COLLECTING TAX DEBTS: SPARE THE ROD, SPOIL THE CHILD
Author: Ruan Botha
How much tax debt is actually outstanding and does SARS have the capacity to collect all revenues due?
South Africa has passed its first wave of COVID-19 and, with no ace up its sleeve, it takes no hustler to see what hand our economy has been dealt. In his Medium-Term Budget Policy Statement (MTBPS), Finance Minister Tito Mboweni charted the course in securing the country?s economic recovery post COVID-19 by undertaking to stabilise our fiscal deficit and debt-to-GDP ratio. This is, however, not merely for the asking as our economy is expected to contract by at least 7.8%, in comparison to the global forecast of 5.2%.
With whispers of a tax revolt and a foreshadowed fiscal cliff soaking up collected revenue, government?s “bad hand” leaves no room to bluff when it comes to the billions of rands in uncollected tax revenue. The situation looks even more dire as Edward Kieswetter, Commissioner of SARS, estimated the revenue shortfall to be approximately R285 billion. In the current landscape where many non-compliant taxpayers are getting their own way because they are not being held accountable, this begs the question whether collection of outstanding revenue and admitted tax debts is feasible by SARS. This while compliant taxpayers are not getting what they are paying for and bear the brunt of deficits in basic service delivery.
The Finance Minister acknowledged in his MTBPS that ?recent tax increases have generated less revenue than expected, and evidence suggests that tax increases can have large negative effects on GDP growth?. This statement perhaps alludes to the revenue service’s mind shift from over legislating to collecting of current and historic revenue.
SARS? burden to collect tax
SARS is the revenue collecting authority of South Africa and was established in terms of the South African Revenue Service Act of 1997, with the mandate and key objectives of efficient and effective collection of revenue. These objectives must in turn be achieved by the efficient and effective use of resources and the widest possible enforcement of national legislation concerning the collection of revenue.
SARS must further advise the Finance Minister of all matters concerning revenue, including the collection thereof, its powers and follow-through of revenue streams. The former seems to be neglected as SARS registered a revenue collection deficit of R14.5 billion against the revised revenue collection target in the 2018/2019 Tax Statistics Report, and in the MTBPS the Finance Minister predicted even larger revenue shortfalls that will persist over the medium term in 2020/21. This mirrors the historic revenue collection statistics, wherein SARS indicated that billions of rands in historic uncollected tax revenue remain outstanding, all of which fully admitted to being payable.
The Finance Minister further detailed in his MTBPS the key factors affecting current revenue collection: a significant decline in compensation, weaker import outlooks and lower VAT collections, drop in excise duties resulting from the (now lifted) tobacco ban, and reduction in corporate income tax and dividends tax receipts. A possible explanation for SARS? lack in collecting taxes due is hinted at in the Tax Ombud?s report on investigation into systemic issues. Two of the major issues outlined by the Tax Ombud was the fluidity of the PAYE statements of account and SARS? inability to adhere to the dispute resolution timeframes, in that there is a possible aptitude and/or capacity issue.
Commissioner Kieswetter, in a 2020 press release, stated that ?SARS would come down harder than ever before?. Contrary to the point and with current revenue collection spiralling downward, outstanding historic revenue seems to be at the bottom of the list of things to do ? the big question is whether the historic tax debt is in fact real if it is owed but insufficient steps are taken by SARS to ensure taxpayer accountability.
SARS? collection mechanisms and triumphs
The Tax Administration Act holds tax compliance as a central value, shapes the weapons in SARS? arsenal, and enables SARS to issue assessments and select taxpayers for inspection or verification and conduct audits. Some of the Act?s creative mechanisms include third-party appointments in terms of section 179 and issuing of civil judgments by virtue of section 172. SARS may also apply to court for a warrant of execution and, where intent is proven, imprisonment may be sought in terms of sections 234 and 235 of the Act. At this point it is important to note that SARS is a creature of statute and cannot perform any action or exercise any power that is not contained in the Act.
A recent example where SARS applied its mind to collect historic tax debt for the 2006 to 2012 years of assessment is reported in the judgment of the rhino poaching kingpin Joseph Nyalunga v CSARS (90307/2018). The matter revolved around the reviewing and setting aside of assessments in terms of sections 95(1) and 100(1)(a) and (b), wherein the court held that if a taxpayer has not submitted any returns SARS is entitled to issue an assessment based in whole or in part on an estimate, and found in favour of SARS as the taxpayer?s time period to raise an objection had passed.
In the matter of Barnard Labuschagne Inc v SARS and Another (23141/2017) SARS went the extra mile by providing the taxpayer with one of its employees on a full-time basis to assist the taxpayer to get their affairs in order. This dispute relates to the taxpayer?s tax debt comprising VAT, PAYE, UIF and SDL for the dates 2009 to 2017. SARS in terms of section 172 issued a certified statement (to be treated as a civil judgment). The taxpayer applied to court to have the civil judgment rescinded. However, the court held that although a certified statement may be treated as civil judgment for purposes of recovering outstanding revenue, it is not a civil judgment by a court and therefore cannot be rescinded.
In 2019, after obtaining a civil judgment and warrant, SARS moved in on cigarette baron Adriano Mazzotti, and attached assets at his private property for the outstanding tax debt of R33 955 228.22.
SARS is not only clamping down on individuals but also corporate entities, as illustrated in CSARS v Zikhulise Cleaning and Maintenance and Transport Service (14886/16). This matter revolved around a final winding-up order in terms of section 177 of the Tax Administration Act and section 346 of the Companies Act, 1973. The taxpayer, to the detriment of the fiscus, went as far as ceding its contracts to other parties which in turn resulted in a tax debt of R204 million. The court held that should SARS fully comply with the provisions of section 177(3) of the Tax Administration Act, the taxpayer may be liquidated pending the outcome of an assessment under appeal.
SARS has been scrutinising personal income tax and corporate income tax non-compliance and has also zoned in on taxpayers disobeying the provisions of the Customs and Excise Act. This was clearly illustrated in BP Southern Africa (Pty) Ltd v CSARS (19955/2020; 22772/2020), where the taxpayer sought a refund through set-off against import duties where exportation was completed. However, the court found that the taxpayer failed to produce documentation proving export of fuel and SARS correctly snubbed the set-off.
Shortly after the judgment, on 4 September 2020, SARS issued a media statement in which it again stressed the importance of taxpayers providing the necessary supporting documents to comply with the Customs and Excise Act. SARS put this point to the full bench in the Bloemfontein High Court in the matter of CSARS and Another v Alves (A194/2019).
On the VAT front, a couple of cases have been doing the rounds. However, the most noteworthy must be that of horseracing enthusiast Ms Hariram who was sentenced to 10 years’ effective imprisonment for theft and fraudulent VAT claims amounting to R1 981 762.19.
A new tomorrow
Glimpsing into the future, we might see SARS building on a plan of action. SARS and Treasury have detailed their near-term objectives to collect current and historic tax debts as closing the tax gap, remaining focused on international taxes, increasing enforcement to eliminate syndicated fraud and tax crimes, continuing to use third-party data to find non-compliant taxpayers, collecting PAYE and VAT debt, and ensuring that outstanding taxpayer returns are filed and liabilities paid.
As SARS has shown its teeth, one wonders whether the bluff is real, since the revenue collection statistics suggest a different story. With that being said, taxpayers are now more curious than ever as to whether SARS? plans to recover the mammoth outstanding revenue will be successful.
SARS? uncollected revenue ? how real is the debt and feasibility of collection?
In a culture of spoiled, non-compliant taxpayers that do not blink at SARS? well stocked arsenal, SARS must put all its cards on the table and clean its house. Late in 2020 the HAWKS decided to wash the dirty laundry, as one of SARS? own was arrested at their Bloemfontein office ? accused of attempting to solicit a bribe from a taxpayer to write off a historic debt for a mere R20 000. This attests to the sad state of the previous administration and suggests SARS still has a long way to go.
Trapped in economic stagnation SARS cheekily missed its revenue collection target by R300 billion in the past fiscal year and still faces the national debt of R4 trillion. With all its collection powers at hands, why is it then that SARS keeps on missing its revenue collection targets? The Tax Ombud report again sheds some light in confirming that an average of above 80% of matters referred to it were resolved in favour of taxpayers. This demonstrates that even if SARS are missing their targets, the outstanding revenue might not be the country?s real debt as not all assessments issued reflect the true tax position of taxpayers. To make matters worse, not all taxpayers are aware of their rights in terms of the Tax Administration Act and may be oblivious to simple mechanisms of dispute resolution.
Clearly there is a debt. However, how real it is, is up for debate. The more pertinent question is: what does a short-staffed and incapacitated SARS stand to do when faced with section 171 of the Tax Administration Act, which imposes a ban on SARS commencing revenue collection proceedings after 15 years from date of assessment?
This time limit places even more pressure on SARS: it is now time to go all in, weed out corruption, rebuild its house and ensure collection of what is due to the fiscus. Due to the previous administration’s mismanagement, the feasibility of collecting outstanding revenue remains doubtful. For some it might seem as if SARS is grasping at straws but compliant taxpayers must keep faith that SARS will be able to collect the historic debt. The new administration has set the pace. It is too soon to tell what the future holds but one truth remains: when the rod is spared the child is spoilt
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This article first appeared on Jan/Feb 2021 edition of Taxtalk