HOPE FOR SARS REJUVENATION
Author: Gasant Jacobs
After the devastation at SARS and, in the face of economic challenges, can SARS regain the respect of taxpayers and its position as enforcer of equitable tax laws? Find out why the writer of this article thinks it can.
As 2020 finally came to an end, no one considered it soon enough. It was that hard a year. But 2020 was not all doom and gloom. Yes, we had a global pandemic, we had the collapse of the global economy, and many South Africans were plunged into even greater hardship. It is hard to conclude which was worse, the economic devastation or the health and social meltdown South Africa had to endure because of this pandemic.
The year ended with the announcement of the discovery of a range of vaccines, and hopefully this will herald a new beginning for 2021. As the country looks to rebuild the South African economy and ease the societal devastation caused by the premature passing of many of our loved ones, one thing crept up on us almost unnoticed: a rejuvenating SARS.
Much has been written over the last few years about the systemic breakdown of the once widely admired tax administration. The devastation of the systematic hollowing out of SARS not only had a human toll, but gradually SARS was beginning to lose its awe and aura in the eyes of the tax-paying public. SARS became just another state institution: inept and run by government-appointed, pliable management, with little or no experience and even less respect from the taxpayers. For many taxpayers, it was no longer a simple decision to be compliant, because SARS was no longer perceived as that institution which will ensure that there will be consequences for noncompliance.
Over the last few years, SARS appeared in the media mostly for all the wrong reasons. This continuous blitz that we were accosted with had the inevitable consequence of taxpayers beginning to think that if SARS is so corrupt in itself, how could the tax administration even morally expect that hard-working South Africans should pay their taxes, especially if the titans of state capture were paid by SARS instead of them paying SARS?
The silver lining to an otherwise dark cloud
One silver lining of an otherwise dark 2020 is that South Africa appointed Edward Kieswetter in the year before the pandemic wreaked such devastation. As if it was not hard enough to turn the once mighty SARS into an institution that was to be respected again, the first anniversary of the appointment of the new Commissioner was marked by SARS having to give the country a half a trillion rand as COVID-19 relief; money the country simply did not have to give.
In March 2019, SARS appointed the new Commissioner on a five-year contract, and now, almost two years into this appointment, substantive, systemic changes have become apparent. At the beginning of 2020, SARS released its first five-year strategic plan with the new Commissioner at the helm, and it was like the old SARS came back. The plan included:
Re-building public trust and confidence
Providing clarity and certainty
Making it easy for taxpayers and traders to comply with their obligations
Detecting taxpayers and traders who do not comply
Expanding the use of data
Modernising its systems to provide digital and streamlined online services
The strategic plan is part of an offensive that is intended to sway public opinion and looks to the above interventions to serve as a measure that helps to ensure that the top three words the public associates with SARS are all positive. It also aspires to reduce the tax gap to 10?15%. It is because of this tax gap that we argue later in this article that the money is in fact there.
At the end of 2020, the green shoots of rejuvenation are becoming self-evident. During the last quarter of the year, SARS appeared in the news on multiple occasions, and this time for all the right reasons. Tax cases were being finalised (and seen to be finalised) with many delinquent taxpayers either going to jail or having to pay SARS the outstanding taxes, coupled with heavy penalties and interest. Of course, SARS is losing some of the cases as well, but this bodes well for our legal system, showing that the taxpayer can dispute a SARS claim and have full confidence that he or she will get a fair shake when the matter is heard.
When the new Commissioner was appointed in 2019, SARS was in serious decline. Less than 67% of the public had confidence in SARS. Voluntary tax compliance was estimated to be less than 67%. Yet, less than 30% of audit interventions yielded results.
Is the money really out there?
The Davis Tax Committee had its role expanded by the Finance Minister in 2019 and was mandated to examine the “tax gap”, that is, the gap between what should be and what is actually collected. Since then, it has been working closely with authorities to figure out the sum total of losses. The estimated R50 billion figure includes losses from customs, VAT, base erosion and profit shifting (BEPS), and the non-payment of tax by wealthy individuals. Judge Dennis Davis, head of the committee, suggested that the figure could potentially be higher, with the amount lost due to VAT fraud and tax evasion by high-net-worth individuals yet to be quantified. “If you take all of that, a R50 billion estimate is very conservative”, he said.
Over the last few years, SARS struggled with performance issues and tax revenue collection has been below forecasts for some time, compounded by the fact that the country is in a deep recession. The pandemic accelerated debt levels and the unemployment rate, while at the same time state enterprises require constant bailouts. Even before the pandemic, Treasury identified poor economic conditions, low business confidence and a lack of reliable electricity supply as some of the key contributors to the decline in tax revenue witnessed over the past few years.
According to SARS, about three million South Africans accounted for 97% of the country?s personal income tax collected in 2019. In Q4 of 2020, President Ramaphosa presented the South African Economic Reconstruction and Recovery Plan to Parliament. This plan warned that South Africa will not be able to meet the Finance Ministry?s debt targets and it may be undesirable for it to attempt to do so when the economy is being battered by the fallout from the coronavirus. In short, South Africa is running out of money, and time to address its financial woes.
Instead, the President?s plan proposed a number of tax hikes and changes to be considered, including:
Increases to the fuel levy and estate taxes
A three-year ?solidarity tax? that would increase taxes for higher earners
The introduction of a basic-income grant that could cost R243 billion a year and would necessitate tax increases
Pension funds and other private investors backing infrastructure projects if there is a clear pipeline for the next 10 to 20 years
The South African tax base
In its last annual report, SARS and the National Treasury indicated that only 3 million out of the country?s population of 56 million paid almost all of the personal income tax in 2019. This constitutes a group of just over 5% of the country that has to fund the rest. Added to that, the contributions from companies ? the third largest contributor to state coffers ? were down substantially in the tax returns submitted during the 2019 fiscal year.
SARS table showing income by tax type
SARS? data show that personal income tax, corporate income tax and VAT remain the largest sources of tax revenue, comprising approximately 80% of the total tax revenue collections.
Astonishingly, according to SARS figures, only 24% of companies that submitted tax returns were profitable. ?Sluggish economic growth, structural challenges in some sectors of the economy, low confidence levels and political uncertainty? were pointed out as factors that impacted on company profits and tax contributions. This is an illogical situation. A cursory glance at the country?s stock exchange will show that shareholder value has increased exponentially over the last five years. Is it inconceivable that shareholders can continue to increase their value but their companies are not profitable?
The graph below is just as astonishing.
SARS table showing taxes on income and profits (personal income tax versus corporate income tax)
How is this even logical? Companies are reporting record profits, the stock markets around the world are breaking through the barriers, company stock prices are soaring on all global bourses, but the tax burden of companies remains about the same as about a decade ago? How is this even possible? These two tables are a manifestation of what has commonly been referred to as BEPS, and it seems to continue unabated, despite the vast policy changes which were introduced by tax administrations around the world.
So, what can SARS do to secure stable sources of revenue to provide the social goods expected by the South African populace?
The required interventions
There has been a marked improvement at SARS since 2019. The Rogue Unit report (and all the baggage that comes with it) has finally been put aside. This will allow SARS to regain the moral high ground, which is absolutely imperative if SARS hopes to succeed in securing that holy trinity of public confidence, voluntary compliance and reducing the tax gap. The answer lies in transparency. As taxpayers, we need to know that we can trust SARS to act with integrity. And given the current political climate, and apparent lack of consequence management for almost any kind of malfeasance, the public needs to know that SARS is once again sitting on that perch of being beyond moral reproach.
Artificial intelligence and reliance on data
The Commissioner is known to be a big supporter of improved technology to increase tax efficiency. The fact that SARS introduced auto-assessments for this past tax year is indicative that SARS is addressing the digital demands of collecting tax from individual taxpayers. SARS now needs to show a similar determination to introduce the tools that will curtail the rampant transfer pricing abuses that affect tax administrations throughout the African continent.
SARS graph indicating tax revenue by category
Over the last few years, only corporate income tax reduced markedly, while revenue for every other form of tax increased over the same period. Are we to imagine that company profits are on a sustainable decline whilst shareholder wealth has increased exponentially over the same period?
The decision by SARS to re-establish its Large Business Centre (LBC) will go a long way to ease the administrative and compliance burden of corporate taxpayers and multi-nationals. It should enhance tax collections of a component of the tax base where they have fallen sharply since the centre was dismantled in 2015 following major restructuring under Commissioner Tom Moyane.
Hopefully, the new LBC will encourage compliance, ensure responsible enforcement and offer specialised and sector-specific expertise to large businesses. Sector-specific expertise needs to be developed in the most crucial sectors in the economy, including financial services, e-commerce, mining and agriculture. Expertise in highly complex tax legislation, notably international taxation, including transfer pricing, needs to be nurtured to ensure that revenue is taxed where it is generated. This will arm SARS with greater administrative knowledge, better risk-profiling in terms of audits, and better audit and dispute outcomes; ultimately, cajoling corporate taxpayers to greater levels of voluntary compliance.
We saw, towards the end of 2020, the SARS Commissioner was appointed as the Vice Chair for ATAF. This is a significant signal to the international community that SARS is back to reclaim its rightful place as a leader in tax administration on the African continent. It is essential that SARS rekindles its multilateral relationships in the sphere of international tax, especially so in Africa that could potentially become a massive unitary trading block.
In March 2020, we saw the change in tax law that dealt with the treatment of foreign income. Before the change, South African tax residents who earned foreign income had their income fully exempted by SARS if they were outside the country for more than 183 days. The law has now been amended. South African tax residents who earn foreign income will have the first R1.25 million of that income exempt from tax but will have to pay tax on the income in excess of the first R1.25 million. This simple change in the legislation is akin to the introduction of a whole new tax revenue stream. Hitherto, those who earned foreign income were deemed outside of the tax net. Though the change in the law was touted long before the new Commissioner joined SARS, the Commissioner?s belief in technological advancement for an increasingly efficient SARS should go a long way to ensure that this new revenue stream is adequately tapped.
We believe the money is out there. It might require some policy tweaks, but more importantly, it requires inspirational leadership. As 2020 came to a conclusion Elon Musk, the South African-born CEO of Tesla, sent out a memo to his staff imploring them to keep up the levels of production over the festive season to ensure that their clients who are waiting to take delivery of their vehicles are not disappointed. He later sent a second memo, imploring those same individuals to collectively put their heads together to come up with ways of how the company can be more cost efficient. This, let me remind you, is from the world?s second richest man, addressing the employees of one of the world?s most valuable companies, imploring them to improve productivity and reduce costs!
SARS says its vision is to ?build a smart, modern agency with unquestionable integrity that is trusted and admired?. We now look to 2021 to see how SARS regains our trust as an admirable tax administration; whether SARS will succeed in getting tax compliance, voluntary or otherwise.
We believe that in the foreseeable future the institution will be restored to its former glory, as can be seen by the green shoots which appeared in an otherwise dark 2020. Still, it needs the fullest cooperation from tax professionals and industry bodies who advise on tax strategies.
Please click here to complete the quiz.
This article first appeared on Jan/Feb 2021 edition of Taxtalk