Report of the Portfolio Committee on Finance on its Oversight of the South African Revenue Services (SARS) Annual Report 2004/05, dated 8 November 2005:
The Portfolio Committee on Finance, having considered the annual report of SARS for 2004/05 and the related presentations by the Commissioner and the senior management of SARS reports as follows:
The Portfolio Committee on Finance held a hearing on 19 October 2005 at which the Commissioner and senior managers from SARS presented the SARS annual report for 2004/05. This was followed by a discussion of issues arising from the documents and presentations during which members of the Committee raised a number of issues. Further Committee deliberations took place in further scheduled Committee meetings.
Given the parliament’s constitutional function to exercise oversight it would be useful if SARS would adopt the format developed by National Treasury for the presentation of Annual Reports. This would enable SARS to focus more succinctly on the key strategic issues.
During its engagement with SARS and its deliberations, the committee raised issues around measures to reduce the tax gap, improve operational efficiency, the need to integrate customs control areas with other organs and departments of government and management of the tax "debt book".
The exceptional performance of SARS revenue collections, which are significantly beyond projections, is a reflection of the implementation of successful measures but also the economic performance in South Africa.
The Committee is of the opinion that the reporting and oversight process could be further enhanced if SARS were to provide specific details relating to the administration of the different kinds of tax returns and other interactions with the public, and also provide a regional breakdown of SARS in this regard. The structure used by SARS provides a sound insight into strategic developments within the organization and should continue to be used but with a revised format corresponding to that developed by National Treasury (NT).
The Committee appreciates the information on SARS’ performance across the organization. However, the Committee would like to see the reporting on performance being linked back to specific performance targets that SARS should set in its strategic plan. The Committee suggests that SARS should look at the performance tables presented in the annual reports of departments and develop a similar format that meets the special needs of the organization.
While the Committee commends SARS for its increased revenue collection it nevertheless remained of the view that the pursuit of more robust revenue forecasts would contribute to the broader strategic planning on the fiscus.
The Committee was not able to detect any obvious flow from the strategic plan to the annual report and in many instances it was difficult (if not impossible) to track how measurable objectives in the strategic plan had been achieved. The use of scorecards to report performance in the annual report makes the process of reconciling plans to actual performance difficult.
The Commissioner pointed out that SARS is still a developing organization and was currently developing a charter of standards and quality of services that would be made public and allow for better evaluations of performance.
Although SARS is not subject to the same reporting requirements as government departments, the Committee is of the opinion that there should be a clear link between targets and actual performance notwithstanding the use of scorecards.
The Committee also expressed their interest in engaging with SARS around the charter of standards before it is finalized.
In response to the Committee’s call for improved precision in revenue forecast the Commissioner indicated that these forecasts are made at a particular point in time and had to take into account a range of variables which made it difficult to ensure 100% accuracy. SARS also factor in their revenue projections on economists future estimates of what is likely to happen in the economy.
However for the period under review three main reasons for these revenue overruns were put forward. Firstly the rapid rate of growth in the economy and increases in consumption exceeded all expectations. Secondly there is better than expected tax compliance of South Africans and thirdly the significant improvements in the internal processes and efficiency of SARS.
In response to the Committees comment on media reports that the tax burden in South Africa is higher than in other comparable countries the Commissioner assured the Committee that the media is misleading the public in this regard, as the comparisons they were making were not context specific. Furthermore the middle income level tax-payer is not being squeezed.
The Commissioner shared the Committee’s concern at the number of non-contributing large business clients and confirmed that SARS was investigating the issue on an ongoing basis in an effort to close down these tax-avoidance schemes. Such clients employed a number of tax specialists. An example of advice been given was that large business clients purchased loss-making companies to offset and reduce company tax obligations.
The Committee raised a number of issues in relation to estimating and reducing the tax-gap. First how does SARS estimate the tax gap? Secondly to what extent do increases in the number of registered tax-payers contribute to increasing revenue? Thirdly what is being done to reduce the GAP, and more specifically to combat tax evasion, broaden the tax base, eliminate tax havens, and ensure tax is collected from the informal sector.
The Commissioner indicated that SARS uses internationally recognized techniques to measure the extent of the tax gap. These methodologies indicate that there is a clear link between increasing tax-payer registrations and closing the tax gap, but that they cannot be used to work out a precise relationship between the two variables.
SARS has adopted a three-pronged approach, which was developed following extensive international research and comparisons, to close the tax-gap. The first prong of this strategy is to create awareness and reach out to people who are unaware. This outreach includes everyone from those in the informal sector to CEO’s and Chairpersons of large companies. At the grass roots level this awareness campaign is intended to inform people about their obligations and how they can pay tax. At the CEO level the awareness is about promoting responsible tax management and assisting large companies to reduce tax risk.
The second prong of the strategy is to make SARS a service oriented organization. There is good evidence to show that people respond well to service. This is reflected in the training provided, the call-centres established, cultural changes and organizational improvements. The third prong of the strategy is to have a strong and visible enforcement arm. At present SARS has the capacity to contest smart tax evasion schemes, but the Commissioner noted that this is an area they need to continually improve and build capacity so as to remain one step ahead of the tax consultants.
The Committee welcomed the number of measures that had been developed and adopted by SARS to reduce the tax-gap.
The Committee inquired about the actual percentage of errors requiring revised assessments, which could be attributed to mistakes made by SARS staff.
SARS confirmed that the measures in place indicate that such errors are on a declining trend. These mistakes are measured manually in the absence of an automated system. SARS added that they do have processes to monitor staff and that staff under perform are sent for further training. SARS nevertheless acknowledged that they need to develop a system to monitor staff errors.
SARS also added that better-informed and skilled tax practitioners will also reduce the number of errors and SARS is doing work with practitioners to help them reduce errors on the part of practitioners.
The Committee raised a number of issues in this area, which covered custom controls, including measures to combat smuggling and the Auditor-General’s comments in this regard.
In response to the Committees’ inquiry on measures to strengthen custom controls and speed-up the necessary infrastructure development at border posts and the failure to meet such targets SARS acknowledged the seriousness of the issue.
Regarding the development of infrastructure at border control posts it was conceded that conditions were terrible and that staff were subject to less than satisfactory living circumstances. However, the Commissioner pointed out that SARS was dependent on the Department of Public Works for the development of infrastructure at border posts.
The Commissioner also acknowledged that the standards at border control post in South Africa are not acceptable, when compared internationally. It was noted that Miami in the United States had implemented a practice where customs are responsible for large "customs control areas", and where the operations of customs takes priority over all other activities. The Commissioner suggested that South Africa should develop a similar approach, with SARS exercising primary control in ‘customs control areas’ supported by other departments.
The Commissioner acknowledged that given current arrangements this would require the agreement of the Departments of Safety and Security and Trade and Industry as regards jurisdiction.
The Commissioner told the Committee that once the departments have reached an agreement then SARS could focus on modernizing and transforming equipment, ensuring greater visibility and building the relevant capacity. This would also enhance SARS’ ability to combat smuggling
The Committee noted with concern the extent of smuggling, and inquired about the measures being developed to address the problem.
Capacity constraints were at the core of the challenge to combat smuggling and the Commissioner pointed out the time constraints linked to its anti-smuggling capacity. This impact on the collection of relevant data and the development of sufficient risk profiles in this area.
In response to the Committee’s inquiry on the delay in purchasing and getting the scanners operational, the Commissioner indicated that the matter is tied up in a PPP process, which is managed by National Treasury. He also pointed out that SARS cannot afford to purchase the scanners without additional financial support and therefore have no alternative but to follow the present route.
The Committee asked what steps were being taken to address the Auditor-General’s comments on in-bond entries.
The Commissioner indicated that SARS had made substantial progress in reducing the number of in-bond entries and that it appeared in the report because they were working from an initial large number. However they have built capacity to improve controls and the matter would improve over time.
The Committee raised a number of questions on the issue of the debt book, namely:
SARS had inherited a large number of legacy problems, which needed to be addressed, while still servicing a large number of clients. The Commissioner acknowledged that existing procedures to manage the debt book were cumbersome and needed refinement. One of the legacy problems was the strategy of "cherry picking" incentives, which resulted in the debts which were easier to collect being targeted. This led to the more difficult debts not being dealt with in time, which often resulted in it becoming impossible to collect such debts. The Committee was assured that a new system, which should be in place by next year, will be automated and cover each individual debtor.
The Commissioner indicated that SARS is using credit bureaus to provide data to trace debtors and professional debt collectors to assist in the collection of debt. However SARS recognises it needs to build capacity in this regard, not only in terms of systems and skills but the number of people to deal with debt.
The Commissioner acknowledged the possibility of confusion arising from the reporting on debt but pointed out that this was due to the quasi-cash system in place at SARS, which is not consistent with financial reporting in other departments.
The Commissioner indicated they would give a written explanation of the different classifications of debt write-offs. He also requested the Committee to assist the process by providing appropriate enabling legislation.
The Committee accepted that SARS had a long way to go, but that it had already made significant improvements to improve compliance and was taking steps to reduce risk through more robust management of the debt book.
Based on its deliberations the Committee makes the following resolutions:
SARS, working together with the National Treasury, must develop appropriate framework legislation to facilitate debt collection and the write-off of debts.