SARS 2021/22 Annual Performance Plan; with Deputy Minister

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Finance Standing Committee

05 May 2021
Chairperson: Ms P Abraham (ANC) (Acting)
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Meeting Summary

Video: Standing Committee on Finance

Annual Performance Plans

The South African Revenue Service (SARS) briefed the Standing Committee on Finance on its Annual Performance Plan (APP) for 2021/22. SARS was on a long road to recovery, but the institution was stable.

SARS collected R38 billion above the expected revenue collection however expenditure for the previous financial year was far above revenue. This meant a budget shortfall or deficit of R553 billion. The budget deficit was however lower than the estimated R603 billion.

SARS told the Committee the current economic environment resulting from COVID-19, resulted in SARS’s tax collection ability remaining significantly constrained. It showed decline in registered taxpayer and trader compliance levels. SARS’s ensured tax compliance in the country was increased, by making non-compliance more difficult. Taxpayers and traders who negligently, deliberately, aggressively stayed outside of the taxation system, or who were non-compliant, would be immediately detected and pursued. SARS would enforce tax compliance reminders, investigative engagements, asset seizure orders, the institution of court action, and criminal prosecution more stringently.

SARS was actively pursuing individuals and groups involved in state capture to ensure it paid taxes due. SARS was working on seven state capture-related projects which involved 85 civil matters and 58 criminal matters. Seven civil matters and 32 criminal matters were finalised. SARS handed over 27 of the completed criminal matters to the National Prosecuting Authority (NPA). SARS begun issuing letters of demand for over R28 billion in 2019/20, compared to R3 billion in the preceding financial year. SARS was involved in 570 investigations with the estimated amount to be recouped totalling R4 billion. SARS recovered R2 billion from its activities combating financial and tax crime. This included over 570 cash collections, and the detection and prevention of over R223 million worth of attempts at fraud.

SARS said it will pursue those in violation of the country’s tax laws, and those who owe money to SARS, without fear or favour.

The Committee questioned the extent of political interference encountered by SARS in matters relating to tax. The Committee raised questions on the state of the illicit economy in South Africa, and said SARS was far from the level of work needed to deal with the proliferation of criminal activities, especially in light of the increasing illicit economy resulting from COVID-19.

Members asked about the status of the working relationship between the management of SARS, labour movements, and unions, particularly in comparison to the Committee’s experience during the oversight visit in late 2019.

Members asked about the fight against corruption and tax crimes, specifically asking if there were any stories to tell from the year under review, about the fight against corruption and tax crimes, as much revenue was lost in this way.

Meeting report

The Chairperson welcomed the South African National Revenue Services (SARS) and National Treasury.

The Deputy Minister of Finance, Dr David Masondo, was present and began the presentation.

Dr Masondo said the Department collected R38 billion above the expected revenue collection. The bad news is that expenditure for the previous financial year was far above revenue. This meant a budget shortfall or deficit of R553 billion. The budget deficit was however lower than the estimated R603 billion.

He said the minor improvements in the fiscal situation were insignificant, and SARS should not rest on its laurels. The fiscal situation in the country was still poor. Debt was close to R4 trillion, and projections of debt for 2023/24 were as high as R5.2 trillion. The revenue shortfall was high and debt servicing costs were projected to rise.

To turn the situation around the economy needed to grow, as tax was a function of economic growth. The government was working hard to implement the widely accepted economic recovery plan.

Principal issues included the fight against COVID-19, and ensuring a reliable supply of electricity. These are immediate tests for the recovery plan. The South African economy remained largely suppressed, despite signs of recovery. This hampered SARS’s collection ability. Public confidence in tax administration and improved administrative measures also increased the ability to collect revenue. Poor management of tax revenue in the public sector hampered citizens’ willingness to pay tax.

The Chairperson said there were questions from the previous committee meeting. The Director-General hoped Dr Masondo could deal with these in the discussion.

Presentation to Standing Committee on Finance (SCOF) – South African Revenue Services (SARS) Annual Performance Plan (APP) 2021/22
Mr Edward Kieswetter, SARS Commissioner, began the presentation on SARS’s APP for 2021/22.

Strategic Clarity
It is important for SARS to remain independent of other influences, but be governed by the law. Tax collection is integral to the fiscal framework. Tax collection cannot destroy the system, but should rather enhance it. SARS’s role extends to the protection of the county’s borders from illicit flows.

The future SARS will focus on involves people, technology, data, and integrity.

Strategic Priorities 1-5 years
There are nine objectives for SARS’s strategic priorities. The benefit derived from tax non-compliance can never exceed compliance. SARS needs to ensure this. Public trust is sacrosanct to revenue authorities.

Situational Analysis
There are ten key external factors to consider. Currently, South Africa faces a stable interest rate environment and low inflation. The economy improved slightly over six months. This momentum is expected to continue. A continued stable rand-dollar exchange rate is expected. This is good for imports to the country. This situation is not however, good for dollar-based revenue such as the export of minerals.

The state of government debt is aided by improved tax revenue collection. This means there is less need to raise money in the international markets through issuing bonds. National Treasury had the previous day reduced Treasury bonds on international markets, improving fiscal integrity.

A notable challenge remains illicit economic activities. These gained ground during the suppression of the formal economy under COVID-19.

The African Continental Free Trade Area (AfCFTA) presented positive aspects, as well as risks for South Africa. Opening borders and expanding markets presented opportunities for risks which arose from the illicit economy. The Agreement did not only create a free trade zone, but opened the opportunity for additional risks to the formal economy.

Of the three internal factors faced by SARS, adapting to remote working under COVID-19 is the most important.

Responsible fiscal citizenship is a microcosm of the broader social contract in the country. Parliament has a role to play to ensure trust in legitimate use of public finances, to assist SARS in tax collection.

Resources over the Medium Term Expenditure Framework (MTEF) Period
The underfunding previously experienced compromised the autonomy of SARS, and in turn impacted South Africa’s fiscal integrity. The recruitment freeze is ending, and SARS will be re-hiring critical skills.

The significance of an adequately funded revenue service would mean little need to increase tax rates in the country.

Discussion
Mr G Hill-Lewis (DA) said he had some general remarks before his questions.

It was encouraging to see SARS continue its recovery and trajectory in the right direction. South Africans buy into the redistributive tax system. Tax morality was tied to perceptions of SARS, and tackling corruption in State, which was admittedly not entirely SARS’s role. The Institution’s trajectory was right, and improvement was clear. The Committee welcomed this.

On the state of finances, he heard the importance of what the Commissioner was saying, and welcomed the additional allocation made. There was also a compelling case to make regarding return on investment in SARS. It was higher than raising money from more debt issuance, or increasing taxes and placing the burden on South African families and businesses. If the State had options to raise more revenue through improving SARS’s collection capacity, this was something he supported as one of the cheapest and most efficient options.

He knew the Commissioner could not discuss individual tax cases, and he wanted a statement for public assurance. The recent history of SARS was of political interference and cadre deployment. This affected the ability to act without fear, favour, and integrity required for public trust. There were recent media reports of political parties allegedly contravening the Tax Administration Act, in the tens of millions of rand. He imagined there would be pressure exerted on SARS in this regard. He wanted public assurance regarding any matter of tax offence, to the effect, no matter who was involved - SARS would act without fear or favour to recover money owed. The money is owed not to SARS, but to the South African public. It ensures the delivery of basic services through tax funds, primarily for the poor. This was SARS’s higher purpose and it needed to exercise it without any interference.

Mr G Skosana (ANC) welcomed additional revenue collection at SARS, despite the expenditure increasing as well. It was a step in the right direction. He asked SARS to build on the positive steps taken.

Regarding the institutional focus on ‘must win’ tax battles, the fight against corruption, and tax crimes, he wanted to know if there were any good stories to tell from the year under review, about the fight against corruption and tax crimes, as much revenue was lost in this way.

He asked for the status of the working relationship between the management of SARS, labour movements, and unions, particularly in comparison to the Committee’s experience during the oversight visit in late 2019.

Dr D George (DA) knew SARS had a troubled past. He spoke in Parliament in 2015 about concerns he had with the appointment of Tom Moyane as SARS Commissioner. It was early days, but the current Commissioner was doing well.

He asked about the ability of SARS to investigate tax fraud and syndicates. It was clear from the advertising that SARS was employing the skills needed to improve its abilities. He asked how SARS prosecutes and capacitates itself to pursue the wealthier tax evaders.

The Committee was told in the presentation, 54% of businesses had problems in complying or paying its agency tax to SARS on behalf of employees. This was a serious offence. The only reason companies did this was because companies did not have money to pay SARS. This was very problematic, and complicated SARS’s revenue collection ability. He asked what SARS was doing to ensure the money was collected and action was taken in this regard.

It was important for non government organisation’s (NGO’s) and political parties to pay tax. He asked what SARS would do if this was not done. He asked for assurance SARS would act without fear or favour on such matters, given what occurred in the past.

The Chairperson commended SARS on the work being done. The Committee was told about the cleaners with masters qualifications employed at SARS. The Chairperson asked what SARS’s plan on this was. This was something happening across the country. Highly qualified graduates were working on the streets because of not being able to find jobs. It spoke volumes of the status of unemployment in the country.

On the issue of the previous audit opinion, she asked what the audit action plan for SARS was.  

The Chairperson said she wished to find out about disability employment at SARS. The presentation said SARS aimed for three percent, and she asked where SARS currently was. She wanted to know if there was compliance with the legislation of the country.

Mr Kieswetter asked the Chairperson for clarity regarding her question about the audit action plan.

The Chairperson said the question was if the audit action plan was in existence, and if it was attached to the APP.

On the questions of political interference with SARS’s mandate, Mr Kieswetter assured the Committee and the public, in his term as Commissioner at SARS, there was no interference from any political parties or leaders. He assured Members he would not entertain political interference and would rather resign from his position. SARS had to be independent and administer laws independently, without fear or favour. If any staff member at SARS was influenced by any third party, for example, taxpayers seeking to collude and co-opt staff members within government agencies to defraud the justice systems, the members who chose to collude would not be tolerated at the institution. He gave his absolute assurance of this.

SARS’s case selection methodology was politically neutral. It did not cherry pick its cases. It evaluated compliance risks and profiled taxpayers accordingly. If, through this process, a taxpayer, entity, or company, regardless of its status, was placed on SARS’s radar by the case selection methodology, SARS would engage and hold it accountable for the tax obligation owed to the country.

On the question of tax crime and the illicit economy, South Africa was nowhere near the level of work required in proliferation of criminal activities, and expansion of the illicit economy. In the previous year, SARS completed 842 criminal investigations in this area. This included areas such as fuel, tobacco, clothing, textiles, footwear, and the gold sector, regarding illicit flow and areas of tax evasion.

SARS dealt with non-compliance in three areas. The first was general non-compliance, such as paying tax late, where SARS nudged people along. The second was aggressive non-compliance, where individuals abused the laws and structures by understating revenue and overstating expenses. This could be done through aggressive tax planning, bordering on tax evasion. It was permissible to minimise tax exposure and risk in lawful ways, but many players bordered on becoming evaders. The third was the criminal and illicit economy.

SARS also completed and raised assessments for income tax (IT) and value-added tax (VAT). This brought in R6.8 billion in additional revenue. SARS issued letters of demand for detections of tax crimes, in the amount of over R28 billion of additional assessments. This is compared to R3.3 billion in the previous year. It required a consistent effort to drive a letter of demand further, and to collect additional information to advance the work.  SARS had to be brought to a point of entering into a resolution, through collection of the tax, or dispute resolution. This would be followed by civil matters regarding collection of the funds, and criminal matters.

An additional 31 projects with over 570 active investigations, amounting to over R4 billion, were underway. Specifically, within state capture projects, SARS was looking at seven projects. These concerned SARS listening in and following up on the customs projects relating to state capture. SARS had 85 civil matters and 58 criminal matters. Seven of the civil matters and 32 of the criminal matters were finalised by SARS. 27 of the matters were handed to the National Prosecuting Authority (NPA).

The following week there was a joint workshop scheduled with the NPA to improve in this regard. From this work, almost R2 billion was recovered. It consisted of over 570 cash collections, detection, prevention of R223 million in fraud, and over R1 billion of other revenue leakage risks.

Other administrative actions taken in this regard was the issue of preservation orders. These were issued where there was reasonable suspicion of a flight risk of an asset. Nine preservation orders were issued to prevent or place a hold on R5.5 billion in asset values, which were considered flight risks. There were five search and seizure operations undertaken to establish the extent of assets at risk. Two tax enquiries, one in gold, and one in the illicit financial flows spheres, were also undertaken. There were 1661 illicit trade interventions undertaken. There were over 500 interventions in customs matters. There were 4600 seizures of illicit goods, which sought to be brought through South Africa’s borders. These were illegal or undeclared goods to the value of R2 billion, including R90 million in cigarettes seized. From the numbers, SARS was merely scratching the surface of the flow in the illicit economy.

SARS stepped up its interagency working groups with the Department of Trade and Industry (DTI) to further improve the work which required collaborative efforts.

On the question of management’s relationship with labour, SARS was stepping up in this regard, and was working hard. Management was engaged with unions and was upfront about funding constraints, wage increases, and the employee value proposition. The relationship between management and labour did not always have to be confrontational, and there were ways to work together.

On capacity building, there was money ring-fenced for the year, which was for additional capacity building. This was for IT security and support systems, with an extra 100 specialists being brought in. Data analytics was a key area, 40 additional data scientists and engineers would be brought in. This included additional trained data statisticians. In audit and risk, 140 additional staff, focusing on customs and risk analysis of customs and excise, would be brought in. Employees would be brought in for tax evasion matters, with a focus on high wealth individuals, criminal investigation and forensic investigation, and areas of specialised auditing. There were 200 graduates from across various disciplines who would be brought in. This was part of SARS’s commitment to feed South Africa’s skills pipeline and respond to the high levels of youth unemployment. This would be done annually. The graduates may not stay with SARS, but would gain valuable skills and improve the graduates’ employability.

SARS established a centre for large and international business. This would establish capacity to better deal with high wealth individuals’ and entities’ tax collection.

On business compliance, there were challenges businesses faced with non-compliance. The level of non-compliance pre-dated COVID-19. Legislation already allowed companies faced with payment issues, to approach SARS to defer and compromise arrangements. He invited employers to approach SARS in this regard, rather than pursuing non-compliance. It was not SARS’s job to put people out of business, but SARS would enforce the law without fear or favour.

On the question of plans for cleaners, a basic training programme was developed, and would look at a basic skills assessment. This would be followed by more detailed due diligence to establish an employee baseline. To work for SARS the minimum job requirement was matric. Many did not have this. However, of the employees examined, some had a matric or post-matric qualification, and the assessment would continue, along with a re-skilling programme.

On the audit action plan, SARS did not submit the actual plan to the Committee. The internal audit plan was part of the overall report submitted to the Committee.  

The status of disability of employees at SARS was currently two percent. The target was two point six six percent. The five-year plan for three percent took SARS beyond the requirements.

The Chairperson thanked Mr Kieswetter for his responses and checked for follow ups from the members.

She asked for an update on the Global Digital Tax Framework, as it relates to the taxing of the digital economy. This included an update on the structures in place to track illicit financial flow. The Committee had in the past proposed an Inter-Ministerial Committee. She hoped with the Commissioner’s response, the Deputy Minister would also contribute.

Mr Kieswetter said South Africa worked with the Organisation for Economic Cooperation and Development (OECD), through SARS and National Treasury. The work concerned companies whose business models entailed the delivery of goods and services via a digital platform. Here, a company could be based in the United States, but operate globally. Regarding taxation, two factors were previously relevant for determination of taxing rights of a sovereign. Firstly there was the physical presence, or permanent establishment of the company in a country, as well as the exercise of taxing rights at the point of sale. SARS always collected VAT at the point of sale, exercised within South Africa’s borders. What was not previously included in taxing rights was the income derived through income tax, because the first principle of residency was not met. This was a problem as large companies such as Amazon and Alibaba were headquartered outside of the country. The first principle largely accepted by the international community was, the nexus of physical residency had changed to economic business. Economic presence was increasingly the minimum requirement for taxing rights.

Secondly, the correct level at which the taxing right was determined, enjoyed less widespread consensus, and there were unresolved issues which remained for the global community to agree on. The second area was beyond the threshold, and concerned the determination of what other tax could be accrued. Negotiations were delayed because of COVID-19, and because of the United States ‘entering the party later’. South Africa was actively involved, to have its voice heard. It did not work as a single country, but as a bloc of aligned interests, through the African Tax Administration Forum (ATAF) and the African Union (AU). There was direct engagement with the Presidency and Minister of Finance on those issues. He assured the members South Africa was adequately engaged in this regard.

On the question of financial flow, this was an area which went beyond SARS. It concerned the Financial Intelligence Centre (FIC) and the South African Reserve Bank (SARB). SARS specifically, was impacted when companies who imported goods and services from overseas suppliers required advanced payment. Here, companies submitted requests to the SARB. A matter often seen as an area of risk regarding financial flow, money laundering and customs fraud was where companies would apply for the advanced purchase of goods, and when the goods arrived at customs, it was undeclared. SARS worked closely with the SARB to conduct discrepancy analysis in this regard. He was looking to improve the real time exchanges between SARS and the SARB, and in this way to conduct early detection of abuse. This entailed illicit flow out of the country or illicit flow of goods into the country.

SARS was also working with the Financial Intelligence Centre (FIC) and all banks to determine disclosure of funds held offshore. There was over R400 billion owned by South Africans, banked offshore. For these funds to be legitimate offshore, it had to be approved by the SARB, fully disclosed, and reported through the banking system, as well as being disclosed through the tax and revenue collection system. He could not say these requirements were fully met in this regard. SARS was working with the FIC to amend this. It was also working with the OECD on the Automatic Disclosure of Information Programme. A special voluntary disclosure programme was introduced previously, and R44 billion in offshore funds was disclosed by South Africans. He wanted to improve the sharing of information between banks and SARS, as well as connecting the dots with individuals seeking to avoid tax in the country.

The Chairperson asked the Deputy Minister for his comments.

Dr Masondo said the Commissioner covered the question of financial crimes and illicit financial flow well. Such action made it difficult to generate revenue. This was at a time when, it was more important for the State than ever. Illicit financial flow was the key driver of the illicit economy, where activities were hidden from the regulatory authorities. The Commissioner highlighted how SARS was working with other entities, such as the SARB, to combat these crimes. The crimes took different forms, such as illicit import and export, through smuggling. These required the support of the Border Management Authority (BMA). There was also the matter of illicit domestic production, which evaded taxes. There was trade mispricing, such as under-declaration to evade customs and duties due, as well as over-declaration to facilitate money laundering. SARS was working hard to combat all these matters.

The issue of declaring profits in countries with no tax, called tax havens, was the focus as well. SARS was working with the OECD on matters of digital taxation. It was important to build an organised bloc around the issue. Through ATAF, SARS, and South Africa, were trying to put the matter on the agenda of the AU to have a better organised African voice on the issue, as Africa ‘lost a lot’ through digital economy taxation, or lack thereof.

SARS was working hard to build organisation capacity to tackle illicit trade and financial flows. This could not be done alone. South Africa needed to work with other countries in Africa and the globe. Profit shifting mechanisms, including intergroup loans, could not be tackled individually by countries and tax authorities. SARS and the Department of Finance were contributing in this regard, to ensure the matter was tackled seriously. Otherwise, South Africa would be forced to borrow more and privatise its expenditure, which was not in the interests of the country.

The Chairperson thanked Dr Masondo. The responses assured the Committee SARS was headed in the right direction. The Committee was pleased with the work being done at SARS, and pleased with the leadership under Mr Kieswetter. SARS was a people-centred institution with developmental plans. Regarding all areas of strategic intent, especially voluntary compliance, she urged South Africans to work with SARS. The issue of tax in South Africa was not only the responsibility of SARS, but all economic actors in the country who had responsibility for tax. The Committee was pleased to note the work done regarding ensuring prevention of customs abuse at the borders, and the work being done for the governance within SARS.

The Chairperson appreciated the presentation by the Commissioner, but next time, wished to have the presentations and responses to the Committee include a sense of the leadership at SARS, as it exists under the Commissioner. The Committee needed to feel and hear SARS speaking about the programmes being dealt with. She knew the Commissioner was doing well and working hands-on. SARS was ‘turning the corner’, regarding its troubles. The Committee wanted a sense of the kind of leadership at the centre of SARS, behind Mr Kieswetter.

The Chairperson thanked the Members and contributors, and the Deputy Minister for always honouring appointments with the Committee, and for being eager to assist and advise. The Chairperson thanked the Commissioner.

The meeting was adjourned.
 

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