SARS on Makwakwa matter; KPMG Report; 2017/18 revenue; Steinhoff; Illicit Financial Flows; Illicit Tobacco Trade

Meeting report

The Chairperson welcomed everyone, particularly the South African Revenue Service (SARS) delegation. He indicated that the Committee had decided that because the Jonas Makwakwa and KPMG matters were being dealt with in the disciplinary inquiry into the conduct of Commissioner Moyane, and were also highly likely to be relevant to the President’s Commission of Inquiry into SARS performance, it would not fully engage on these matters for now, to avoid undermining these two processes.

Deliberations on Makwakwa matter
Mr Mark Kingon, Acting Commissioner, SARS, said, in hindsight, SARS dealt with the matter involving former head of business and individual tax, Jonas Makwakwa, in the wrong way. He pointed out that there was a fence between SARS as the tax authority and SARS as an employer. On receiving a report from the Financial Intelligence Centre (FIC), the entity’s function was limited to investigating tax evasion and not money laundering. Only once tax evasion had been established should disciplinary action be followed. Instead SARS’s human resources department appointed Hogan Lovells to investigate the case from a human resources point of view, which was the wrong approach- this was the crux of the matter.

Mr Kingon said the time had come where employees’ tax affairs should be transparent. People should not hide behind secrecy clauses. He believed SARS staff needed to be tax compliant and that this should be made a condition of their employment. He insisted that under his watch the law would be applied. SARS will do what is right in all circumstances. He was limited in what he could say about the case because of the pending disciplinary inquiry as pointed out by the Chairperson.

Discussion 
Mr D Maynier (DA) asked if anybody within SARS had been fired or held accountable in relation to the mishandling of the Makwakwa matter.

Mr A Lees (DA) asked if the investigations would also encompass the third parties, named in the Hogan Lovells report, who purportedly made donations to Mr Makwakwa. 

Mr N Nhleko (ANC) noted the divide between SARS as the tax authority and SARS as an employer as alluded to. He believed that was where the answer lied. From an institutional point of view, the human resources department might have been correct in taking steps after the SARS employee in question was reported to have transgressed.

Ms T Tobias (ANC) said there needed to be a distinction between SARS the employer as well as SAS the tax collector. The distinction should be made at all times. It had to be understood from the onset. She cautioned Members to be mindful of the ongoing processes when probing SARS on these matters.

Mr F Shivambu (EFF) made reference to rumours that Acting Commissioner Kingon had no academic qualifications. He asked whether he had matric or any post-matric qualification.

Mr Kingon said the allegations identified by Mr Shivambu were indeed doing rounds on social media. For the record, he had been a SARS employee for 34 years. He was in possession of matric and a Bachelor of Administration from UNISA. Furthermore, ensuring that people were held accountable was work in progress. At this point nobody had been held accountable but those who transgressed must be held to discipline. He reassured the Committee that SARS would deal with the matters fully and do what is right. The distinction between SARS as a tax authority and as an employer was an ongoing struggle. However, recommendations had been made to have tax compliance as part of conditions of employment within SARS. This was paramount and would be effected in due course. SARS would do what is right without fear or favour under his watch.

The Chairperson said while the Committee could not deal with the matter fully, and could not pre-empt outcomes of the investigations, it urged government and the persons involved to cooperate fully to ensure expeditious completion.

National Treasury input on Makwakwa matter
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, gave a presentation on the Makwakwa matter. He told the Committee that the President was expected to announce the terms of reference of the commission of inquiry into SARS and who will serve on it this week. The Commission would focus on past issues such as transgressions related to various tax laws. It was expected to consider the adequacy and legality of steps that SARS took to address revenue shortfalls in the past two years, including unauthorised bonuses to top executives and withholding of refunds to ordinary taxpayers. Also expected to be included in the terms of reference is SARS’s adherence to tax administration processes, including for VAT refunds, mining rehabilitation funds, and adherence to customs and excise provisions with particular reference to tobacco. Treasury hoped that the Commission’s work could also assist in strengthening SARS’s capacity to deal with illicit financial flows and tax evasion by highly connected individuals. Given the law on tax confidentiality, only a commission of inquiry had the power to go into specific tax-related transgressions or to consider whether there were any transgressions related to, say, VAT refunds.

Mr Momoniat referred to the role of private-sector auditing, forensic and legal companies involved with the investigation of Makwakwa. KPMG and Hogan Lovells were directly commissioned by SARS and remained silent (hiding under ‘confidentiality’) even when their reports were deliberately distorted to mislead Parliament and government. He echoed similar criticism expressed earlier this year by Peter Hain in the UK’s House of Lords, where Hain called for Hogan Lovells to face an industry inquiry for its role in state capture. Therefore, Treasury hoped that the Commission of Inquiry would also look at all correspondence between these companies and SARS and to what extent there was abuse. Going forward, consideration should be given to the following: How it could be ensured that confidentiality was not abused to hide criminal and administrative abuses; and how to effect more transparency to expose blatant acts of corruption or state capture, which also affects the integrity of SARS. 

Discussion
Ms Tobias appreciated Treasury’s input and emphasised the need for Parliament to look into confidentiality clauses as relating to tax affairs of individuals. This needed urgent attention as it would help in efforts to deal with corruption.

The Chairperson said the Committee could not discuss the Hogan Lovells report as it could prejudice the SARS Commissioner from having a fair hearing. He noted that the Committee requested the Hogan Lovells report together with any other relevant documentation from the Commissioner in terms of the rules of Parliament. The Committee further requested that sections of the report, dealing with private taxpayer details, be redacted. However, the full report was then delivered in hardcopy to the Committee Secretary, with a letter attached in which the Commissioner expressed his discomfort in sharing the report, and that he had decided not to redact anything. In exchange with the Parliamentary Legal Advisor, it was agreed that only Members were entitled to the full version which was confidential. However, a redacted version would be available to the public in an open Committee meeting.

Mr Lees said there was no way the Committee could not discuss the contents of the Hogan Lovells report just because investigative processes had not been completed. The reality was the issues were in the public domain and hence had to be dealt with. It would be an abrogation of its duties if the Committee did not do so. He however conceded the scope of the discussions should be limited and further suggested Hogan Lovells be given an opportunity to respond.

Mr Shivambu queried why Treasury was making inputs on SARS’ internal disciplinary matters. Treasury should not be dealing with internal issues at SARS. The Committee must not be agitated by the sensationalist report from Treasury. A disciplinary hearing was underway at SARS, and raising the issues might weaken the case that the State or the President might have against the Commissioner. The cases must be handled properly and the process itself must not be endangered. Further, Mr Momoniat had vested interests in what was happening at SARS, and was not being objective. The EFF had written a letter to Treasury and the Minister expressing concern about his conduct in relation to the Financial Sector Conduct Authority and his distortion of tax policy, to which there had been no response. He further accused Mr Momoniat, and the Committee by extension, of being used as a pawn by ‘former colonisers who think they can interfere’ – by which he meant Peter Hain. He suggested that the Committee should write to Hain to instruct him to stop raising domestic issues in the House of Lords. South Africa has the capacity to deal with its issues. 

The Chairperson said it was not right to accuse Mr Momoniat of having vested interests without substantiating such claims. Furthermore, Parliament allowed the Executive to make inputs and having him expressing the views was in order. Mr Momoniat should be afforded the right of reply, both in public and in writing, as this was an attack on his integrity.  He reminded Mr Shivambu that Peter Hain played a leading role in the British anti-apartheid movement, and smacked down the proposal to write to Hain. Mr Shivambu should approach the International Relations Committee instead.

Mr Shivambu said the Chairperson should not suppress views from Members. Having Treasury make comments on issues relating to a quasi-judicial enquiry and even trying to agitate Parliament was incorrect. If the Committee wanted a report on the disciplinary process, it would be demanded after the processes have been concluded. He added that there was prima facie illustration of tax avoidance amounting US$2 billion involving unnamed companies in various reports. He thus recommended that either a separate commission dealing with tax avoidance is setup or the terms of reference of the SARS inquiry be expanded to look into tax avoidance.

Mr Momoniat responded to Mr Shivambu’s comments. He was not sure what he meant by vested interests, and pointed out that Treasury follows set out processes in coming up with any regulations, which are also signed off by the Director-General and the Minister. He rejected the allegations with contempt. He also expressed his willingness to take a lifestyle audit together with Mr Shivambu.

The Chairperson asked for Hogan Lovells input, particularly about whether they acted consistent with the legal profession in the handling of the Makwakwa matter.

Hogan Lovells input on Makwakwa matter
Adv Lavery Modise, Chairperson, Hogan Lovells South Africa, said the firm had always wanted its confidential and privileged report on Makwakwa to be made public, but that it was for SARS to waive its attorney-client privilege. It was relieved that SARS had released the report to the Committee. He justified the role played by Hogan Lovells in its inquiry into Makwakwa, rejecting that it was a whitewash. It was misleading and incorrect that the Hogan Lovells investigation extended into allegations of criminal conduct or tax evasion on the part of Makwakwa, which arose from the report submitted to SARS by the Financial Intelligence Centre (FIC). The Hogan Lovells inquiry was restricted to labour-related aspects and was focused on whether any of the suspicious, unusual or ad hoc payments identified in the FIC report were a breach of SARS’s internal policies and/or the Public Finance Management Act. The firm was required to determine whether this amounted to misconduct in the employment context. Investigations into criminal conduct and tax evasion had to be undertaken by the Hawks and SARS, and were not matters that Hogan Lovells could legally attend to. The disciplinary inquiry itself was, therefore, a properly convened disciplinary inquiry at the time, consistent with labour laws, the law firm’s letter of engagement, and the express recommendations contained in the law firm’s report to address only the specific, labour-related matters that Hogan Lovells was legally permitted to investigate and address. At the time of the disciplinary inquiry, there was no admissible evidence available to support any charge with any reasonable prospects of success at the disciplinary inquiry, based on the identity of the source of funds and/or any alleged criminal activities or tax-evasion activities. The law firm’s report made it very clear that there was no clearing of Makwakwa of any acts of corruption or acts of money laundering or of tax evasion. Instead, and as previously stated to Parliament, it notes that these areas were to be determined by the Hawks and SARS itself with PricewaterhouseCoopers. It was also clear from reading the evidence in the report that Makwakwa, through his lawyers at Baker & McKenzie, consistently challenged the authority of Hogan Lovells’ investigation into his conduct as an employee of SARS and refused to provide the necessary evidence to support the source of many of the seventy five suspicious cash deposits identified by FIC. In no way did the Hogan Lovells report clear Makwakwa of employee misconduct. Rather, the report recommended that disciplinary action should be taken against him for failure to disclose private business interests, failure to obtain permission to undertake outside employment work for Biz Fire Worx, and failure to co-operate and fully assist his employer in an investigation. It was the SARS-led disciplinary tribunal conducted by disciplinary chair Adv Terry Motau SC that found Makwakwa not guilty on these charges and not Hogan Lovells.

Adv Modise added that a number of politicians and campaigners had made extreme claims against Hogan Lovells based solely on accusation and insinuation. They have claimed to have ‘evidence’ that the firm colluded in state capture when nothing was further from the truth. With the publication of the report, Hogan Lovells expected those claims to stop immediately and an apology to be offered to it.

Discussion
Mr Lees found it quite disturbing that Hogan Lovells appeared before the Committee to try to take the moral high ground and then make generalised accusations that it was under immense pressure from people who have no facts. These general statements were not assisting at all in dealing with the matters at hand. Furthermore, given the contents of the PwC report pointed out possible tax evasion, would it be correct that client confidentiality, which the law firm was emphasising, protected Mr Makwakwa- when he was not its client, instead of SARS. If that was the case, on what basis? Also, to what extent was any information relating to tax irregularities protected on the basis of attorney-client confidentiality.

Mr Shivambu failed to understand the wisdom of discussing matters still under investigation. He suggested the Committee wait for the consolidated report which would be a product of complete due processes. Why was the Committee in such a hurry when there was a quasi-judicial process underway?

Mr Nhleko cautioned against waiving confidentiality conventions as a matter of principle. This could expose the Committee to litigation challenges. He suggested the matter not be discussed any further.

The Chairperson said the Committee did not have the competency to make any final conclusions on the role of Hogans Lovell in the Makwakwa matter and believed that the Law Society and the pending Legal Practice Council and/or any other appropriate body should consider this. Just like auditors, lawyers need to look at their professional principles and ethics. Any organisation carrying out this inquiry should include at least one retired judge. The Committee also believed that consideration needed to be given to including the role of Hogans Lovell in the Makwakwa matter, as part of that Commission of Inquiry’s terms of reference.

Deliberations on KPMG report
The Chairperson asked for the Acting SARS Commissioner’s comments on the KPMG report mindful of the pending investigations.

Mr Kingon agreed he could not discuss any aspects or contents of the KPMG report as it was linked to disciplinary processes which were currently underway. He indicated the report caused a lot of harm to the organisation and some employees suffered severe reputational damage as it divulged sensitive information which should not have been in the public domain.

The Chairperson said the Committee would wait for the outcome of the investigations. The Committee once again requested the Independent Regulatory Board for Auditors (IRBA) to complete its inquiry into KPMG’s role in the SARS report reasonably soon.

Mr Shivambu said the Committee should decidedly recommend that SARS should not have any relationship with KPMG, to preserve the tax authority’s integrity. KPMG was a collaborator in corrupt practises, to which the Auditor-General used this as the basis to sever ties with the firm.

Mr Roy Waligora, Director: Forensic, KPMG, expressed KPMG’s respect for the process that SARS was undertaking. To the extent that KPMG could assist, the audit firm undertook to do so. However, he disagreed with the statement to the effect that KPMG was corrupt.  

SARS Revenue
Mr Fabian Murray, Acting Chief Officer: Business and Individual Taxes, SARS, took the Committee through a presentation on the tax authority’s unaudited revenue results for 2017/18. Collections for the 2017/18 financial year amounted to R1 216.5 trillion, yielding a shortfall of R0.8 billion against printed estimate and a prior year growth of R72.3 billion (6.3%). Collections from companies were marginally lower than printed estimate despite the GDP growth of 3.1% and 2.3% in quarter three (2017) and quarter four (2017) respectively. Economic developments that emerged in the previous quarters had an adverse impact on the overall corporate income tax (CIT) collections due to the lag effect. This together with a higher dividend tax (DT) base from the unusual payments received in the prior year which emanated from a rate change, led to a significant under-collection in DT/STC (secondary tax on companies).

VAT collections were below expectation, as a result of moderate consumer spending; partly due to high unemployment, relatively weak real household income growth and subdued household credit growth, together with sluggish merchandise imports. On an annual basis, growth in real final consumption expenditure by households was 2.2% in 2017 from 0.7% in 2016. Personal income tax (PIT) collections experienced a lower than expected growth as a result of lower wage settlements, containment of bonus payments, job shedding and increasing unemployment and inflation. Legislative changes to retirement reforms accounted for a substantial amount of the shortfall in PIT collections. These changes allowed higher tax deductions for retirement contributions which resulted in higher than expected PIT refunds, as well as lower pay-as-you-earn (PAYE) collections. In a year of subdued global trade, nominal merchandise imports into RSA revealed a negative growth level of 0.1% year-on-year for the first half of 2017/18, before recovering steadily in the second half to exhibit an overall 4.1% Y/Y growth rate against 2016/17. This turnaround was driven by an upswing in import levels buoyed by a significant improvement in the domestic currency during quarter four (2017/18). However, this was weighed down heavily by the continued subdued levels of investment, domestic demand and household consumption; which strained the Customs revenue as Import VAT fell short of revenue estimate, while Customs duties narrowly exceeded the target.

Mr Kingon reported that tax compliance was under pressure. Compliance continued to be a concern and SARS needed to guard against it — the non-submission of returns, late submission of returns, and filing of returns without payments continue to be an issue. He noted that in April more than 14 000 VAT vendors filed returns but did not pay their VAT for the month. The amount outstanding was R1.1 billion. Steps had been put in place to ensure that this tax was paid. SARS teams were working in an environment where people are utilising these amounts for cash flow purposes and it was a serious concern. More so, SARS was extremely concerned about any audits that were called into question as SARS then could no longer rely on them to determine whether the tax was paid correctly. Compliance overall was under serious threat and it is something that the executive committee was looking into.

Discussion
Ms Tobias asked for perspectives about what drives real household consumption so that it could be juxtaposed with economic performance. She emphasised the need to find robust models which could give precise revenue collections forecasts and projections.

Mr Lees asked about the contents of the pro forma letters sent to taxpayers by SARS. There was a commitment that these would be revised and written in simple language. He asked about progress on this front.
 
Mr Murray said SARS sent out 1.6 million generic letters for personal income tax in the previous year. He agreed there had been an outcry about the generic letters over the years. He announced that this tax year, 50% of audit cases would receive specific letters. This was a positive step in the right direction. Also, household consumption is affected by a number of factors such as the level of indebtedness, unemployment, fluctuations in household income among others. Also, SARS was working hard in getting the projections right.

SARS presentation on Illicit Financial Flows (IFFs) and Illicit Tobacco Trade (ITT)
Mr Kingon acknowledged that SARS had not been dealing efficiently with illicit financial flows, illicit tobacco and other illicit trade. This had been a source of great concern to the Committee, especially in the context of the sharp fall in tax revenue, which had necessitated an increase in VAT by one percentage point. There was so much more that SARS could be doing in order to give the Financial Intelligence Centre (FIC) the necessary resources. Teams to deal with the problem would be established from the skilled personnel still in the organisation. This would enable the tax authority to move forward in a far more structured manner. He noted that some preliminary engagements had taken place with banks regarding the reconciliation of advance payments made for imports with the actual goods imported. The use of fictitious imports was one way of sending money out of the country illegally. He had been concerned about the levels of reconciliation. SARS was not doing this properly, and the banks were going to help. Notably, an interagency working group on international financial flows had been set up with various government agencies to co-ordinate their work. Nine cases had so far been identified for multi-agency collaboration involving more than R9 billion. From the initial analysis there were serious concerns from a tax point of view with these cases. Engagements with the South African Reserve Bank indicated that people were abusing the R1 million limit on the amount of money that can be taken out of the country annually. They were getting others to use their allocated amount to take out money on their behalf. SARS needed to get a grip on those transactions.

Mr Kingon said SARS was in the process of re-establishing dedicated investigative teams to probe the illicit tobacco trade. SARS was setting up multi-disciplinary teams which would also be constituted to investigate the illicit gold and fuel trade. However, while SARS in the past had well-resourced teams to investigate illicit trade, these units were predominantly dissolved. Historically SARS Project Honey Badger was managed under a unit called National Projects. National Projects brought about the integration and coordination of various capabilities and dedicated teams to focus on specific areas in the illicit economy. Investigators that formed part of these teams have been split up and scattered throughout SARS. The revenue service currently only had one dedicated team focusing solely on illicit trade in the tobacco industry, with a staff of eight, which was “very insignificant”. Furthermore, the sharp fall in the number of staff employed by the SARS had limited its ability to curb illicit financial flows, which drain billions of rand from the economy every year. The exodus of employees meant the staff complement of the tax authority had declined from over 14 000 a few years ago to about 12 600 now. He added if SARS does not invest in this, delivery might suffer.

Discussion
Ms Tobias said SARS would need teams alive to various schemes to circumvent the law, especially within ports of entry. She urged greater co-ordination between the different agencies involved in combating these illicit transactions.

The Chairperson welcomed the R1 216.5 trillion revenue collection in the past financial year, but believed far more could be raised if SARS dealt more effectively with IFFs, and the illicit tobacco and illicit trade. The Committee welcomed the formation of the Inter-agency working group, but wanted to see results. VAT and fuel levy increases were not morally justifiable VAT when at the same time, money was being lost through illicit means. He reiterated the Committee’s view that there should be an inter-ministerial committee by the Minister of Finance to more effectively tackle IFFs. This committee should include the Ministers of Trade and Industry, Mineral Resources, Police and Justice. Lastly, the Committee believed that the President should, if possible, consider whether it is appropriate to include SARS’ response to IFFs, as part of the terms of reference of the commission in a way that does not unduly delay the commission’s other work. At the next meeting, the Committee would want to know how far SARS would have gone in formulating and implementing a strategy to deal with IFFs over the next six months. SARS would be expected to report on this every quarter.

The meeting was adjourned.