BY RUAN JOOSTE

Finweek English Edition - - Cover Listen To The Podcast On Fin24.com -

AS THE GLOBAL eco­nomic slow­down reaches pro­por­tions not seen in decades, fears are mount­ing that or­di­nary tax­pay­ers will likely pick up the short­fall in the per­cent­age of tax rev­enue to gross do­mes­tic prod­uct (GDP) as a re­sult of lower ex­pected tax rev­enue col­lec­tions from the de­clin­ing prof­itabil­ity of South African busi­nesses.

An­a­lysts ex­pect the per­cent­age of tax rev­enue to GDP to in­crease from 28% in the last Bud­get year – al­ready above the 25% rec­om­mended by the Katz Com­mis­sion – to 30%. Martin Wal­beck, Africa tax di­rec­tor at Ernst & Young (E&Y), says: “A global eco­nomic slow­down doesn’t mean the SA Rev­enue Ser­vice’s rev­enue goals and the strong drive to achieve them will nec­es­sar­ily di­min­ish. Tax­pay­ers can ex­pect more court cases, tax con­tro­versy and au­dits. The fo­cus is go­ing to be on ag­gres­sive tax plan­ning, tax eva­sion and strict ad­her­ence to the law.”

Deneys Reitz tax di­rec­tor Ernie Lai King, agrees. “The over­run on tax rev­enue col­lec­tions for the last Bud­get year was in the re­gion of R9bn and the per­cent­age of tax rev­enue to GDP is around 28%. The slow­down will im­pact on the prof­itabil­ity of South African com­pa­nies and busi­nesses, which will trans­late into lower 2009/2010 tax rev­enue col­lec­tions.”

King says South Africans can ex­pect the per­cent­age of tax rev­enue to GDP to in­crease even fur­ther. “The com­plex­ity in our tax sys­tem con­tin­ues to in­crease and calls for an over­all de­crease in the cur­rent high ra­tio of tax rev­enue to GDP are likely to go un­heeded.”

That may seem para­dox­i­cal at a time when over­all tax rev­enue should be shrink­ing, in tan­dem with a gen­eral de­cline in cor­po­rate prof­itabil­ity. But the ve­neer of an or­gan­i­sa­tion that – from afar – seems a model of State ef­fi­ciency be­trays the re­al­ity of ill-equipped and un­skilled Rev­enue au­di­tors un­der im­mense pres­sure to reach year-end tar­gets set by their su­pe­ri­ors.

An in­ves­ti­ga­tion by Fin­week into Rev­enue’s cen­tral case man­age­ment and tracking sys­tem – used to ver­ify and re­port tax as­sess­ments and col­lec­tions – paints a scur­rilous pic­ture of sys­temic malaise where un­der­skilled and un­qual­i­fied au­di­tors and se­nior man­agers have in­vari­ably dis­re­garded in­ter­nal con­trol pro­ce­dures, flouted pub­lic ac­count­abil­ity stan­dards and found “creative” ways to raise, in­crease and de­fend tax as­sess­ments at the cost of tax­pay­ers.

Fin­week has it on good au­thor­ity that close to 500 Rev­enue au­di­tors’ only qual­i­fi­ca­tion is ma­tric. When we put that to Rev­enue, Lo­gan Wort, GM: Rep­u­ta­tion Man­age­ment, flatly de­nied the al­le­ga­tion. “The fact that Rev­enue is run by ma­tric­u­lants is an ex­ag­ger­a­tion,” he says. “We’re aware skills are scarce but re­search shows we’re an at­trac­tive em­ployer and we re­tain skills where em­ploy­ees be­lieve in our phi­los­o­phy.”

Trou­ble is, au­di­tors at Rev­enue cer­tainly be­lieve in the phi­los­o­phy of tax col­lec­tion – if that’s in­deed what Wort means. How­ever, com­bined with com­pli­cated tax prin­ci­ples that have to be ap­plied to some­times very in­tri­cate com­mer­cial ar­range­ments, a rep­u­ta­tion of ag­gres­sive tax col­lec­tion and mon­e­tary in­cen­tives on which au­di­tors’ rev­enue tar­gets are

based, is it any won­der Rev­enue has be­come a force to be reck­oned with, ex­ceed­ing ev­ery tar­get set an­nu­ally since its in­cep­tion over a decade ago?

Ac­cord­ing to cur­rent and for­mer Rev­enue em­ploy­ees (who spoke to Fin­week on con­di­tion of anonymity) the in­ter­nal state of af­fairs bor­ders on “in­san­ity”.

In­deed, that’s no mere ex­ag­ger­a­tion. They state that tax as­sess­ments, col­lec­tions and cor­rec­tions are cap­tured man­u­ally from in­come tax, value added tax (VAT) and pay-as-you-earn (PAYE) sys­tems. “The fact that the sys­tems aren’t in­te­grated, cou­pled with hu­man er­ror, can re­sult in a mis­match be­tween the re­port­ing sys­tem and the core sys­tems,” they say.

“It’s not un­com­mon for as­sess­ments that have been re­versed (due to er­ror, for ex­am­ple) from the three rel­e­vant sub-sys­tems to still re­flect on the man­age­ment sys­tem.” For ex­am­ple, an amount of R5m as­sessed in 1998 can still re­flect on the man­age­ment sys­tem but won’t be found on the other three sys­tems. “The man­age­ment sys­tem is where na­tional re­port­ing fig­ures are de­rived from,” they add.

In other words, the re­ported fig­ures are false re­flec­tions of the ac­tual rev­enue owed by tax­pay­ers to Rev­enue. Ac­cord­ing to its state­ment of fi­nan­cial per­for­mance for the year ended 31 March 2008 (con­tained in its re­cently re­leased an­nual re­port), net rev­enue was R565,3bn. That’s al­most a 17% in­crease over the pre­vi­ous year, which was R484,11bn. That fig­ure is R16,2bn above the orig­i­nal printed es­ti­mate of R556,6bn and R1,8bn above the re­vised printed es­ti­mate in the 2008 Na­tional Bud­get.

Rev­enue is rep­re­sented by gross col­lec­tions net of re­funds. Its cash flow state­ment shows those amounts, and even more, were trans­lated into cash, with the tax­a­tion por­tion of cash re­ceived from op­er­at­ing ac­tiv­i­ties be­ing R589,28bn. That’s al­most R80bn more cash in hand than the pre­vi­ous year of R509,31bn.

Cash in­cludes cash in hand, which com­prises amounts re­ceipted by Rev­enue as at 31 March but not yet de­posited and cash at the bank. Those ex­u­ber­ant amounts look very im­pres­sive on pa­per and the Au­di­tor Gen­eral (AG) noted in the ex­ter­nal au­dit re­port on the an­nual fi­nan­cial state­ments and man­age­ment let­ters that no sig­nif­i­cant or ma­te­rial non­com­pli­ance with pre­scribed poli­cies and pro­ce­dures ex­ist.

In the re­port the AG states the pro­ce­dures to ob­tain au­dited ev­i­dence on the amounts and dis­clo­sures in the fi­nan­cial state­ments – in­clud­ing the as­sess­ment of the risks of ma­te­rial mis­state­ment (whether due to fraud or er­ror) – showed no ev­i­dence of mis­in­ter­pre­ta­tion of un­fair pre­sen­ta­tion. In ad­di­tion, the AG be­lieves Rev­enue com­plied with all leg­is­la­tion, in­clud­ing the Pub­lic Fi­nance Man­age­ment Act (PFMA), the Con­sti­tu­tion, the Pub­lic Au­dit Act and the South African Rev­enue Act, to which it’s sub­ject.

What all that le­gal jar­gon means is that Rev­enue is op­er­at­ing within the scope of the law and that re­ported fig­ures cor­re­late with its ac­count­ing sys­tem. How­ever, the re­port didn’t ex­press an opin­ion on the in­ter­nal con­trols of the or­gan­i­sa­tion. That’s surely a tad dis­con­cert­ing, be­cause that’s the one el­e­ment of fi­nan­cial man­age­ment that can put fi­nan­cial state­ments and an au­dit re­port into dis­re­pute. In ad­di­tion, qual­i­fied an­nual fi­nan­cial state­ments (AFS) don’t nec­es­sar­ily mean noth­ing is wrong: it means that (based on the au­dit sam­ple of the AG) the er­rors found were within “ma­te­ri­al­ity” lev­els.

That’s true at one level: there’s no doubt Rev­enue has done a great job col­lect­ing na­tion- al rev­enues and im­prov­ing the tax com­pli­ance lev­els of South Africans.

How­ever, our probe into the va­lid­ity of Rev­enue’s re­ported fig­ures (based on in­ter­views with cur­rent and for­mer em­ploy­ees) re­veals highly ques­tion­able meth­ods by au­di­tors to in­flate year-end rev­enue col­lec­tion num­bers and meet their in­cen­tive tar­gets.

Says a for­mer em­ployee: “Jan­uary to March is silly sea­son at Rev­enue. Col­lec­tion de­part­ments work till the early hours of the morn­ing, some­times of­fer­ing to phys­i­cally col­lect cheques from tax­pay­ers.”

Our in­for­mant adds that in their drive to meet year-end in­cen­tive tar­gets, Rev­enue’s au­di­tors use “creative” ac­count­ing. For ex­am­ple, a large as­sess­ment raised in De­cem­ber last year and found to be in­cor­rect should have been re­versed in the­ory but was kept on the sys­tem (as an in­come item) un­til af­ter year-end and only then re­versed. That means such as­sess­ments will be in­cluded in num­bers re­ported to the pub­lic and used to de­ter­mine in­cen­tive pay­ments.

“Tax­pay­ers may also find waivers and pay­ment plans be­ing de­nied and more penal­ties and in­ter­est charged (some­times up to 200%) dur­ing that three-month pe­riod,” the in­for­mant says, adding: “Rev­enue goes into bully mode and the ‘pay now, ar­gue later’ at­ti­tude is ap­plied. The num­ber of as­set seizures in­crease, in ad­di­tion to the num­ber of un­re­solved

dis­putes left on the sys­tem. Rev­enue em­ploy­ees are put un­der tremendous pres­sure, some­times to the detri­ment of a tax­payer’s rights in cer­tain in­stances.”

It seems the dis­re­gard for con­trol pro­ce­dures is also vis­i­ble at the high­est lev­els of man­age­ment. For ex­am­ple, the In­come Tax Act com­pels em­ploy­ers to pay over pay­roll taxes such as PAYE to Rev­enue within seven days of month-ends. How­ever, Rev­enue pushes many State in­sti­tu­tions to do so by the last day of March at year-end. That’s a seven-day cash ben­e­fit that will be in­cluded in that year’s col­lec­tion fig­ures.

Tak­ing into ac­count the num­ber of pub­lic ser­vants in SA, that amount can run into mil­lions of rand. “Reach­ing tar­gets by ar­ti­fi­cial means has be­come a cul­ture at Rev­enue but is in con­tra­dic­tion of what tax law stands for,” the for­mer em­ployee says.

The proof is in the pud­ding. Ac­cord­ing to ex­pen­di­ture and bor­row­ing fig­ures re­leased by Na­tional Trea­sury for the 2007/2008 tax year, tax in­come amounts to any­thing be­tween R30m and R70m/month, with March be­ing the high­est of them all (see ta­ble).

We all know Rev­enue is un­der im­mense pres­sure to per­form. It has set tar­gets, it has to en­force leg­is­la­tion, it has had no hand in draft­ing and it must up­hold a cer­tain stan­dard. But is or­gan­i­sa­tional pres­sure a good enough ex­cuse to dis­re­gard in­ter­nal con­trols and ap­ply meth­ods in vi­o­la­tion of the law and of tax­pay­ers’ civil rights?

How­ever, Rev­enue’s Wort

says

that cus­tomer im­pact sur­veys and au­dit fig­ures show the over­all per­cep­tion of the or­gan­i­sa­tion is pos­i­tive. Wort says Rev­enue has al­ways been up­front re­gard­ing its in­no­va­tive and creative ways of col­lect­ing rev­enue from tax­pay­ers. “It’s an is­sue of rev­enue ef­fi­ciency,” he says. “We can’t raise taxes but we still need to meet our tar­gets. How else will we be able to ex­cel as a rev­enue agency?”

Wort adds that the R1bn (State PAYE taxes) out of R169bn of to­tal per­sonal tax rev­enue is in­signif­i­cant. He says that most of the mis­ap­pro­pri­a­tion or mis­in­ter­pre­ta­tions of tax­pay­ers’ funds men­tioned are in­signif­i­cant in the greater scheme of things.

How­ever, al­though re­liev­ing peo­ple of their hard-earned cash has never won any­one pop­u­lar­ity con­tests, anti-tax ac­tivists might not be so far off when it comes to SA’s tax regime.

What makes Rev­enue’s clear dis­re­gard for hon­est ac­count­ing and tax­pay­ers’ rights even worse is its overzeal­ous, of­ten ag­gres­sive, method of de­fend­ing its bot­tom line.

Ac­cord­ing to Jef­frey Owens, di­rec­tor of the Cen­tre for Tax Pol­icy and Ad­min­is­tra­tion at the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD), SA’s tax au­thor­i­ties are a tough lot. “Their level of ag­gres­sion com­pares well with their coun­ter­parts in Europe but hasn’t reached the lev­els of the IRS in the United States just yet.” Rev­enue has been ac­cused of man­han­dling and the warn­ing lights are start­ing to “flicker,” he says.

That’s a stark irony in light of the goals and val­ues set out in Rev­enue’s strate­gic plan re­leased in 2005. It set out a broad ap­proach and spe­cific in­ter­ven­tions it would pur­sue dur­ing a three-year plan­ning cy­cle. Among other laud­able prom­ises, the Com­mis­sioner vowed to lighten the ad­min­is­tra­tive bur­den of sub­mit­ting tax re­turns, in­crease the tax base and mo­bilise a col­lec­tion regime without in­fring­ing tax­pay­ers’ rights.

The ap­pli­ca­tion of cer­tain core val­ues – such as re­spect, trust, equal­ity, in­tegrity, hon­esty, trans­parency and cour­tesy – were to be the hall­mark of its pub­lic re­la­tions dis­po­si­tion.

Tax­pay­ers should ask them­selves whether Rev­enue has lived up to those core val­ues in its deal­ings with tax­pay­ers. Based on our re­search (and in my opin­ion) the an­swer is no. But be­fore we get too sub­jec­tive – and in all fair­ness – Rev­enue has also suf­fered from the skills crunch in this coun­try, not to men­tion the af­ter­shock of af­fir­ma­tive action and the ex­o­dus of many spe­cialised skills from the pub­lic sec­tor in the process.

To com­pound mat­ters, in­dus­try play­ers have noted the com­bined im­pact of an acute cri­sis of ca­pac­ity at Rev­enue and com­plex tax leg­is­la­tion. Part of the prob­lem is warped re­sources al­lo­ca­tion. Skilled team leaders are em­ployed in an ad­min­is­tra­tive ca­pac­ity and not in the field of as­sess­ing, where most of the mis­takes oc­cur. In ad­di­tion, the Large Busi­ness Cen­tre (LBC) is ab­sorb­ing most of the skills: which means re­gional offices don’t have the re­sources to of­fer ef­fi­cient ser­vices or ex­per­tise.

In­dus­try play­ers say Rev­enue also has to

en­force laws it wasn’t in­volved in draft­ing, which makes it more dif­fi­cult to con­sult with it as the in­ter­pre­ta­tion of rules dif­fers on both sides.

Fact is, tax leg­is­la­tion has changed so many times over the past five to seven years – be­com­ing more com­pli­cated with ev­ery amend­ment – that even in­dus­try vet­er­ans strug­gle to keep abreast of it all.

Des Kruger, a tax di­rec­tor at Mallinicks At­tor­neys and an old tax hand of 30 years, ar­tic­u­lated it per­fectly in Par­lia­ment re­cently when he said that amend­ments in tax leg­is­la­tion will drive him to al­co­hol.

For Rev­enue em­ploy­ees who have to ad­min­is­ter close to 20 dif­fer­ent (some­times very com­pli­cated) tax laws, ad­min­is­tra­tion is doubt­less a dif­fi­cult feat by any stan­dard.

How­ever, that doesn’t mean the dire con­se­quences for tax­pay­ers of Rev­enue’s man­age­ment’s poor ef­forts in at­tract­ing ap­pro­pri­ate skills, pro­vid­ing proper train­ing and ef­fec­tively manag­ing staff turnover are ex­cus­able.

Fin­week’s con­fi­den­tial in­for­mants say that with staff turnover so high, au­di­tors are also not prop­erly ed­u­cated in the in­dus­tries they need to au­dit. “Au­di­tors don’t get any recog­ni­tion for non-cash flow ef­forts in un­der­stand­ing the construction in­dus­try, for ex­am­ple. Man­age­ment ex­pects them to as­sess and re­search an in­dus­try in one go.”

That means an all-en­com­pass­ing, wellex­e­cuted au­dit is out of the ques­tion and leads to au­di­tors rais­ing in­cor­rect as­sess­ments due to a lack of un­der­stand­ing, time con­straints and pres­sures from man­age­ment to re­alise mon­e­tary gains.

“Be­cause man­age­ment wants in­stant cash grat­i­fi­ca­tion, many in­cor­rect as­sess­ments are sub­mit­ted,” our in­for­mant says. “But what they don’t re­alise is that it takes money and time to cor­rect those fig­ures at a later stage.” In ad­di­tion, in­ter­est and penal­ties levied by au­di­tors aren’t ob­jec­tive – they’re left to their dis­cre­tion. Due to their over­all lack of qual­i­fi­ca­tion and ex­pe­ri­ence au­di­tors will, for ex­am­ple, charge 200% in­ter­est if a tax­payer in­ter­preted the In­come Tax Act dif­fer­ently to how he did – es­pe­cially if there isn’t con­sen­sus in the in­dus­try on the ap­pli­ca­tion of that sec­tion of the Act. The tax­payer in such a sce­nario wasn’t neg­li­gent, dis­hon­est, didn’t evade tax and fol­lowed the ad­vice of his tax ad­viser. What do you do?

Many tax­pay­ers have found it more eco­nom­i­cal to pay as­sessed taxes than take the time and ex­pense to dis­pute the mat­ter. The dis­pute res­o­lu­tion process is a lengthy one and can drag on for years.

Those pre­pared to take on the mighty Rev­enue and its open cheque­book will have to bud­get for a lot of man-hours and le­gal fees.

Some good news comes in the form of the tax courts, which have halted Rev­enue’s in­tim­i­dat­ing de­meanour by dis­miss­ing var­i­ous cases with costs, find­ing in favour of the tax­payer (see court case box.) The bad news is that the gen­eral tax com­mu­nity will have to pay for those le­gal costs as well. Hav­ing your case heard in a tax court is es­ti­mated to cost up to R500 000, which can in­crease ex­po­nen­tially when taken to higher lev­els of the ju­di­cial sys­tem.

Iron­i­cally, that merely adds more rev­enue to the prover­bial tax­man’s cof­fers. In­deed, de­fend­ing tax mat­ters in court and em­ploy­ing con­sul­tants and at­tor­neys to do so has al­ready cost the tax­pay­ing com­mu­nity a pretty penny. Pro­fes­sional and spe­cial ser­vices for the year ended 31 March 2008 cost the tax­payer close to R750m. Notes to the fi­nan­cial state­ments aren’t spe­cific about which amount was al­lo­cated to which pro­fes­sion and in what con­text, but the main ex­penses in­clude au­dit fees, le­gal fees, IT main­te­nance, con­sul­ta­tion fees and se­cu­rity ser­vices.

In­dus­try play­ers think it’s not too much of a con­cern. “Those ex­penses equate to less than 2% of to­tal rev­enue col­lected and form part of run­ning a busi­ness,” they say. Of course, that’s 2% added to the same ar­ti­fi­cially in­flated fig­ures men­tioned above – and R750m less for eco­nomic de­vel­op­ment. But, hey, who’s count­ing?

overzeal­ous? Pravin Gord­han

Warn­ing lights are start­ing to flicker. Jef­frey Owens Fo­cus on ag­gres­sive tax plan­ning. Martin Wal­beck

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