ATC071109: Report on Annual Report 2006/2007 of the South African Revenue Service.
Report the Portfolio Committee on Finance on the Annual Report 2006/2007 of the South African Revenue Service (SARS), 9 November 2007
The Portfolio Committee on Finance met on 10 October 2007 to consider the Annual Report 2006/2007 of the South African Revenue Service (SARS).
The Annual Report was presented by the Commissioner of SARS. After the presentation discussions followed which are recorded below.
Recommendations based on the engagement of the Committee with SARS are provided in the final section.
2. Strategy for dealing with tax payment delays of big companies
The Committee thanked SARS for the quality of its report and presentation. The Committee referred to one of the challenges SARS had identified in its Annual Report as being the delays of some of the big companies in paying their taxes and enquired what strategy SARS had for ensuring payment, other than the general promotion of good corporate governance.
SARS indicated that generally the approach was to engage with such companies through their taxpayer relations managers who would discuss the matter with chief financial officers as well as chief executive officers in order to raise their awareness of such practices.
SARS noted, however, that these efforts were not sufficient as it appeared to have become common practice. It was therefore worth considering amending the legislation to ensure more severe penalties than currently legislated, in order to disincentives’ such behaviour. The Commissioner noted that he hoped SARS did not get accused of taking an overly hard line in this regard, but that such measures were perhaps the only way to ensure that things changed for the better.
SARS also doing monitor newspaper articles in terms of how recalcitrant companies were performing, since evidence suggested that they tended to underestimate future profit in their interaction with the tax authorities. Through challenging some of these estimates SARS was able to bring in additional money.
3. Costs of Litigation
The Committee enquired how much it cost SARS to go to court in the period under review.
SARS responded that the cost of court cases in the last financial year was about R 60 million.
4. The Role of SARS in border control
The Committee referred to the Cabinet decision that SARS would be the lead agency in border control and enquired whether it was the international norm that the revenue and customs agency also managed border control.
SARS indicated that the international trend post-9/11 was that customs administrations were moving away from just customs administration and taking up the role of border security. In most countries a multiplicity of agencies still existed and they battled with how to integrate all their activities. It was clear that, in the South African case too, more cohesiveness among the border agencies was needed and SARS would contribute as best as possible in its role as lead agency. The border control centre that had been set up would be useful in this regard, together with new technology.
5. Increased revenue collection and the extent of tax relief
The Committee congratulated SARS on once again achieving success in revenue collected. It asked SARS to elaborate more on the contributing factors that led to the huge increase in revenue collection, referring specifically to personal income tax revenue gains and the fact that corporate income tax now represented a high of 24.5 per cent of total tax collected. As a result of this, tax as a percentage of GDP was now greater than 27 per cent. The Committee asked SARS to specifically link this question to the supposed ‘tax relief’ of recent fiscal years, since in some respects these trends suggested that the burden on the person in the street had increased, even if nominal personal income tax rates had been lowered.
SARS referred to a number of factors which produced revenue overruns. Firstly, there was improvement in the rate of employment as well as increased remuneration. Wages increased at a higher rate than inflation so nominal personal income tax revenue had increased correspondingly. Bonuses paid out were also higher in certain sectors. A second factor was business profitability, which impacted on corporate income tax collected. The Commissioner referred to the SARS presentation which had showed that there was a significant increase in corporate surpluses in the period under review when compared to previous years. Domestic expenditure was also higher as a result of higher household consumption. This meant that more VAT as well as personal income tax was being collected. A higher level of imports occurred than anticipated which also resulted in a slight increase in the customs duty collected.
Regarding the tax burden, SARS stated that the issue was that of the right fiscal balance. What was needed was to retain tax progressivity so that if you earned more, you also paid more. It was also necessary, however, to ensure that the lower ends of the income scale were not overburdened. SARS noted that the policy intent for most of the last ten years had been that as South Africa created additional fiscal space, the lower income brackets benefited more - thus, for example, 8 to 9 years ago the threshold income for income tax was R 18 000.00, whilst this year it was R 43 000.00.
As the tax base broadened, the burden on particular tax payers was reduced. SARS wanted to ensure that all South Africans paid their right and fair share and believed that the current system was a fair and equitable one. Whilst all over the world people said that they didn’t like to pay tax, South Africans were different. People were comparatively happy to pay tax because they knew they were contributing to a better country. South Africa continue to face a structural constraint as the tax base remained a narrow one - it was only as the economy grew that the number of tax payers would also increase and the structure of the tax system would change further.
The tax mix in SA had also changed considerably over the last decade. There had previously been a huge dependency on some individuals to carry the tax burden and it was now distributed more evenly.
Regarding the fact that tax now stood at 27 per cent of GDP, there was an argument amongst observers that even this was too low because South Africa was a developing country with a large developmental role required of government. Even though the figure now exceeded 25 per cent SARS felt that there was still a balance between public and private sectors and that too many resources were not being transferred from the private to the public sector. Lastly, all of South Africa’s tax rates were comparable, as SARS had pointed out repeatedly, to those of other countries.
6. Employment equity and disability figures
Referring to employment equity, the Committee noted with disappointment that, in reporting on disability figures, the Annual Report did not provide disability figures broken down by race, gender and level of staff, which was necessary in order to get a good picture of equitability in this respect.
SARS began by pointing out that the labour department had a new compliance model which rated an organisation based on a composite score. Issues of disability actually had a very low rating in this particular compliance model and it would be of interest to go back and determine why this was the case.
SARS had, however, made significant progress in this regard, if the last five years were considered. And amongst the 233 disabled peopled SARS employed, 4 advocates were included. It was not only at a low skills level that disabled people were employed by SARS.
7. The debt to revenue ratio
The Committee noted that the debt to revenue ratio had decreased and that SARS was doing well in this respect. It also referred to the statement by SARS in April that there would be further changes in this regard. The Committee noted that the international benchmark was 3 to 7 per cent and wondered when and how SARS would reach that target.
SARS confirmed that its present ratio was about 12 per cent. Whilst this ratio looked quite high on paper, one of the reasons for this was how debt was classified. The SARS debt book included debt under dispute, which was different from the way many other countries classified their debt. SARS was currently working on a proposal to reclassify debt. This would immediately result in about R16 billion not being shown as debt and the ratio would come down to 8 to 9 per cent.
In the case of customs, the Committee referred to the Annual Report’s statement that a substantial number of vehicles had been seized and requested more information on this, such as where seizures took place, what types of vehicles were seized, and what procedures Customs followed to ensure that it was acting reasonably and not seizing vehicles which in fact were legal. The Committee also requested information on Customs officials and what their job descriptions were, so as to ensure that they did not go beyond their mandates in the exercise of their duties. The Committee also enquired whether SARS would be able to initiate a commission of inquiry should there be reasonable evidence that wrongdoing and misuse of positions was in fact occurring.
On the seizure of vehicles, SARS emphasised that no seizure of vehicles should take place outside of the law or an unfair basis. Where any transgression of either the rules or the required levels of integrity occurred, SARS would deal with the offenders in terms of the law. They would be given a written or a verbal warning, appear before disciplinary committees and the like.
Though it would probably not establish commissions of inquiry, SARS would always try to find out what went wrong and who was responsible, and then address that wrong. SARS was, however, a human organisation and mistakes and lapses of judgement sometimes occurred. What was important was to put systems in place to ensure that when such lapses did happen, the public was not unfairly treated.
Regarding the legal seizure of motor vehicles, SARS detailed the process to be followed. SARS detained second hand motor vehicles for at least 42 days to allow the clearing agent or the importer to claim or produce all the necessary documents. If, after 42 days, those documents were not produced, the process moved to the seizure stage.
Motor vehicles were a complex problem for a number of reasons. Firstly, South Africa allowed second hand cars to cross through its territory to neighbouring countries but these vehicles did not all get there and those that got there often found a way of getting back.
There were also a number of entities which had forms of jurisdiction over vehicles coming into the country. For example, apart from the Department of Transport, there was also the SABS, since vehicles actually had to meet their standards. The DTI also made decisions in terms of what imports they did and didn’t allow in a desire to protect the domestic motor industry.
9. High-risk and low-risk tax-payers
The Committee referred to the distinction made in the Annual Report and elsewhere between high-risk and low-risk tax-payers and asked SARS to clarify the distinction.
SARS typified a low-risk tax-payer as one whose income was limited to a monthly salary. A more high-risk category would be a tax payer receiving income from a range of investments where the risk would reside in the question of whether all investment income had been adequately reported.
The key aspect for SARS was to use its limited resources in a manner which concentrated efforts on high-risk tax-payers. There were a number of attributes SARS associated with high-risk tax-payers, such as being involved in an industry associated with structured tax products, having a history of non-compliance, a tendency for accounting income and taxable income of the company to be markedly different, as well as marked divergences between the nominal and effective tax rate paid by the company, the amount of time tax matters featured in the board meetings of the company, and the frequency with which the company was ready to interpret tax law differently from SARS.
10. Measures to reduce tax risks in the property market
The Committee referred to the statement in the Annual Report that some risks and challenges existed regarding property sales. The Committee enquired whether, in SARS’s endeavour to address the problem, it had made any attempts to link up with stakeholders who were involved in the bond registration process.
SARS noted that, as mentioned in the Annual Report, property was one of the emerging focus areas. SARS had been working very hard with the information provided by intelligence colleagues, and had dedicated resources specifically to this area. A lot of cases were already underway and SARS would probably be in a position next year to provide details of the outcomes of these efforts.
SARS indicated that it relied on information from the SARS hotline where people phoned in and identified suspicious activities within the property sector. SARS also had a third party interface with the deeds registry. There had also been efforts to talk to the Estate Agents Board.
From a broader policy perspective it needed to be considered whether special reporting requirements needed to be imposed on the industry, for example when someone bought a particular property for R 10 million in cash. Under such circumstances it would be good for SARS to know where the cash and income came from, for example. SARS was still in the early days of its work here and the reporting requirement might still be given greater consideration.
11. Impairment loss in 2006/2007
The Committee enquired after the statement in the Annual Report that in 2006/2007 there had been an impairment loss of R 68.4 million for certain software programmes and asked after the circumstances that led to the impairment of these assets.
SARS responded that it had contracted for particular software that it was using for call centre services. In December 2005, the company it had contracted signed a further contract for the next few years which would enhance that software and provide a range of additional services as well. That company was then taken over by another software company and the people who took over the company said that the previous contract was not going to bind them and that the additional services that SARS was expecting at the negotiated rate would not be supplied. SARS then had new software developed in order to ensure that the initial software it had purchased would be useable. But in accounting terms it was necessary to write off the loss. SARS would still try to recover some of this ‘theoretical’ loss by seeing if other government entities were interested in using the initial software.
12. Empowerment of small businesses
The Committee enquired after the extent to which small businesses were being empowered and noted that the Annual Report contained a section discussing the Large Business Centre but did not have a corresponding section on small business measures.
SARS noted that small business was now of equivalent importance to large business, except that they provided less revenue. SARS reviewed some of the things that it and the National Treasury had done to assist and empower small businesses. There was firstly the separate tax regime for small businesses, where they only paid a marginal tax rate of 0per cent for taxable income up to R 40 000.00 and only 10per cent for taxable income from R 40 001.00 to R 300 000.00. There were also the educational programmes which were directed at small businesses, as well as the work done during the small business amnesty. Further, in the budget of this year the Minister of Finance had announced that SARS and Treasury would be working on a new tax product for small businesses. SARS had also set up small business desks at most of its offices which were intended to provide assistance geared especially at the concerns of small business owners.
A significant difference between large and small businesses was that there were fewer large businesses and so it was possible to concentrate the staff that handled large businesses into one big centre instead of many smaller ones. For small business support one needed to decentralise and ensure that more facilities were created on the ground where owners could interact with SARS, receive assistance, education and the like. What SARS now intended was to have a small business unit at its head office which managed all of these programmes in a more coherent way and developed products in consultations with small business which were more in line with their own capability.
13. The Performance of SARS
The Committee noted that it was difficult to exercise oversight over SARS because it was difficult to set numerical measurable objectives for its activities. It further noted that, three or four years ago, SARS had appeared very good, but given the amount of revenue it was collecting now, it had perhaps not been as good as supposed then! One international measure of performance for revenue collection agencies was that total expenditure should be between 1 and 2 per cent of revenue collection. SARS’s was currently closer to 1 than to 2per cent, which suggested very good performance.
SARS noted that the Committee had clearly described the trajectory of a state institution in the democratic era in South Africa. There had been a state in the past which had dealt with a minority in a particular way and with a majority in another way. In a very short space of time, this same state machinery had transformed itself to deal with the majority in a very different way that is as part of the citizenry of the country. Further to this challenge, SARS had always said that it was a very old and well established institution with old systems, old processes and huge people challenges. The Annual Reports reflected the progress that had been made against this background in turning SARS into a more modern, effective and efficient institution. The strategic plans on the other hand, set out SARS’s ambition or aspiration to be as “world-class” as possible, using as a benchmark countries that had had tax systems operating for fifty years or more.
There were, however, constraints that SARS had to contend with, such as that there had been no really significant investments in technology systems in the organisation. SARS had put in new computers and was going to put in a new network over the next few years, but the old technology systems were still the base on which it operated, which was, by the way, not too different from many other similar agencies around the world as well. Regarding human resources, significant numbers of people had also left, as a result of poaching by the private sector as the economy boomed. Skills retention was becoming a significant challenge. SARS anticipated that the salary bill would increase as a result of trying retaining scarce skills in the organisation.
14. The role of compliance in revenue collection increases
Wit respect to a previous question about the reasons for more revenue being collect, the Committee enquired whether the increased over-runs was maybe due to compliance and how much of SARS’s revenue gains and over-runs were in fact accounted for by compliance improvements. The Committee further referred to the Katz Commission estimate of some years ago that the tax gap was approximately R 15 billion and enquired whether SARS had any estimates of what the current tax gap was.
SARS pointed out that its compliance model made it easy for people to comply, and that it was trying to get increasing numbers of people to buy into the recognition that they also had to do their bit. More and more disincentives also had to be created, as well as campaigns with big and small businesses to ensure that businesses bought into this enhanced compliance culture. This required greater frequency of contact between SARS and business in order to ensure the consolidation of the right behavioural patterns and interactions. Where businesses did not comply, however, the law existed and would be utilised by SARS.
In a sense voluntary compliance was an end destination. Compliance was largely determined by the tax and broader culture of that society and how it would behave if there were no other pressures on it to pay all taxes due than the recognition of it being the right thing to do. Tax administrations around the world dreamt of achieving true voluntary compliance. Studies suggested that the factors which determined the degree of compliance included the credibility of government and its institutions, and the extent to which the tax administration was respected and regarded as competent and fair.
Regarding the tax gap, a key consideration was how to better identify risk and this needed better information than SARS had at present. Third party information was a key aspect of SARS’s strategy in this regard. The better the risk engines, the more progress SARS would make in eradicating the tax gap. SARS noted, however, that no real estimates had been made recently of the size of the tax gap.
15. Writing off outstanding debt
The Committee noted that SARS expected to collect some R 11 billion of its outstanding R 57 billion debt, that is R 46 billion was expected to be written off. The Committee recognised that one never collected 100per cent of bad debts, but wondered why SARS was expecting to write off such a large amount. The Committee also wondered what measures could be applied to delinquent tax payers in this regard.
Regarding especially older debt, SARS indicated that in the last 2 to 3 years the debt book had been stabilised in the sense that the debt book hadn’t grown further. A much bigger focus was intended in the next few years on old debt. At the end of the process all debt had to be either collected, adjusted or written off. SARS noted that a large portion of debt in the twenty-four months or more categories was estate debt or debt of companies which had ceased to trade. Debt collection thus also depended on third parties which made this a challenging category of debt.
16. Tax disputes
The Committee referred to the fact that where SARS made a ruling on a tax issue, most tax payers capitulated to this ruling even if they found the SARS explanation somewhat clumsy. The normal person in the street was unlikely to contest the issue further in court. The Committee therefore wondered what percentage of entities that capitulated to SARS rulings were people and what percentage were corporates who could afford lawyers, since this might be useful information.
SARS argued that resource imbalances in fact generally favoured tax payers rather than tax administrations. SARS almost never initiated litigation. A court process generally started when tax payers were unhappy with their assessments. Tax payers could appeal to special courts that had been created for tax matters: a tax board existed for smaller questions which were similar to a small claims court. This was precisely to make the legal process more accessible to the person on the street. A tax court also existed for larger cases. If a party was not satisfied with a decision of the tax court then they could also go to a higher court.
However, various measures also existed to help resolve matters in a non-litigious manner through mediation and facilitation of disputes outside the more adversarial court environment.
17. Information security at SARS
The Committee enquired how secure information was at SARS.
SARS noted the importance of information security given the nature of the information it held. IT security was a constant game of ‘safe maker’ and ‘safe breaker’. A key issue was ensuring that staff followed procedures as required: typically where security was compromised it was not the IT security system which was at fault but people who had not followed procedures properly. To date there had been no significant instances of IT security problems at SARS.
18. Small business tax amnesty
The Committee referred to the small business tax amnesty drive and enquired how many convictions had been made of people who did not comply with tax law.
SARS emphasised that the purpose of the tax amnesty had not been punitive but had been aimed at getting small businesses compliant. They then benefited from a clean slate and SARS benefited from the added revenue and increased integrity of the system. Therefore the current phase was primarily concerned with processing and adjudicating applications. SARS would however follow up non-compliant businesses in future.
19. Tax payer contact details
The Committee noted that SARS had been making an effort to clean up the contact details of taxpayers to reduce the quantity of undelivered returns, which was cited as one of the reasons for the outstanding return book. The Committee enquired after the practical measures taken by SARS to ensure that contact details were current and accurate.
SARS firstly noted that the obligation rested on tax payers to ensure that their details were correct and updated. SARS had, however, used the opportunity of returns being submitted every year to ensure that details were still correct. There had also been address campaigns.
Such measures had not always proved to be enough and SARS had also come to rely more on third party sources. The institutions that SARS believed had the best details of this sort were the credit bureaux and SARS had started using them as a reference point for tax payer data. Details were compared and where they corresponded was ticked off as being in all probability correct. Using this approach, SARS was able to send returns only to those tax payers where a fairly strong likelihood existed that the address and other details were accurate. In the previous filing season about 300 000 returns came back. To date, of 3.9 million sent only 27 000 had come back: thus this approach had already delivered clear benefits.
20.1. The Committee recommends that SARS, in reporting on disability figures, provide such figures broken down by race, gender and level of staff, as this disaggregation was necessary in order to get a better understanding of its performance with regard to the Employment Equity Act.
20.2. The Committee recommends that SARS provides a report on the need to consider changing existing legislation to enable SARS to have recourse to more severe penalties in the case of tax payment delays by companies.
20.3. The Committee recommends that SARS provides it with a detailed update on progress made with respect to the measures to reclassify existing debt.
20.4. The Committee recommends that SARS provides it with a more detailed report of trends in SARS’s salary bill, following from its comments at their Annual Report hearing that SARS might have to increase salaries in some instances as part of its staff retention strategy.
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