National Treasury Strategic Plan 2008/9 - 2010/11

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Finance Standing Committee

20 May 2008
Chairperson: Mr N M Nene (ANC)
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Meeting Summary

South African Revenue Services, briefed the committee on its strategic plan 2008/9-2010/11. After an update on SARS recent direction, revenue challenges and the 3 main messages that characterised their new approach were outlined. The central initiative of segmentation was introduced and the focus for the next 12 months was reviewed and SARS' approach to implementing strategic plans were detailed. Proposed timelines were discussed as well as SARS' compliance philosophy which was described as making compliance as easy as possible and making non-compliance as hard as possible. Their strategy was to target personal income tax.
 
The issues arising from the discussion were tax culture and compliance in South Africa. The volatile market conditions were commented on and SARS was asked if targets had been revised. South Africans’ negative attitudes toward taxation was raised and SARS was asked  what could be done to change this. Employees being victimised by employers’ non- compliance was queried as well as tax avoidance.

As to third party reporting arrangements, SARS was asked if an education plan was ready. Outsourcing SARS' scanning facilities, FICA legislation compliance, plans going forward as well as compliance with preferential procurement were queried. SARS was asked if their role in social security reform had been determined and what the benefits were of the differentiated operating model for the segments. Other questions included whether the VAT threshold could be used as an escape, how would SARS manage extended zero rating, a call to quantify zero rating, taxpayer profiling, the tax implications of 2010 and various questions relating to staffing, equity and vacancy rates.

Meeting report

SARS Presentation
The presentation was opened by Mr J Moleketi, Deputy Minister of Finance. He made a few introductory remarks on SARS and its representative. Mr P Gordhan, Commissioner of the South African Revenue Services, reviewed the update on last year's plan and said that it was clear on SARS'  direction over the past 5-7 years. On the revenue challenge, he said that special effort would be required on tax collection in the 2008/9 financial year. The printed estimate for revenue was R 642 billion but bearing the economic climate in mind, SARS would need another 4 to 6 months before commenting further.

The 3 key messages that had emerged were, firstly a movement to an outward taxpayer view where customer service was a priority. Secondly, automation, as there was a need to free their staff resources for more useful work. Lastly, proactive engagement, moving towards managing compliance by anticipation. He reported on SARS segmentation of numbers, roles, revenue, needs, services, education, risk and enforcement efforts. They had set up the customer segment unit to this end.

The focus for the next 12 months was increased service, education and outreach, streamlining and automation, increased enforcement and service. SARS’ approach to implementing their strategic plan was discussed with particular reference to their prioritised deliverables. On the timelines, he said that they would separate normal business from the modernisation aspect so that neither is neglected. There was an execution focus to deliver on these plans. The specific focus areas mentioned were risk, which referred to the detection of non-compliance and customs which revolved around SARS role at the border posts. SARS compliance philosophy was described as making compliance as easy as possible and making non-compliance as hard as possible. Their strategy was to start with personal income tax (PIT), particularly eliminating support documents and implementing a sophisticated risk engine, quicker processing services and refunds.

Next, he reviewed the key successes of 2007, highlighting the forecasted growth of e-filing and the operational centre in Alberton. He discussed the key challenges of the automated process and the challenges from 2007 and added that many lessons had been learnt about human tendencies and they would have to compensate for that.  He outlined what was proposed for 2008 and commented specifically on the experience of Denmark and Sweden with pre-populated returns. The internet would be useful as part of this future vision. SARS was to take third party reporting further this year.

The new approach to employers was described and he said that free software would be provided to employers and there would be an efficient manual process for those not using technology.

The new employer filing season was now in the preparation period, where SARS was making contact with employer. They had disincentives - stringent new penalties for employees - in place to encourage compliance. They were setting up a dynamic that will be managed for a much more disciplined system. Reconciliation and updates will become more frequent in the next 5 years to create smoother system where employers also take some responsibility.

On the individual taxpayer front, he outlined the previous year's challenges and what was new in the current year. He made special mention of the taxpayers who would qualify for no return this year. He said SARS was to cut costs with request forms and that this was a bold experiment for which public feedback would be welcomed. Regarding SARS' glimpse of the future for the 2012 filing season, he said it was a vision that would take some time to achieve. He detailed the 3 periods of the upcoming filing season and the changes to service. On the latter he highlighted the upgrading of call centres to contact centres, using Interactive Voice Recognition (IVR) and other technologies to improve service. He reviewed third party data reform. On risk engines, he said that change cannot happen if they are not capacitated and that this would mean massive changes for staff but that they were managing this change.

The customs modernisation programme concentrated on the cadet programme. Mr Gordhan said that this was very different training. They had already deployed at OR Tambo International and in addition, the dog detector unit was also very successful. The Authorised Economic Operator (AEO) programme was needed as 20% of traders accounted for 80% of trade volume. In technology, advances on the tax side would be used to boost the customs side. SARS was to be the lead agency at the border, a suggestion that was adopted at the January 2008 Cabinet Lekgotla.

He outline SARS approach in social security, highlighting their continued participation in the Interdepartmental Task Team (IDTT). Business operations and their various aspects were discussed as well as the way forward and phase 2 of their strategy. He concluded by examining external and internal objectives and added that the cultural and behavioral changes envisaged would lay a platform for the future.

Discussion
Mr B A Mnguni (ANC) referred to the presentation and said it would be a big culture change for South Africans to be tax compliant. He asked what would happen if people did not comply.

Mr Gordhan responded that the responsibility lay with the individual but that SARS would have to do some pushing to shift behavior. He said that everyone receiving a letter was not the best use of SARS’ resources but SARS was resilient, sympathetic to difficulties and would go the extra mile.

Mr Mnguni referred to the National Treasury’s revised figures for economic growth and the volatile market conditions and asked if SARS had also revised their targets accordingly.

Mr J Moleketi, Deputy Minister of Finance, spoke to the revised targets. He responded that the rise in food prices was premised on the escalation of fuel prices. He said the committee is investigating the matter as to the extent and intervention needed. He said they were awaiting the outcome of that and SARS will have to deal with the impact.

Mr Gordhan added that sustaining a compliance culture was key. He said it was a combination of compliance culture and economic growth. Even if growth was high they must still be able to efficiently collect. He said they would have to wait and see.

Mr Mnguni asked if SARS had done a study on the expansion of zero rating.

Mr Gordhan responded that SARS would co-operate with the assessment on VAT. There were no conclusions and SARS would implement whatever the outcome position turned out to be.

Dr D George (DA) referred to Annexure F and the pilot study on South Africans’ attitudes to taxation and read the conclusion. He asked if SARS was planning intervention to manage South Africans’ attitudes.

Mr Gordhan agreed with Dr George and said that all the factors pointed were part of the equation. He said the approach was to highlight the benefit of paying taxes and what tax was used to pay for.

Dr George wondered what the penalties for tax avoidance were and specifically referred to the treatment of default cheques.

Mr Gordhan responded that ultimately there would be penalties for non-compliance and there were sufficient legal provisions for this.

Mr N Singh (IFP) wanted to know what had informed the R642 billion target.

Mr Moleketi replied that the projections had a reason behind them but revisions had occurred; there was ongoing modeling and its was a dynamic process. They could not anticipate it but SARS would work toward a particular model.

Mr Singh asked why employees should become the victim of their non-compliant employers.

Mr Gordhan replied that the pay as you earn (PAYE) employer approach was the initiative of the current year but there were administrative issues. SARS was awaiting policy decisions and was making contributions to the IDTT. He said that the penalties on employees were too weak and had not curbed non-compliance in the past. He said the goal of this was real time information from the employer and added that it was in an early stage and they would manage it according to feedback and problems.

Mr Singh asked what was being done about increasing gender equality in respect of the special skills SARS requires. He asked if there were particular courses to improve quality.

Mr O Magashula, General Manager (Corporates Services): SARS, responded that there were challenges on the gender side. SARS had launched the Leadership Development Management Group. This was to be a feeder group into management opportunities at SARS. Of these 70% were female. SARS was targeting this to address equity challenges. The problem was that they had a very small pool of skilled people and the retention of female senior managers. Their coaching programme was assessing the development of managers to identify areas that female managers need supporting. In graduate management they were undergoing a branding process of SARS as a public service entity. They were engaging in more accurate profiling to attract the right people. SARS had an upcoming media campaign to attract people who shared SARS' vision involving branding SARS as a “cool” organisation to work for at high schools and universities. 

Mr Matlwa responded that SARS had difficulty fighting for resources, as capacity for remuneration was limited in comparison with banks and corporates. As a result, they could not retain the talent. He said some people joined simply for the variety of exposure to all tax types and issues.

Mr K A Moloto (ANC) asked about 3rd party reporting arrangement; specifically, if there was a plan ready for education on this matter.

Mr Gordhan referred to a software providers' meeting and the upcoming regional forums to contact employers directly in provinces said that this was a big investment.

Mr Moloto referred to the Tax Laws Amendment Bill and said that corporate tax was very complex. He asked if SARS was lacking the capacity to handle those transactions and were there resources invested in this regard.

Mr  Kosie Louw, General Manager (Law Administration): SARS, responded that corporate tax was a very complex tax system because corporates operated in a sophisticated, dynamic environment. He said the tax regime must keep track in order to maintain this tax base. SARS would make changes to plug loopholes and keep track of international developments. SARS' segmentation, specifically the Large Business Centre (LBC) was operational. In addition anti-avoidance legislation had been sharpened 2 years ago. They have published new rules on the reporting arrangements for earlier warning of tax avoidance which enable a faster response. SARS was keeping close ties with other revenue services to share information as many of these tax avoidance schemes originated internationally. He said they were participating through the OECD, in working committees on tax avoidance

Mr M Matlwa, General Manager (LBC), responded that the tax challenges were global. He said that delegations from South Africa, Brazil and India were discussing transfer pricing, the role of the LBC and had technical tax discussions where actual cases of tax avoidance were presented. He referred to an enhanced relationship with corporates to understand the way they dealt with taxes.

Mr Moloto asked if there were any trends being picked up in the conduct of financial intermediaries. He also wanted to know if new legislation could contain the abuses of tax practitioners.

Mr E Kieswetter, Chief Operations Officer, responded that of the estimated 21 000 tax practitioners, about       10 000 were not registered. He said SARS sought to regularise the work of tax practitioners in a regulated framework. The trends SARS had picked up were that about 10% of registered tax practitioners were not compliant in their own tax affairs and that this was a worryingly large number. Secondly, the relationship between SARS and the client was often arbitraged by the tax practitioner. SARS was currently awaiting a new Bill in order to act against practitioners and hold them to account.

Mr Gordhan said that there should be some kind of an accreditation system for tax practitioners. He suggested the idea that compliance should be awarded and non-compliance should have penalties. He said the Bill would provide a regulatory framework and that SARS required this.

Ms N Sibhidla (ANC) asked if the Customs Border Control Unit (CBCU) was in place already

Mr L Radebe, Deputy Chief Operations Officer, responded that there was co-ordination between departments at the ports of entry. He said it was not statutory and as people co-operated voluntarily, this posed a challenge.

Mr Gordhan added that SARS hoped the legislation would help create the right culture.

Ms Sibhidla asked if any services were outsourced by SARS.

Mr Gordhan responded that SARS' business was sensitive and even though they have had many offers, not too much of their core business has been outsourced. They have outsourced debt collection in the past but have now developed the capacity for that. For security reasons, particularly pertaining to e-filing, SARS policy was now outsourced.

Mr S Marais (DA) extended complements to SARS for their past performance and asked about the scanning facility in Alberton and what was happening in the meantime.

Mr B Hore, General Manager (Strategy, Modernisation and Technology), responded that SARS would be rolling out 4 e-filing centres in March. They were confident that the basic process was under control and they would have enhancements in the future such as linking to the contact centres to put information at the fingertips of operators through digitisation. He said this was their fundamental vision.

Mr Marais referred to e-filing and wanted to know how SARS profiled taxpayers: was it individually or by class.

Mr I Pillay, General Manager (Compliance), responded that they did both individual profiling as well as profiling by class. The approach was through segmentation by looking for trends in a particular segment, except when a case is individually dealt with. He said a statistical basis was used to choose cases.

Mr Marais asked about the Financial Intelligence Centre Act (FICA) legislation.

Mr Gordhan responded that with respect and FICA, SARS had a relationship with the South African Reserve Bank to investigate the movement of goods and money. He said SARS was active in their FICA responsibilities through regular meetings and good co-operation.

Mr Pillay referred to the joint team on the customs side and the problem of the smuggling of cash, the focus of which was how different institutions amongst government could manage the whole chain so that it was not fragmented. He said there were cracks in the system and breaches that needed attention and they would have to pull together.

Mr Marais asked what SARS’ plans were going forward.

Ms N R Mokoto queried SARS’ compliance with preferential procurement and asked how many tenders had been awarded to young people and women.

Mr Gordhan responded that 55% of procurement deals went to BEE businesses. There were ensuring legislative compliance. He said that South African companies had difficulty competing on the bigger tenders. SARS had to ensure that they perform in their mandate to use funds wisely and more details on this would be forthcoming.

Ms Mokoto asked about SARS’ role in social security system. She asked if such a role had been determined and what the challenges were of this.

Mr Gordhan replied that SARS was participating in the Interdepartmental Task Team (IDTT) but that it was ultimately a policy issue. He said SARS needed direction on practical steps and they did not want to presume on policy. They would do what they were asked to do. In collections they had had success with the Unemployment Insurance Fund (UIF). It depended on the base of the system but there was a proviso that the platform must be in place.

Ms Mokoto queried the Differential Operating Model and how it would be beneficial in identifying segments.

Mr Gordhan responded that the Differential Operating Model and the implementation of segmentation had the benefit of addressing all concerns at once. The challenge here was the constant loss of skills. He said that the benefit for government was this was a one stop service. He said they would focus on each segment and the links between segments. SARS would endeavour to understand behaviour and structure services accordingly.

Ms Mokoto asked if SARS was ready for the 2010 customs and tax load.

Mr Radebe responded that SARS would participate in a number of structures on ports of entry co-ordination. He said SARS was setting up capacity to monitor implementation of guarantees and tax free bubbles among others and that SARS was looking into that co-ordination.

Mr Louw replied that they had codified the legislation as to FIFA and their affiliates. This concerned how goods would be treated in respect of duties, consumption, duty free goods, exemption and benefits. He reported that all guarantees were in place.

The chairperson referred to the human resources figures presented and asked about vacancy rates.

Mr Magashula replied that they had recently completed a panel of recruiters to address the 2008/9 targets. There was a need for infrastructure and they had identified for disabled employment and fill vacancies. As to the vacancy rates, he referred the committee to SARS' headcount trends and said that SARS was ahead of the curve in vacancy rates but were struggling to attract the appropriate skills.

Mr Gordhan added that the concept of vacancy rates was different in SARS, as it was dynamic but there would be no job losses. He said the challenge in all this was to keep efficiency going.

Mr Marais referred to the disability figures and issued a challenge to SARS to employ 100 people to meet their 2% target.

Mr Gordhan replied that SARS would take him up on that challenge.

Mr Marais asked about the VAT thresholds and whether people have tried to use these as an escape.

Mr Louw replied that the new threshold would only come into place on presumptive tax. He added that there were no reports of specific attempts to escape VAT.

Mr Gordhan responded that just because there were no specific reports, this did not mean there was no abuse.

Mr Singh asked how SARS would manage the process of extending VAT zero rating to more items.

Mr Singh asked about problems with customs at airports.

Mr Gordhan said that the reports on muggings were regrettable and they did not help a meaningful investigation or create solutions. On optimising safety, he said there was no evidence that there was a link to customs officials and that they needed to look at a wider base as to where the problems were. He said the customs forms were in place and transgressions would be dealt with on a legal basis. He said a Customs Border Control Unit (CBCU) was found in any well run customs agency and were the front line at all ports of entry, implementing the Customs and Excise Act. They were trying to stop interference through the spirit of co-operative governance. He said SARS was trying to promote that.

Mr Mnguni asked if the impact of VAT zero rating extension could be quantified.

Mr Moleketi replied that this was a subject of discussion to develop a comprehensive response to South Africa's challenges. He said the numbers were tricky on the issue of quantification and they might not be useful at this point. He said there were complexities in a more differentiated tax regime and they could not anticipate a particular response.

Mr Moloto said that he found the movements on VAT very interesting, making the observation that various changes had been proposed from increasing VAT on certain items to 17% to zero rating others.

The meeting was adjourned.

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