Crackdown on tax dodgers
Tax relief in budget will be mitigated with better collection — at least, that’s the plan
● Cracking down on companies that are not paying their dues is one measure the South African Revenue Service (Sars) is taking to increase the tax take. If effective, it will go some way to mitigating the impact of no tax increases in this week’s budget.
Sars commissioner Edward Kieswetter said this week in an interview with Business Times: “Our view is before we fiddle with tax rates we must look to address the criminal activities and proliferating value added tax fraud and customs under-declaration.”
Kieswetter’s view is that most people are honest and want to pay their taxes — so the compliance model on which he is rebuilding Sars aims to give certainty to taxpayers on what they owe, make it easier to pay, and put in place a credible threat of deterrence.
A big concern is the very low level of compliance on PAYE — where companies don’t file returns or pay over to Sars the tax they have collected from their employees.
With personal income tax contributing more than a third of the total tax take, and more than 90% of that being collected through the PAYE system, this is a key revenue item.
Kieswetter said the overall compliance level is just 57%-58%. He emphasised that employers who do not pay over PAYE are committing a crime. PAYE compliance will be a huge area of focus this year, he said.
VAT fraud is another big area of concern, one where there is plenty of cash to be recouped.
Sars found more than 600 companies that had registered for VAT and claimed refunds on input costs never had any intention of trading and shut down within four or five months.
It estimates that about R600m was lost to fraud by these companies and it has now obtained 73 convictions (including of two businessmen last week who were sentenced to 168 years in prison).
Customs fraud is another focus area where cases are starting to be brought to court. Clothing and textiles is one area where Sars has found significant undervaluation of goods by importers who are paying far less than the duty that should be due.
In one sample of containers that Sars intercepted, importers declared the goods at less than 10% of their real value.
“Ghost” exports are another area of customs abuse — where exporters overstate the value of goods for export, on which no VAT is payable, or they “round trip” goods, including fuel.
“These aren’t new levels of abuse but the era of state capture created a culture of absolute impunity and abuse,” said Kieswetter.
“It’s not a victimless crime: the poorest in society ultimately suffer.”
Over and above this is the aggressive tax structuring by corporations and high net worth individuals that erodes SA’s domestic tax base. The Treasury moved to tackle this in the budget with new measures on interest deductions by corporations — used by some to abuse transfer pricing rules — as well as caps on the assessed losses that can be claimed for tax purposes.
The prospect that strengthening the tax authority will in itself improve revenue collections is one reason finance minister Tito Mboweni is now looking to cut the corporate tax rate “in the near future to help our businesses grow”, as he said in his budget speech this week.
Officials suggested that an improved tax take from corporations would make it feasible to cut the rate without losing revenue.
Judge Dennis Davis, who is chairing a reconstituted tax advisory committee, has estimated the tax “gap” could be as high as
R70bn. His committee is looking at ways to close this.
After five years of sizeable annual tax hikes, Mboweni also opted not to increase any of the other major taxes this week, describing it as “foolhardy” to do so in such a difficult economic situation.
In October, Mboweni estimated tax collections would fall R52bn short of the targets for 2019/2020 he set in last February’s budget. This week he increased that to R63bn — worse even than the revenue shortfall at the peak of the global financial crisis.
That reflects economic growth turning out to be even weaker than October’s already weak forecasts, at an estimated 0.3% for last year rising to an average of just 1% over the next three years, the Treasury estimates.
Yet the latest revenue shortfall could have been even worse if not for some extra cash that Sars managed to pull in as it embarked on the long process of repairing the damage done by state capture, rebuilding its capacity to tackle noncompliance and make sure that SA’s taxpayers pay what they owe.
Kieswetter, who took office eight months ago, described the challenges facing the tax authority. He is working hard with Sars’s 12,500 staff to fix them — but it will take time.
He acted swiftly on the “integrity” issues that were identified by the Nugent commission. Five senior members of Sars’s leadership under former commissioner Tom Moyane have left.
But the loss of experienced people after Moyane captured Sars in 2014 was profound — it has lost about 3,000 staff since then, including more than 250 auditors in compliance and investigations, more than 100 highly specialised analysts in the Large Business Centre, 60 customs officials and more than 200 debt collectors.
Of those senior people who stayed, 60 had been marginalised and a “disoriented” Sars had been reconfigured to focus mainly on low-impact work.
Now Kieswetter is hiring — he is in the market for 29 senior people — and working to rebuild the tax authority and bring strategic clarity and focus to its operations, as well as to rebuild tax morality in SA and make it easy for taxpayers to pay what they owe.
To support growth, we propose no major tax increases.
Indeed, there is some real personal income tax relief.
Tito Mboweni
Minister of finance