South African Revenue Services (SARS) overview of its mandate and scope of work
28 July 2014
Posted by: Author: SARS
Recent Meetings for NCOP Finance
Date of Meeting: 23 Jul 2014
Chairperson: Mr C De Beer (ANC)
Documents handed out:
South African Revenue Services (SARS) overview
Audio recording of the meeting:
SC Finance: South African Revenue Services (SARS) overview of its mandate and scope of work 1
SC Finance: South African Revenue Services (SARS) overview of its mandate and scope of work 2
The South African Revenue Services (SARS) briefed the Select Committee on Finance about its mandate and scope of work. The Commissioner acted as Chief Executive Officer (CEO) and was responsible for the administration of the tax and customs laws. The current SARS operating model involved strategic stakeholder interaction, process improvement, information management and compliance and operational risk. There were currently about 25 million people registered as taxpayers with 20.3 million currently active.
The laws that were administered by SARS were discussed as well as the tax life cycle, tax practitioners, international agreements and its modernisation programme. SARS volumetrics were looked at, for example, Personal Income Tax (PIT) contributed 34.5% to tax collection; Corporate Income Tax (CIT) 19.9%; VAT 26.4%; Fuel levy 4.9%; Customs 4.9%; Secondary Tax on Companies/Dividends Tax 1.9% and other forms 7.4%. Other measurements included tax revenue as a percentage of GDP; direct tax compared to indirect tax; cost of revenue as a percentage of tax revenue; custom duty declarations and number of arrivals and departures according to Home Affairs. SARS compliance model was based on three pillars: education, service and enforcement with its emphasis on education and service. Enforcement was only used as the last available option. SARS is involved internationally in the negotiation and finalisation of Agreements for the Avoidance of Double Taxation (DTAs) and Tax Information Exchange Agreement (TIEAs). There were currently 73 DTAs that were in force, six were in the process of negotiations and eight were already signed but not ratified. There were eight TIEAs in force and 10 were still under negotiation while five were still not ratified. DTAs and TIEAs required ratification by both Houses of Parliament. Priorities of SARS going forward included enhancement of technical capability of staff, introduction of single registration of taxpayers across government, implementation of Customs Bills, border management and a refined approach to taxpayer segments such as small business.
Members asked SARS about the noncompliance of the construction industry; the procedure to deal with illegal goods inside South Africa; SARS mentioned it did not have a board but the SARS Act (No 34 of 1997) made provision for an advisory board; what was the current status of the ombudsman; whether SARS was responsible for the fluctuation in the fuel price as this affected the working class; the higher number of arrivals than departures; if there was a task team dealing with tax evasion. They urged SARS to fast-track the issuing of tax clearance certificates for small businesses and that it ensure that foreign owned shops in the townships complied with tax laws.
South African Revenue Services (SARS) mandate and scope of work
Mr Kosie Louw, SARS Chief Legal Officer, indicated that SARS played an instrumental role in the economy of South Africa and it was important to ensure that people and companies complied with their tax obligation. In terms of the SARS Act (No.34 of 1997) the mandate of SARS was to collect all revenue, ensure enforcement of the tax and customs legislation and also provide a customs service to control the movement of goods into and through South Africa whilst facilitating legitimate trade. SARS was also mandated to advise the Minister of Finance on matters concerning revenue, as well as the Minister of Trade and Industry on matters concerning the control of goods. Mr Louw indicated that the SARS advisory board had been abolished as it did not have decision-making powers. The Commissioner acted as Chief Executive Officer (CEO) and was responsible for the administration of the tax and customs laws. The current SARS operating model involved strategic stakeholder interaction, process improvement, information management and compliance and operational risk. There were currently about 25 million people registered as taxpayers with 20.3 million currently active and about 14 000 people working at SARS and the bulk of employees worked in the operational area. There were also about 3 million active companies paying taxes and 0.3 million active trusts.
SARS is constantly modernising its tax systems and processes so as to simplify and standardise tax returns, improve compliance and reduce operational risks. SARS had to deal with enforcement investigations for those companies and people found guilty of tax evasion. It was critically important for SARS to be accessible to people and a lot resources were spent on building new branches, call centres and self-service options. SARS operations involved compliance centres, taxpayer and trader education, processing and auditing, account management and debt.
SARS governance mechanisms ensured the proper functioning of SARS and these involved the Minister of Finance, Public Finance Management Act (PFMA), Auditor General’s Office, Parliament, Courts, Office of the Tax Ombud, Audit Committee, Internal Audit and various other laws.
Mr Nathi Nxele, Senior Manager: Product Oversight - Personal Income Tax, Legal and Policy Division of SARS, mentioned SARS' core values: mutual respect and trust, equity and fairness, integrity and honesty, transparency and openness, courtesy and commitment. Individuals and companies had to realise the role they played in stimulating the economy of South Africa and in assisting those who were still marginalised. The laws administered by SARS were divided into those dealing with the main tax (Personal Income Tax (PIT) Income Tax Act of 1962; Corporate Income Tax (CIT) Income Tax Act of 1962; Value Added Tax guided by the Value Added Tax Act of 1991) and smaller taxes (Dividends Tax guided by Income Tax Act of 1962; Donations Tax - Income Tax Act of 1962; Skills Development Levies - Skills Development Levies Act of 1999; Estate Duty - Estate Duty Act of 1995; Securities Transfer Tax - Securities Transfer Tax Act 2007; Transfer Duty - Transfer Duty Act of 1933).
PIT was paid by individuals on their taxable income above the tax threshold and the bulk of PIT was paid through Pay As You Earn (PAYE) and the provisional tax system. PAYE was the employees tax deducted monthly by the employer from employment income earned by an employee, and Provisional Tax was paid on six-monthly basis on income not subject to PAYE i.e. business income. Both PAYE and Provisional Tax were mechanisms to collect tax in advance on an on-going basis during the year to avoid paying a big once-off payment on assessment. CIT was paid by all legal entities such as companies on their taxable income at a rate of 28% and the bulk of CIT was paid through the provisional tax system by companies. Small Business corporations pay tax on a concessionary progressive rate scale ranging from 0% to 28% and this was mainly to incentivise and develop small businesses.
Mr Nxele noted the main duties and levies collected by SARS in terms of the Customs and Excise, 1964 are: Customs Duty; Excise Duty; Air Passenger Tax; Fuel Levy; Air Departure Tax and an Electricity Levy
Mr Louw indicated that the SARS compliance model was based on the three pillars of education, service and enforcement. It was important to educate people about the importance of tax and SARS was already educating community members, students at schools and universities about the tax obligation so that when they start employment or owning businesses they would know what their responsibility is. The service part involved making it convenient for tax payers to pay their taxes, and also encourage compliance. SARS was obligated to enforce compliance to those who were committing tax evasion. The vast of majority of taxpayers were compliant and were willing to comply with the tax laws and SARS was also facilitating voluntary compliance. SARS was also looking at cases of those who were willing to pay taxes but not able to because of the distance to SARS branches as in the case of rural areas and those who were uninformed about the procedure to pay taxes. There was also a small segment of individuals and companies who were unwilling to comply with tax laws, and SARS was obliged to use enforcement.
Mr Louw stated that the Customs Value Chain at SARS involved:
- Control of places of entry and exit
- Control of imports and exports goods
- Advanced reporting of imports and exports
- Registration and licensing
- Movement in and out of terminal and deports
- Tax status of goods
- Clearance and release of goods
- Collection of debt due
- Dispute resolution and judicial.
Mr Louw said that tax practitioners played an important role as intermediaries to assist taxpayers to comply with obligations. Only those tax practitioners belonging to a recognised controlling body were allowed to charge taxpayers for advice. In addition, tax practitioners must register with SARS as tax practitioners who were now regulated in terms of the Tax Administration Act, 2011.
SARS was involved in the negotiation and finalisation of Agreements for the Avoidance of Double Taxation (DTAs) and Tax Information Exchange Agreement (TIEAs). There were currently 73 DTAs that were in force, six were in the process of negotiations and eight were already signed but not ratified. There were eight TIEAs in force and 10 were still under negotiation while five were still not ratified. DTAs and TIEAs required ratification by both Houses of Parliament according to section 231(2) of the Constitution. SARS was also involved in the negotiation and finalisation of Customs and VAT Mutual Assistance Agreement (MAAs). There were 15 Customs MAAs in force and 11 were under negotiation while six were already signed but not ratified and there were two VAT MAAs signed but awaiting ratification. Mr Louw noted that these agreements were of a technical nature and classified as section 231(3) agreements of the Constitution. SARS assisted with the legal framework of the One Stop Border Post (OSBP) Agreement between South Africa and Mozambique and also administered various multi-lateral and bi-lateral Preferential Trade Agreements.
Looking at volumetrics with the SARS environment, Mr Louw compared direct versus indirect taxes, noting that in 1994/95 direct taxes contributed 53.8% of total tax collection and by 2008/09 it was at a high of 62.7%. The CIT contribution increased from 11.9% in 1994/95 to a high of 26.5% in 2008/09 and subsequent to the recession had only recovered to 19.7%. Tax to GDP ratio had also dropped in 2009/10 to 24.4% but had since then steadily increased. SARS was established during the late 1990s and hence the cost of collection was reflected from only 2000/01. The cost varied, from a high of 1.23% in 2005/06, this had subsequently declined to below 1%. The cost of collecting revenue in South Africa was compared to 17 other countries such as Russia, Brazil and India. Customs Duty was not a big part of revenue collection but played an essential role in trade policies. The Department of Home Affairs (DHA) noted that in 2013 South Africa received about 19,758,215 arrivals and had 18,493,254 departures. Tax was collected at all ports entries including land border ports, airports, and harbours. SARS was concerned that the number of arrivals in South Africa exceeded the departures and there was a need to work with different departments in order to equalize this.
PIT contributed the most to tax collection with 34.5%; CIT 19.9%; VAT 26.4%; Fuel Levy 4.9%; Customs Duty 4.9%; STC/DT 1.9%; Other taxes 7.4%
Mr Louw stated that over the last few years SARS had gone a long way in modernising its tax systems and processes such as:
- Reducing, simplifying and standardising returns
- Electronic filling of PIT returns (currently 99.36% of returns were submitted electronically)
- Pre-population of PIT returns
- Increasing SARS footprint (by means of mobile tax units)
- Centralising the processing of Customs document at four hubs
- Introduction of enhanced risk management systems for Core Taxes
- Introduction of a new Customs Management System.
The priorities of SARS going forward included the enhancement of technical capability of staff; this was to ensure that people working at SARS were skilled and well-equipped to deal with tax collection and avoidance of fraudulent activities and this included regulation of intermediaries. SARS was planning to introduce single registration of taxpayers across government. SARS also planned to enhance collaboration with other government institutions such as the DHA, especially in border management, and the DTI. The Customs Bills had been processed by the Select Committee on Finance last year and still needed to be implemented and it would take SARS a year to 18 months to implement the Customs Bills. SARS also wanted to refine its approach to taxpayer segments, especially small business as they were contributing to employment and poverty reduction.
Ms T Motara (ANC) suggested that SARS needed to make presentations available to the Members the day before the meeting so they could be familiar with the content under discussion. She said Mr Louw had mentioned that SARS did not have a board but according to the SARS Act (No. 34 of 1997), part 3 made provision for the establishment of an advisory board. She wanted to know the current status of the tax ombudsman, as the ombudsman was seconded from SARS personnel. She indicated that an ombudsman needed to be an independent person as you cannot be both a player and a referee at the same time.
Mr T Motlashuping (ANC) added that indeed the SARS Act was very clear on the separate roles of the accounting officer and an Executive Authority.
Mr Louw apologised that the SARS Act version handed out to the Committee Members was not the correct amended version. There had been an advisory board when SARS was formed but this was not a decision making board hence the board was subsequently abolished. In terms of the tax ombud, SARS took the United Kingdom (UK) model where the tax ombud was not appointed by SARS but appointed by the Minister of Finance and the ombud has a contract with the Minister. The ombud is required to report to the Minster on an annual basis..
Mr Franz Tomasek, Group Executive for Legislation and Policy Research, SARS, said that the tax ombud was appointed by the Minister of Finance, and this was also the case in Canada. Taxpayers’ information was confidential and this was required by law and keeping the information within the SARS structure was important for confidentiality. South Africa had also a Public Protector that acted as an ombud for all of government institutions and SARS needed to take this into consideration when designing the structure of its organisation.
Mr S Mohai (ANC) acknowledged that SARS was one of the outstanding institutions in South Africa. He proceed to mention that there were areas for improvement that needed to be highlighted; including non-compliance in the construction industry and the proliferation of illegal cigarettes. He asked what procedure SARS took when it found illicit goods, whether at airports, harbours and ports of entry.
Mr Louw responded that SARS compiled a list of industries highlighted as risk areas and this included the construction industry, and the illicit economy, especially in the tobacco industry. It was concerning that almost a quarter of cigarettes consumed in South Africa were illegal and this was a massive loss to potential revenue collection. SARS was working together with the South African Police Service (SAPS) to combat the illegal economy. SARS ideally planned to prevent illegal goods before even reaching South Africa and he said the customs laws gives SARS extensive powers to confiscate, destroy or re-export the illegal goods.
Mr E Von Brandis (DA) commended SARS for its sterling work in revenue collection and stated that South Africans should be proud about having one of the most efficient revenue collections in Africa. The PIT return of 34.5% was encouraging and showed the willingness of South Africans to comply with SARS. It was worrying that South Africa had higher numbers for arrivals than departures, as the situation needed to be balanced.
The Chairperson pointed out that arrivals and departures of people in South Africa was the terrain of the Department of Home Affairs not SARS.
Mr Louw responded that time difference between countries needed to be taken into consideration when dealing with arrivals and departures, as different time period could overlap. The high number of migrant workers in South Africa from countries like Zimbabwe, Lesotho and Mozambique also had a potential to distort the situation.
Mr M Khawula (IFP) stated that he was also concerned about the tax ombud being both player and referee at the same time. He wanted to know if SARS was playing a role in the fluctuation of the fuel price as this was affecting the working class. He asked for clarity on the procedure taken by SARS in fraudulent cases especially in Customs and Excise. He asked if any government officials were involved in fraudulent cases, and asked SARS to explain the fact that 10% of fraudulent cases involved foreigners. He asked if SARS was linked to government institutions and the private sector as this tied in with the growing trend of tenderpreneurs. Was there a special task team that focused on follow up of those arrested for fraudulent activities or tax evasion? He was concerned about cases of widowers who complained about double taxation and urged SARS to explain this matter.
Mr Louw responded that SARS did not have power over the adjustment of fuel price levels. SARS did not have figures on fraudulent cases and admitted that there were government officials involved in these crime syndicates. SARS was now working together with the DHA and financial institutions like banks to combat this problem. Although electronics made tax collection easier, there were reported cases of fraud committed by unscrupulous people. Widowers were not doubled taxed, but because the South African PIT worked on a progressive basis, this meant that tax collection was higher when the income of the deceased and the widower was combined. SARS now allowed people to ask their employers or pension funds to deduct a higher amount from one of the income streams so as to allow a person to pay a higher amount of tax during the year and avoid taxation on two incomes at the end of the year.
Mr L Gaehler (UDM) said he was impressed with the presentation by SARS and there was no doubt that South Africa had one of the most efficient revenue collection institutions in Africa. He was concerned that SARS had opened a new office in Mthatha as this was likely to cost those people living in small towns in Eastern Cape as they needed to travel a long distance to reach this SARS branch office. Did SARS have a special team that focused on the problems faced by small business, especially the delays in the issuing of a tax clearance certificate. He asked if SARS was aware that the majority of shops owned by foreigners in the townships were not complying with tax laws and this meant money was getting out of the country.
Mr Louw responded that SARS needed to deal with distances from branch offices. Part of its priorities included increasing its footprint in rural areas and places located in the periphery. Although SARS prioritised using electronic means of assistance, however, people still preferred a physical interaction. SARS was accommodating small business as this had the potential to create job opportunities for South Africans. SARS was concerned about big corporate companies that were avoiding their taxes, through restructuring their profit so as to pay little or no taxation. SARS was working together with the South African Local Government Association (SALGA) to ensure that illicit businesses were eliminated and foreign and local businesses in the townships also needed to be taxed. He was not aware yet of how the Umtata branch affected businesses in small towns in Eastern Cape and it was an important factor that still needed to be taken into consideration.
Mr Motlashuping commented that he was glad that it had been picked up that the SARS Act (No.34 of 1997) was the incorrect version as it did not show the amendments. He wondered about the authenticity of other documents handed out at other committee meetings.
The Chairperson once again commended the level of professionalism at SARS and the way it managed to simplify the process of tax collection. This was likely to encourage compliance and higher tax returns. He thanked SARS for its presentation. He mentioned that Members would be provided with the amended version of the SARS Act.
The meeting was adjourned.
This article first appeared on pmg.org.za.