SARS Budget and Strategic Plan: briefing

Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES
6 April 2005
SARS BUDGET AND STRATEGIC PLAN: BRIEFING

Chairpersons:

SARS Budget vote
SARS Strategic Plan 2005/08
SARS Divisional Report Cards 2004/05
PowerPoint presentation on the Strategic Plan

SUMMARY
The South African Revenue Services briefed the Committees on its budget and Strategic Plan. SARS managed to collect R354, 9m in taxes. A lot of work was still required to close the tax gap and promote a culture of compliance with tax obligations. A lot of work was being done in the informal sector and the second economy on how to incorporate them into the tax system. The registration of taxpayers had increased. The number of tax returns that were delivered in time had also increased.

The debt book stood at about R60 billion. However, about half of it was subject to write-offs. A process to determine uncollectable debts was underway. People die or go into liquidation making it difficult for the debt to be collected.

The current budget allocation was enough for SARS to achieve its objectives for this year. However, it might require additional resources should it get some of its plans in place.

Questions that were raised during discussion focussed on, amongst others, the following:
- the size of the debt book, the possibility of settling the debt book this year and what portion of the book was subject to litigation.
- how much revenue was lost due to death of taxpayers and the impact of HIV/AIDS on revenue collection.
- whether there were further dividends to be obtained from tax administration reforms.

MINUTES
SARS briefed the Committees on its strategic plan 2005/08. The following delegation from SARS attended the meeting: Mr P Gordhan (Commissioner), Mr V Shabalala (general Manager: Zone 1), Mr T Matsheka (General Manager: Corporate Relations), Mr K Louw (General Manager: Law Administration), Mr E Kieswetter (General Manager: Large Business Centre), Mr L Radebe (General Manager: Operations and Service), MS S Zinn (General Manager: Human Resources), Mr P Mangrey (General Manager: Finance), Mr P Richer (General Manager: Risk Management) and Mr K Jarvis (General Manager: Technology Service).

Mr Gordhan made the presentation. (See document attached). He outlined the mandate, achievements and challenges of SARS. He invited the Committee to join SARS in celebrating its success in terms of collecting taxes. It had managed to collect R354, 9b. A lot of work was still required to close the tax gap and promote a culture of compliance with tax obligations. There would be further publication of names of offenders who were prosecuted for tax offences in order to demonstrate the negative consequences of non-compliance. It was important to protect the economy against illicit trade. A lot of work was being done in the informal sector and the second economy on how to incorporate them into the tax system.

Discussion
Mr K Moloto (ANC) noted that SARS would conduct enforcement campaigns that would focus in sectors like the sweet, cellular phones and clothing industries in order to improve compliance with tax obligations. These sectors warranted extra attention. The 2003/04 Annual report included other sectors like the petroleum, chemicals, mining and financial services. Those sectors were, however, not listed in the Strategic Plan under discussion. He asked if SARS was satisfied that those sections were effectively dealt with and therefore did not need more attention. He also asked how they managed the balance between trade facilitation and securing ports of entry against illicit goods. SARS had in the past indicated that it was assisting the National Prosecuting Authority (NPA) build capacity relating to the prosecution of tax and customs offences. This was also not mentioned in the Strategic Plan. He asked if one could conclude that the NPA had the necessary capacity.

The Commissioner replied that South Africa was still building systems, compliance environment, relationships and understanding of what really happens in the economy. The existing systems were not fully compliant but were in a better position than they were before. The strategy of attending to a select number of sectors was paying dividends and outstanding sectors would be addressed over time. None of the other sectors were out of SARS’s sight.

He said that there had always been a dilemma on the issue of trade facilitation or control. Business people would normally say that there should be more trade facilitation. The United States of America (USA), after the September 11 attacks, would not guarantee that exports would get in their country unless the exporting country had the right controls in place. South Africa was one of the first 20 countries to sign the Container Security Initiative agreement with the USA. The agreement assured that containers leaving South Africa, particularly from the Durban harbour, would be able to get through the green line once they got into the USA and be subjected to further stoppages. The USA had some of customs officials sit in the Durban harbour. Each of the consignment that went through the harbour went through their risk management process. They would, with the co-operation of SARS, identify particular consignments that they might want to look at. They were not involved in inspection since this was done by SARS. There was a need for better co-operation with trading partners, risk profiling, intelligence and systems. The kind of risk management systems that SARS was building would put it in a position to deal with some of the problems. Businesses had a schizophrenic approach to this issue. When times are good they would expect SARS to just let goods go through the harbours, borders or airports. They would call for more stops when things were bad for them. There would always be unsatisfied people whether one made more or less stops. The textile industry was more likely to say that SARS was not making enough stops. There was a need to find the right balance.

Mr Kieswetter added that 85% of SARS’s audit activities in large business focused on income tax and a small amount of their activities focused on Secondary Tax on Companies and Pay as You Earn. Increasing would focus would be placed on value Added Tax. The three largest focus areas were financial services, mining and manufacturing. The compliance risk issues in these sectors related to legislation that governed them and the complexities of structures and schemes that they used. The retail sector was an emerging risk and the compliance risk related to the nature of trading and related activities. 40% of audits in the last year focussed on the financial services, mining and manufacturing sectors. These sectors produced about 60% of the total revenue. Almost 70% of revenue derived from SARS’s compliance efforts came from these sectors and this showed that a better understanding of the legislation and schemes governing the sectors would always yield positive results. Audit activities in the retail sector accounted for only 2% of all audit activities and the revenue from compliance activities in large businesses was 5%. There was an opportunity to yield additional results from this sector.

The Commissioner added that the NPA was still building capacity. SARS had not yet at what new capacity the NPA might require. It would soon meet with the new Director of Public Prosecutions in order to make a new route of co-operation. Prosecution capability was very important to SARS. SARS could identify cases and investigate them but the NPA was the institution responsible for prosecutions. Tax and customs were very complicated areas that required specialised skills. The co-operation between the two institutions was very good. It was hoped that a new platform and plan to build the necessary skills would be laid down after the meeting.

Mr I Davidson (DA) congratulated SARS for good work done in collecting revenue. He focused on the estimation of income. He had no problem with understanding income overrun that would take place as a result of increasing generation of income due to VAT and customs. He did not understand how SARS managed to have overruns from corporate tax. Corporate tax estimates were based on declared earnings. One would have thought that SARS would know the amount declared earnings and therefore be in a better position to determine corporate tax. It was understandable how there could have been income overrun up until March. It was, however, not easy to understand how an amount of R9, 6b came in within three and SARS did not know how it came in. with regard to revenue targeting, he noted with interest that SARS had estimated a 5,1% increase for the 2005/06 financial Year. An increase of 11,1% was estimated for the 2006/07 financial year and 9,5% was estimated for 2007/08. He asked what was the basis of the estimates. The 11,1% increase almost tripled the size of the estimated increase in the country’s Gross Domestic Product.

Mr Gordhan referred to page 52 of the Budget Review (Table 3.1). The table provided the signs. It would lay down a number as the government’s consumption. There had been a number of swings in the indicators in the past. Last year the growth rate was published at about 2.6 or 2.9 but went down to 1,9. Consequently SARS was about R5m short of its target in the last financial year. Sections of the economy that were in the export and resource industries were a lot more sensitive to what happened to the Rand. Retailers and the financial services industries were a lot more positively sensitive to consumption. It was difficult to come up with long lasting predictions or estimates on what was likely to happen. The Medium Term Budget Policy Statement process and the Minister of Finance’s announcement in this regard provided a mid-term opportunity to make adjustments. Significant mid-term adjustments were made in the past years. SARS had learnt a lot on the implementation of section 19(3) of the Income Tax Act. It provided that provisional tax should be paid in line with latest profitability figures. This contributed R7b this year and this money would not have been paid this year had SARS not reminded companies that the provisional taxes that they had paid were not in line with profits that they had declared. This measure could also bring unpredictable results. Depending on the decisions made by companies, one could have a small or big gap between what companies had paid and what they should have paid. There had been instances wherein companies had originally declared zero provisional tax only to declare up to R350m following a phone call from SARS. South Africa had been going through a property boom and it was difficult to predict how long it would last. Banks would do fairy well for as long as it lasted. In December last year it was not anticipated that banks would pay around R4, 5b extra in their provisional taxes. This only became clear in 31 December 2004. By and large there was a lot of unpredictability in the system.

He said that the percentage increase from 2005 to 2007 originally stood at 8%. It came down to 5% due to better collection. There were two drivers of the percentage: baseline trends and what the economy was doing. The increases were likely to be lower if the economy was not doing well.

Mr Davidson asked what was the size of the debt book and what portion of the book was subject to litigation. He also asked if there was a possibility of settling the debt book this year. Syndicates controlled hawking in the second economy. He asked to what extent SARS had a hand on this type of trading. It was estimated that hawking was very big. This made it important to know the extent to which hawkers were escaping the tax net. The Strategic Plan seemed not to have any measures to address this issue.

The Commissioner replied that the debt book stood at about R60b. However, about half of it was subject to write offs. A process to determined uncollectable debts was underway. People die and some go into liquidation making it difficult for the debt to be collected. On the litigation side, there were objection and appeal processes to be followed. It was estimated that about R8b of the collectable debt was subject to the objection and appeal processes. One case could hold up to R2b.

He agreed that the member’s observation was right. There was a connection between the hawker on the street and formal businesses. There was a huge number of foreigners operating clothing, cell phones business and other forms of electronic business and they were becoming more dominant players in the market. They seemed to have the ability to see gaps and seize the opportunity to become business people. It was important to have an understanding of what was happening in the market. There was a need to investigate how the supply chain worked. There were interesting and sophisticated supply chains and networks that were operating in South Africa. Some of the people were generating a lot of money. The challenge was to introduce SARS to such people and also in introduce them to the tax South African system. The intention was to understand the system better before requiring them to pay tax. There was also a number of South Africans who were also not paying tax.

Mr B Mnguni (ANC) said that in terms of the Strategic Plan the revenue estimates stood at 24,4% for 2005/06, 24,7% for 2006/07 and 24,6% for 2007/08. The 2000/03 Strategic Plan had a revenue estimation model on which the revenue collections were based. He asked what was the basis of the estimates if revenue collection was volatile as SARS had indicated. He also asked how much revenue was lost due to death of taxpayers. It was vital to know the extent to which HIV/AIDS impacted on revenue collection. In the past SARS had indicated that it was planning to get business from outside the borders of the country. He asked for a progress report on the initiative.

The Commissioner replied that National Treasury set the target tax-GDP ration. It had been between 24 and 25% in the past few years. It was decided on the basis on expenditure budget or tax revenue to be collected. Some were based on policy decisions. It was generally accepted that the ration would remain within the 24-25% bracket. There was a debate whether it should be more given the developmental challenges the country was facing. The figure was in the 30s in European countries that included social security taxes. The impact of HIV/AIDS on revenue collection was not monitored.

He added that SARS was trying to service other government Departments. A lot of resources were invested in projects with other African countries.

Mr Louw added that SARS assisted a number of southern African countries in helping them to understand whether to switch over to a sale based system or a Value Added Tax system. These countries included Botswana, Namibia and Lesotho.

Mr Shabalala added that SARS had invested a lot in monetary terms and by participating in regional project. There was a special arrangement through which SARS collected tax on behalf of Lesotho Revenue Authority and pass it to them rather than them having to collect it from people who entered Lesotho from South Africa. There was also co-operation on issues of vehicles that were supposed to go to Lesotho but somehow managed to remain in South Africa. The authorities were working on a systemic co-operation on the reconciliation of import-exports figures on monthly basis. They were also working on developing a single administration document. In Swaziland, SARS had invested in the development of an integrated business system to deal with customs controlled across borders. The Swaziland would use the same customs systems used in South Africa. A Memorandum of Understanding would be signed to govern the relationship. The Trans-Kalahari Corridor had worked very well and would be extended to cover Namibia and Mozambique. There was also close co-operation with the Zimbabwe Revenue Authority in terms of the management of customs traffic at the Beit Bridge border post. A Memorandum of Understanding was also signed with Zambia.

Mr Y Bhamjee (ANC) asked if there was any system in place to ensure that SARS did not train people only to lose them to the private sector. People were more likely to go any look for greener pastures if they were not offered competitive salaries.

The Commissioner replied that most people were likely to move to another job if they were offered money even if they were satisfied in their current positions. SARS was in a constant process of developing people within its system and recruiting from the market place.

Ms Zinn replied that the retention of staff was critical given the kind of investment had made in them. A key component of the staff retention strategy was ensuring that SARS of competitive and market related salaries. There was a performance and development management system in place. SARS was an employer of choice to many people and also featured well in the best companies to work for. There were also many opportunities to learn and achieve goals of personal development. There was also an attempt to meet people’s personal growth aspirations. Jobs satisfaction and making people that they were making significant contribution towards the achievement of the goals of the institution was also very important. Good employee-Manager relationships were also very critical in ensuring that people stayed longer in the institution.

Dr R Davies (ANC) said that there were big dividends to be achieved from tax administration. The real question was what further dividends could be obtained from further tax administration reforms. SARS had indicated that its people were doing some work in the informal sector. He wondered what was the strategic thinking behind this. The informal sector and the second economy were not quite the same. The second economy was composed of people to whom growth and development in the first economy did not translate into rising living standards. The informal sector was composed of people outside the regulatory framework. Most people thought that the two were the same and that most of the activities in the sectors were low level activities that would probably not qualify for income tax or any kind of company tax. He wondered if SARS was of the opinion that there were some disguised activities in the sectors that needed to be brought into the tax net. There had been a number of newspaper articles suggesting that there was a number of high net worth individuals who were not paying tax. He also asked what level of improvement the numbers in the performance scorecard represented.

Mr Richer replied that it was necessary to get more information and be able to get a broader understanding of players in the informal sector. Those players should be drawn into the system even though there would not be large amount of revenue derived from them. The value of this was twofold: it would enable SARS to prevent the ability of people already in the system to crawl under the counter. It would also enable SARS to build a compliance culture. It was important to make compliance with tax obligations easier.

Mr T Vezi (IFP) said that the critics of the country’s economic performance and growth would often refer to unemployment and jobless growth. He asked if, in view of the statement that 90% of the times it was the economic factors that determined the revenue collected, it would make sense if one was to use the amount of revenue to respond to the critics.

The Commissioner replied that there was no doubt that there would be some benefits on the revenue side as the economy grew. Job creation was a different aspect and one could not link job creation to revenue growth and economic growth. Recent figures from Statistics South Africa indicated a positive trend in terms of job creation.

Ms R Joemat (ANC) said only three provinces had so been attended to in terms of the Siyakha programmes. The lack of roll out to other provinces was a cause for concern. The Western Cape province had the Red Door programme to assist small business. She asked if there were any plans to work with existing programmes in provinces. She also asked how SARS was assisting the neighbouring countries to improve their systems.

An official from the SARS replied that the Siyakha transformation process had been underway for sometime and was due for completion by August 2005. A lot of work had already been done in the Kwazulu-Natal area and the Western Cape. Work was also done in parts of Gauteng Province. SARS was rolling out the programme to other provinces. Finding the right building from which to work was a major challenge.

Mr Matsheka added that SARS had visited many places in the Western Cape, Free State, Limpopo and Eastern Cape provinces and had learnt a lot about small businesses. The aim of the visits was to listen to small businesses and learn more about the second economy. They were also keen to find out what were the people’s perceptions around taxation. SARS had learnt that the size of the business premises was not indicative of the revenue generated by the business. There were businesses that were trading in 10 square metre shops but making over R1m per month.

Mr Ralane noted that SARS had 1 400 staff members. He asked if the institution was under or over staffed. It was important to know what was the appropriate number of employees that the institution required in order to deliver on its mandate. He also asked if the institution had under spent or over spent in any of its programmes.

The Commissioner replied that SARS had the right amount of staff but not the right mix. Increasing skills and having the right skills in the right positions remained as critical challenges. The strategy was to minimise the number of people involved in back offices activities. However, there was no intention to send people into the street. There was a need for more community tax helpers. SARS was also reengineering the recruitment process.

Mr S Asiya (ANC) asked what was the success rate at the SARS Academy.

The Commissioner replied that there were no examinations that people were pout through and this made it difficult to assess the success rate. There were functional courses designed to help people handle different aspects of their duties. There was also a basic computer literacy course and management training. An evaluation of managers would be undertaken once enough training had been done. SARS would find some way of measuring success.

Mr van Wyk said that government’s performance depended on the availability of resource. He appreciated the performance of SARS and that more taxpayers were paying tax. He referred to challenges that affected SARS operations and opportunities to reduce the tax gap and improve service delivery. He also referred to SARS’s aspiration of administering and collecting revenue in accordance with the law and in a manner that would sustain community confidence in the revenue system and its administration. Many individuals and businesses had escaped the tax system. He asked how much revenue was lost due to non-payment of taxes.

The Commissioner replied that SARS was losing a significant amount of money. It had made some significant progress in the last few years in developing a compliance climate. The real challenge was to make compliance systemic. Paying tax and the right amount of it should be a normal part of a person’s behaviour. The "catch me if you can" mentality still existed. Clever people creatively interpreted the law in their attempts to avoid paying tax. Things had improved instead of deteriorating but there had never been a shortage of schemers.

Mr M Johnson (ANC) asked if there was any co-operation between SARS and other government Departments and institution with regard to auditing of financial statements.

The Commissioner replied that SARS was always in a sharing mood and mode. All Departments were free to visit SARS and see how it operated. However, co-operation was not systematic. It was important for SARS not to be seen to be interfering in other Departments and institution’s affairs.

Mr E Sogoni (ANC) noted that travel allowance had been used to avoid tax liabilities. There were accountants who had colluded with other people in avoiding tax obligations. He asked if any actions were taken against those consultants. The Financial and Fiscal Commission had recommended that provinces should identify areas in which they could implement their own taxation system so as to increase their income. He also asked if it would not be expensive to do business in SA if provinces were allowed to do this.

The Commissioner replied that the issue of taxation by provinces was a serious political issue. One had to decide if a federal or unitary system was better. In the USA each State had a right to decide whether or not to charge VAT and also what percentage to charge. One would get people crossing over from one State to another to do shopping because the other State had little or no VAT. The question was whether this is what was required for South Africa. One should also bear in mind the kind of administrative systems that would be required to make the system work. It was generally accepted that federal and quasi-federal system had complex tax regimes. Brazil was an example of such countries. Such a move could have negative impacts on business.

An official from SARS added that they were looking at all professionals who were involved in illegal activities. Individuals and clients who facilitated illegal activities would be charged with criminal offences. They could also be reported to their Associations. It had been found that some directors of companies were abusing their travel allowances.

The meeting was adjourned.