The battle to save a broken Sars
Once an extraordinary triumph, officials now wonder if the national tax agency can be restored, write and
SOUTH Africa’s tax chief steeled himself. Chiding and pleading with former president Jacob Zuma to get him to file his taxes – much less pay the full amount – was always an excruciating task.
And it kept getting worse. One of the former president’s sons, a nephew and countless business allies also had serious tax problems, four former senior officials said, alarming investigators and leaving them wondering what to do.
South Africa’s young democracy had depended on the faith – and taxes – of its people since the end of apartheid, so the risks were evident.
If the leader of the ANC, his relatives and his influential associates could dodge their tax duties, the rest of the country might shirk them, too, hollowing out the government’s ability to function at the most basic level.
Then tax commissioner Ivan Pillay said he tried to be discreet, visiting the president several times from 2012 to 2014 to prod him to comply.
“If I am in the way, just tell me and I’ll go,” Pillay said in a rare interview, recounting his conversations with Zuma. “I won’t like it, but I’ll go. I’m a disciplined member of the ANC.”
Zuma demurred, insisting there was no need to resign, Pillay said. Instead, the president dealt with the issue himself a few months later: He abruptly replaced Pillay with a loyalist who led a sweeping purge of the tax agency, setting off a blistering national scandal that is threatening South Africa in unexpected ways.
Wielding a barrage of fictitious news stories and doctored assertions by one of the world’s biggest auditing firms, KPMG, Zuma managed to thwart scrutiny of his own taxes, his family’s affairs and his allies’ finances, according to Pillay and three other former senior tax officials who confirmed the account.
Then, the president and his supporters went even further. They used the upheaval at the tax agency to seize greater control over the National Treasury, further enriching themselves at enormous cost to the country, according to government officials now trying to repair the damage.
The national tax agency had once been an extraordinary triumph, even for the party that helped defeat apartheid. Just a few years after it helped usher in democracy, the ANC switched from liberation to the mundane workings of government and persuaded millions of South Africans to do the unimaginable – pay their taxes.
In a barometer of support for the fledgling new government, tax collections rose year after year, eventually surpassing some bench marks in much richer, more established democracies, including the US.
The scrappy agency, the South African Revenue Service, won plaudits from the World Bank, Princeton University and other rarefied corners of the world.
“It was the jewel in the state crown,” said high court Judge Dennis Davis, who led a recent review of the tax system and sat on a panel in the mid-1990s to help Nelson Mandela establish the tax agency.
“What has happened subsequently,” he said, “is a very, very, very seriously sad story.”
South Africa’s version of the IRS is perhaps an unlikely setting for a national saga involving spies, spurned lovers, secret brothels, double agents and one of the biggest journalistic scandals of the post-apartheid era.
But the story shows how an increasingly corrupt ANC has undermined its own successes by betraying the very people who brought it to power.
And the drama is far from over. In today’s South Africa – dangling precariously between duelling factions inside the ANC – President Cyril Ramaphosa is struggling to assert his authority and fulfil his pledge to root out corruption. He now stands knee-deep in a messy fight to wrest the tax agency from the legacy of his predecessor, Zuma, and win back the confidence of an angry nation.
With corruption and political warfare gutting the agency, more and more South Africans have simply stopped paying their taxes, a dangerous turn in a nation where tens of millions depend on government services that are enfeebled by graft and misrule. In the eyes of many experts, the government’s – and the country’s – ability to right itself is at stake.
The dismantling of the tax agency unfolded in full view of the astonished country, squandering so much of the public’s dwindling trust that officials now wonder how they will be able to restore it.
Once Zuma removed Pillay as acting commissioner in late 2014, he installed an ally who had been close to the president and his family for decades. Almost immediately, explosive leaks started coming from inside the tax agency, spicing up the pages of a major South African newspaper.
The articles said Pillay had approved the creation of an illegal “rogue unit” that had planted bugs at Zuma’s home to intercept his conversations.
The news grew juicier by the week: hush money was paid to a former spymaster during apartheid to keep quiet about the illegal espionage.
The rogue unit even set up a brothel to go undercover, the reports claimed.
As the shocking details emerged, Zuma’s new tax commissioner, Tom Moyane, called on KPMG to investigate, giving it a nearly $2million (R26m) contract to uncover the truth. A year later, KPMG came back with its results, confirming widespread abuses of power.
Trouble is, it’s not clear whether any of it was true.
The newspaper, The Sunday Times, later retracted its articles. KPMG was forced to publicly dismiss its own conclusions as well, admitting that it had essentially copied a memo from its client’s lawyers and passed off the allegations as its own, fully investigated findings.
“Whoever pays the piper calls the tune, unfortunately,” said Bobby Johnston, former chairman of the Johannesburg Stock Exchange who sits on a panel investigating KPMG.
The retractions came much too late for the tax agency. Pillay and leaders of the “rogue unit” had resigned or been forced out, undercutting the agency’s capacity to investigate and pursue tax dodgers, according to current officials and independent tax experts.
Even more damaging, the lurid tales of corruption and intrigue inside what was once an ANC showcase of good governance contributed to sharp drops in the nation’s tax collection: more than $6 billion short of what the government had expected in the previous two budget years.
The shortfalls have left the nation with fewer resources to tackle its most pressing needs – housing, education, health – in a society that has grown even more unequal under the ANC.
And in a stinging blow to the impoverished South Africans who voted the party into power and kept it there for decades, the gaps have forced the government to raise value-added tax on products for the first time since the end of apartheid.
Much of the national ire over the scandal has focused on KPMG, which helped the chaos along by rubber-stamping some explosive accusations it could not prove. Now the firm is facing collapse in South Africa, raising withering questions about the role Western companies play in providing a sheen of legitimacy while enabling corruption.
KPMG is facing two inquiries in South Africa, and a few weeks ago the auditor-general terminated all contracts with the firm.
Yet the fate of the tax agency is still up in the air. It is only one of many government institutions that have been weakened through years of infighting and corruption by the party that built them.
The ANC has especially chipped away at agencies and posts that hold the powerful accountable, like the national police, prosecutors and the public protector’s office.
But the tax service’s fall was so dangerous that Ramaphosa, immediately after taking office in February, vowed to save the agency. He suspended Moyane, though the bitter fight to fire him is still being waged.
The president’s office has accused Moyane of meddling in the KPMG inquiry, misleading Parliament and failing to properly investigate allegations of corruption, money laundering and tax evasion by his own deputy – charges that Moyane is preparing to rebut in court.
“The tragedy is that Sars was a world-class institution,” said Ismail Momoniat, the National Treasury’s deputy director general for tax and financial sector policy. “Tax collection is critical for nation building, because it’s the kind of underlying foundation for the state.” – The New York Times