Tax Administration Bill [B11-2011]: briefing by South African Revenue Service

Meeting report

Briefing by the South African Revenue Service (SARS)
Mr Franz Tomasek, Group Executive: Legislative Research and Development, SARS presented the informal briefing on the Tax Administration Bill to the Committee (see attached document).

The Bill was intended to provide a modern framework for the administration of revenue collection and to address certain disparities in the existing legislation.  The Bill was a preliminary step towards the intended rewriting of the Income Tax Act.  The background to the Bill included the importance of effective revenue collection; the mandate of SARS; the rationale for tax administration legislation and international best practice in tax administration.

The intended impact of the Bill was the reduction of the compliance burden on taxpayers and the administrative burden on SARS.  The intention was to strengthen the enforcement powers over tax evaders and to improve the service levels for compliant tax payers.  The Bill was designed with due regard for the constitutional rights of taxpayers, balanced with the obligations of SARS.  In drafting the Bill, the international best practice was considered and an extensive consultation process was undertaken.  In general, the Bill was favourably received but the consultative process had highlighted additional issues requiring attention.  The original draft legislation was amended, where appropriate, to take account of the input received.

An overview of the design of the Bill, the main chapters and the interpretation of the proposed legislation were provided.  The salient points of each chapter were summarised.  Chapter 1 contained certain new defined concepts.  Chapter 2 dealt with general administration, powers and duties and the establishment of the Tax Ombud.  Chapter 3 dealt with taxpayer registration.  Chapter 4 contained the provisions concerning tax returns.  Chapter 5 covered information gathering; audit selection; criminal investigations; search and seizure without warrant; the rights and obligations of taxpayers and legal professional privilege.    Chapter 6 contained the provisions concerning confidentiality.  Advance rulings were dealt with in Chapter 7.  Chapter 8 dealt with tax assessments.  Chapter 9 made provision for dispute resolution.  Chapter 10 covered tax liability and payment of tax.  Recovery of tax was dealt with in Chapter 11.  Chapter 12 made provision for the payment of interest.  Chapter 13 dealt with tax refunds.  Chapter 14 made provision for the writing off or waiver of tax debt.  Chapter 15 dealt with administrative penalties and Chapter 16 covered understatement penalties.  Chapter 17 dealt with criminal offences.  Unprofessional conduct of tax practitioners was dealt with in Chapter 18.  Chapter 19 included general provisions and Chapter 20 covered the transitional provisions.  The Schedule to the Bill was summarised.

The briefing was concluded with a summary of the balance between the powers of SARS and the rights of taxpayers.

Discussion
The Chairperson reminded Members that the briefing by SARS was informal.  The normal process to refer a Bill to the Select Committee was lengthy.  He complained that there was no SARS office in Springbok, the largest town in the province of the Northern Cape.

Mr B Mashile (ANC, Mpumalanga) asked what action was taken by SARS to educate taxpayers on the legislation.  He said that tax officials had substantial discretionary powers and that there was potential for the abuse of power by SARS officials.  He asked if there was a code of conduct for officials and if there were consequences for incorrect decisions that had resulted in harm being caused to taxpayers.  He had personal experience of arrogant and unfair behaviour on the part of SARS officials.  He asked if there was a professional body that was responsible for monitoring instances where the code of conduct was violated.

Mr Mashile noted that the provisions in the Bill concerning the Tax Ombud did not ensure that the Ombud would be entirely independent.  The Tax Ombud was appointed by the Minister of Finance and was effectively a part of SARS.  He suggested that the Bill made adequate provision to ensure the independence of the Ombud.  South Africa had a mixed economy and he questioned the extent by which the Bill drew on the tax administration regimes of the major capitalistic countries in the world.

Mr M Makhubela (COPE, Limpopo) referred to Chapter 17 of the Bill, which dealt with criminal offences (see slide 54 of the attached document).  He observed that ignorance of the law was no excuse.  The burden of providing proof was moved to the taxpayer.  The tax estimates calculated by SARS were not based on factual information.  He asked for more clarity on the benchmarking against the experience of other countries and asked if the systems used in Brazil, Russia, India and China had been investigated.

Mr R Lees (DA, KwaZulu Natal) noted the objective to improve the level of service to compliant taxpayers.  However, in his experience, the level of service offered by the SARS call centre left much to be desired.  The concept of best practice was a value judgment.  He asked what was meant by “Senior SARS official”.  He referred to the statement made on slide 27 that “SARS may disregard correspondence without [the] allocated [tax] reference number”.  He felt that it was dangerous practice to ignore correspondence and that there should be an obligation on SARS to engage with taxpayers.  He deplored the absence of a tax office in the town of Ladismith in the KwaZulu Natal province.  SARS had closed many offices throughout the country, which had resulted in SARS becoming inaccessible and required taxpayers to travel long distances.  He noted that SARS intended to increase third party links to include other institutions.  Employers were already required to submit IRP5 certificates directly to SARS and banks and pension funds would soon have to submit the IRP3 certificates.  He wanted to know what the planned extent of the third party links would be as there was a degree of concern that a “big brother” scenario was being developed.  He queried the unfair burden of the cost of audits on taxpayers.  In his experience, taxpayers had to pay for audits that proved that all was in order with the entity concerned.  The taxpayer could not demand a refund from SARS if the demand for an audit was unjustified.  The statements issued by SARS were difficult to understand and certain forms were badly designed.  He asked who was authorised to waive penalties as the practice could be vulnerable to corruption.  He welcomed the amended provisions with regard to the determination of penalties.  He noted that no penalties were applicable to SARS.  In general, he welcomed the Bill, which would help to address the many difficulties with the old Income Tax Act.

Mr Mashile observed that there were certain powers of the Minister that could not be delegated.  He wondered if these particular powers could be delegated to the Deputy Minister.  He asked if the Bill made provision for lifestyle audits or if such audits were dealt with in other legislation.  He was concerned over the particulars of the finances of public officials being made public, for example, details of Julius Malema’s finances were recently published by the press.

Mr Tomasek was not in a position to respond to Members’ questions about the closure of SARS offices as this issue fell outside his area of responsibility.  He was aware that SARS was developing the concept of mobile offices to serve remote areas but could not provide details.  Persons earning less than R120,000 p.a. were not required to submit tax returns unless they wished to claim medical deductions.  SARS used the third party information provided by the employer to assess this category of taxpayers.  SARS intended to introduce the legislation in a series of country-wide seminars and workshops once the Bill was finalised.  SARS had developed a taxpayer education programme and would be happy to arrange a briefing to the Committee on the subject if required.  The Bill included guidelines for the exercising of discretionary powers by SARS officials.  SARS had a code of conduct in place.  The code applied to all SARS personnel.

Mr Tomasek explained that Canada, the United States of America and the United Kingdom had a Tax Ombud, which was funded by the relevant country’s tax office.  These Tax Ombudsmen were regarded as independent.  Denmark and Australia had a Public Protector, which was entirely independent from any other State institution.  The experience of countries with the most advanced tax systems was investigated but other developing countries (such as India) were considered as well.  In fact, India had used the South African model for recent changes in its tax systems.  The proposed legislation would assist SARS to free up more resources to provide a better service to compliant taxpayers.

Mr Tomasek explained that a “Senior SARS official” was defined in Clause 64 as an official who was delegated special tasks by the Commissioner.  He pointed out that SARS was not compelled to act if a tax reference number was not provided in correspondence.  The correspondence might be ignored if it was impossible to identify the taxpayer concerned.  The extent of third party linkages would depend on the ability of the institution to provide information to SARS.  The proposed Protection of Personal Information Bill would have to be taken into consideration as well.  In general, taxpayers had welcomed the pre-filling in of tax return forms.  The comments with regard to the cost of audits were noted but he was not aware of any provision to compensate taxpayers for clean audits.  He undertook to refer the complaints concerning the statements to the responsible official.  SARS had attempted to design forms and statements that complied with commercial standards.  SARS had a team dedicated to the design of forms.

Mr Tomasek explained that the section in the Bill dealing with criminal offences applied to persons who had signed off false statements.  The person concerned should be held liable for tax evasion but the Bill made provision for some protection if the person was truly unaware that someone else in the organisation had committed fraud.  SARS preferred to base estimates on facts but the necessary factual information or supporting documentation were not always available.  SARS was required to justify the estimate.  Certain ministerial powers could be delegated to the Director-General of the National Treasury but the power to issue regulations (for example) could not be delegated by the Minister.

Mr Tomasek said that a lifestyle audit was a comparison of the reported income and the lifestyle of the individual concerned.  For example, a person declared an annual income of R60,000 but had a private plane and owned a wine farm.  Lifestyle audits were one of the techniques used by SARS to determine the validity of the information provided in tax returns.  Tax Court judgments were reported anonymously.  However, the name of the defendant of complainant became known if the matter was referred to the Court of Appeal, the Constitutional Court, if criminal charges were laid or if a Court was requested to repatriate assets.

Mr Makhubela asked for clarity on the provisions concerning the searching of private homes without a warrant if the home was used as business premises as well.

Mr Tomasek explained that SARS could only search that part of the home that was used for business purposes, for example a study could be searched but not a bedroom.  SARS cannot prevent someone from shredding information kept in a safe at home if no part of the house was used for conducting the business.

The Chairperson thanked SARS for the briefing.  The Committee would compile a report on the briefing but was unable to vote on the matter as a quorum of Members was not present at the brifing.  It might be necessary for the Committee to undertake a study tour to investigate the tax systems of other countries.

The meeting was adjourned.