance was R4, 5 billion. He asked if this had to do with the resolution of Saambou's problems. What was happening with the guarantees?

The DG replied that something had happened last year to the cooperatives banking sector and this had delayed the Bill. The Cooperative banking sector was mainly funded by donors. Last year it experienced a series of withdrawal of deposits because confidence in the sector was dropping. The Cooperative Banks were rolled out in an environment where there was no legislative framework setting out the context within which they had to be regulated. They also had unsustainable cost structures and behaved almost like high street banks. Treasury ended up putting in money in order to stabilise the sector otherwise there would have been no point of proceeding with the legislation because the people it was suppose to regulate would have disappeared from the market. At the time that the Annual Report was compiled Treasury was still of the view that it would table the Bill in time. The Dedicated Banks Bill had strong players who were more engaging and more forthcoming.

With regard to the issue around the Post Office, he said that the line function was elsewhere. The question was why Treasury had continued to give money to Departments given that they were not spending it. Treasury had said that no money would flow into the Post Bank until certain conditions had been met. There was new energy both in the Department of Communications and the Post Office and there might be better movement than there had been in the past.

The Director General said that the DBSA could go outside the SADC with the approval of the Governor General who in this case was the Minister of Finance. There had been a number of applications from outside the SADC since the inception of NEPAD. The bulk of the DBSA's involvement elsewhere in the continent had resulted in a situation where the Bank had earned some very decent returns so much that the Minister had a feeling that they putting more emphasis on banking and not on development.

With regard to the Saambou issue he said that there was criminal case going on. There were serious issues of corporate governance and not just the lack of investor confidence. They were pointed out up to a week before Saambou was put under curatorship. When Saambou was put under curatorship it became clear that Treasury had to step in to protect depositor interest failing which it would have injected systemic risks in the financial sector. The guarantee had subsequently been reduced as some of the assets under receivership had been sold.

Mr Mnguni noted that a Technical Assistance unit, co-funded by the European Union, supplemented some of the Treasury's activities through project management and capacity building support for reconstruction and development projects. He asked how many projects were funded by the European Union and what were the value, duration and conditions attached to them.

The Director General replied that these things did not come for free and some of the donors would make certain announcements with big fanfare. They would say that you would have the money provided that your would procure goods and consultants from their country. South Africa would then say 'thanks and we are no longer interested' and then the donors would go to the media and say that there was so much poverty in the country and yet the government was not taking our help. Treasury would only take projects that fitted into its Strategic Plan and government priorities.

Mr Asiya said that there was a lot of fronting in Black Economic Empowerment and Public-Private Partnerships. Were these initiatives taking the people forward? Globally, there was a problem of asset register and management. He asked how Treasury was doing in this regard. He asked if Treasury knew the number and value of assets it owned.

The Director General replied that SA was at the forefront. There were things that one could not value. South Africa owned game parks and had collapsed the fence between SA and Mozambique. One should value the animals in the game park and the problem was that they always crossed the border into Mozambique. How could one know how many lions did SA have and how could one determined the value of each lion? Treasury's Accountant General had issued a guideline on how to account for assets and there had been a series of workshops on this with provinces.

With regard to the BEE and PPP, Treasury was running a red carding or black listing system in terms of which a person who had been found to be fronting would be excluded from future tenders. It was a negative system. In some cases people did not front but get the deals and sell them to other companies. There was nothing much Treasury could do because the tender had been awarded to a qualifying company. The PPP unit would be taking in some interns. The provincial PPPs still had to be approved by the Treasury's PPPs unit. This function would be delegated to any province that could show that it had capacity to manage PPPs. At the moment Treasury was not convinced that there was any province with the necessary capacity.

Mr T Vezi (IFP) said that there was the bottomless pit called the Road Accident Fund (RAF). He asked if Treasury had any plans of getting involved or intervening in the affairs of RAF.

The Director General replied that Treasury had disclosed the RAF as a contingency liability. The problems with the RAF and any proposed solutions were similar to what had been seen with the Unemployment Insurance Fund. People tended to focus on the revenue side of the Fund and not on the expenditure side. The solution was very simple if the focus was just on the revenue side: just give more money. This was not how Treasuries worked. Treasury had kept on saying that the claim management at the Fund was not up to standard. There was a need to minimise the claims. There were also structural issues involved. It had been said that a good motor vehicle accident lawyer only needed one or two tourists who had visited SA and got involved an accident. The lawyer would submit a claim and live comfortably thereafter. The Director General could not think of a country wherein one could get in and access their social security system like that because the RAF was technically social security. Many countries would tell visitors to provide for their own insurance. There would continue to be a big hole in the RAF if such structural issues were not addressed.

Mr Davidson said that there was a concern that performance reporting was at times not up to scratch or nonexistent. He asked what progress had been made in this context. One of Treasury's functions was to advise the Minister on exchange control policy. There had been a lot said about a market related Rand as opposed to a competitive Rand and there had a lot of debate about this. Some of the factors that were not taken into consideration were the issues of foreign exchange control and the impact of the greater liberalisation of exchange control would have on the Rand. He said that he was not saying that exchange controls should be totally be removed. Every country had some form of exchange control. He asked how Treasury saw greater liberalisation impacting on the competitiveness of the Rand.

The Director General replied that the point was that the evidence on exchange control and the impact of the liberalisation of the exchange control on the currency was mixed. Economists would always disagree. Literature had suggested that when liberalising the economy, the capital account should be the last to be liberalised. South Africa had dealt with liberalisation in many contexts. The current account of the balance of payment was fully compliant with Article 8 of the International Monetary Fund (IMF). The capital account was a difficult one. At times the IMF would say that one should move rapidly and get rid of the exchange controls. It was strange because in 1998 when South Africa made an announcement about the exchange controls that it was going to liberalise or get rid of, the IMF had said that South Africa should move slowly because it was dangerous out there. South Africa went ahead with its plans because it had confidence in the credibility of its policies and the path it had taken. In 2001 when the currency crashed, people said that the Rand would strengthen immediately should Treasury get rid of exchange controls. In 2003 the Rand was too strong and people said that the Rand would weaken significantly should Treasury get rid of the exchange controls. A study done by a US bank suggested that the extent to which South Africa had come with the management of economic policy was such that people believed what they heard when the country made pronouncements. The risks for South Africa in the early 1990s used to be "you do not have a track record and therefore we do not believe you can do it". The risk now was that South Africa had to implement every policy announcement that it had made because people really believed that there would be action. People would ask if there was a lack of commitment should there be no implementation of the policy announcements. South Africa would continue with a process of gradual liberalisation because it wanted to ensure that every step taken was calculated and that it was fully cognisant, within the limit, of the implications for the economy and not just the balance of payment.

He said that the study by the US bank said that the Rand would strengthen to as much as R4 90 should South Africa get rid of exchange controls. The problem in the discourse was that when people talked of a competitive currency, they tended to focus on nominal variables. They would say what was the Rand yesterday against the Dollar and this was inconsequential from an economic perspective. What mattered were the real rates because one could not impact on the real variables by taking steps on the nominal variables. When talking about a competitive exchange rate, one would have to take cognisant of the differentials of inflation between South Africa and its major trading partners and the real unit labour cost in SA relative to the unit labour cost elsewhere in the world. The real value of the currency determined competitiveness. He could not say what was the real competitive value of the Rand. People out there were throwing different figures and the truth was that exporters and importers would always give different figures. It was important to bring all variables together so that one could be confident that the steps to be taken would be for the benefit of the South African economy.

Mr Johnson said that one of the important issues was assisting provincial and local governments. He asked what concrete plans were in place to assist in relation to service delivery and capacity. The Government had given guarantees to the 2010 World Cup. Money spent by government was supposed to be accounted for and there monies that would go to the Federation of International Football Associations (FIFA). He asked for a comment on this.

The Director General replied that the Deputy Minister of Finance commonly referred to this as a FIFA World Cup to be held in SA in 2010. FIFA was giving SA an opportunity to host the World Cup. The guarantees that government had provided had to deal with issues like security, emergency services and guarantees in respect of taxation. FIFA did not want to be taxed because they were not taxed anywhere. The big benefits that SA would have to build on related to the legacy that the event would leave in the country. Tourism was earning South Africa more foreign currency than gold and one was hoping that the event would leave a good legacy in relation to tourism.

Mr Johnson asked if South Africa was not giving any financial guarantees.

The Director General replied that the guarantees had financial implications because SA would forfeit tax. The tickets would no have Value Added Tax and all the broadcasting rights would belong to FIFA. SA had to guarantee that it would not interfere in these respects and there were some financial implications. This was one reason why the Soccer World Cup Bid Committee and the Ministry of Sport had to seek the concurrence of the Minister of Finance in terms of the guarantees.

Mr Asiya said that the provisions relating to supply chain management contained in the MFMA were different from those in the PFMA. He asked if this meant that Councillors could not be trusted. Was why there a lack of consistency in the law? Was Treasury planning to amend the PFMA so that it could be aligned with the MFMA? He also asked if former uMkhonto we Sizwe and Azanian People's Liberation Army would also enjoy the same medical benefits as those of former SA National Defence Force members.

The Director General replied that the era of the PFMA was concerned with tenders and procument. It became clear that it was important to manage the course along the value chain. People then started to talk about the supply chain management. The MFMA was better developed compared as compared to the PMFA. The PFMA Amendment Bill would soon be introduced.

Mr Wort replied that people who had served in the liberation movements also qualified for the benefits.

Mr Gabela said that the repeal of the State Tender Board Act had been partially met. There had been non-adherence to conditions attached to conditional grants. He asked if Quarterly Reports offered any assistance when it came to picking up non-adherence to conditions.

The Director General replied that Treasury had picked a lot of unbelievable things through the monthly reports. Treasuries would normally attribute lack of spending to lack of capacity. There was one provincial Department that had only spent 10% of its infrastructure budget by December. In March they had spent 95% of the budget. This was just not possible. They came up with reasons like that some of the expenditure had not been captured by December. Treasury then established that there had been fiscal dumping. This was creating risks in the system and was also costly to the government because it had to go and borrow the money from somewhere.

Mr Momoniat added that there was a Department that had transferred a huge sum of money to an account of a law firm. There was a tendency to blame municipalities for everything. Some municipalities had good systems in place.

Mr Johnson replied that the Committee would be keen to have copies of the monthly reports that Treasury received on spending patterns.

The Director General replied that such reports were available on Treasury's website. Members of the Committee could furnish Treasury with their e-mail addressed so that they could automatically be sent to them.

The meeting was adjourned.