Reassembling a shattered Sars

Wedged between political grandstanding and the remains of a shattered organisation, acting commissioner Mark Kingon has to find a way for the South African Revenue Service (Sars) to reach a seemingly impossible goal – a new revenue target of R1.345 trillion.

Kingon was personally witness to the chaos at Sars, including the dismantling of the Large Business Centre, the destruction of forensic investigations, the sidelining of certain tax assessments, the relocating of productive units into new ‘business’ areas, and the appointment of inexperienced staff into senior positions. However, the first three days of the Nugent Commission of Inquiry into Sars would have been alarming even to a knowledgeable Sars insider.

It is one thing to have a feeling in your gut that cigarette smuggling has reached epidemic proportions and that skills are at a low ebb. It is another to sit through testimony after testimony of skilled ex-Sars specialists and follow detailed presentations of figures and statistics showing the decline in revenue collections and strong indications of cigarette smuggling.

Expert testimony was given by Cecil Morden, previously the chief director of Tax Policy Analysis at National Treasury. Morden presented informative slides that showed significant under-collections of personal income tax, company tax, Vat, customs duties and excise duties over five years. Lower customs duties can indicate imports that are not being declared (hence smuggling). However, Morden also presented a slide which indicated that there was a significant under-collection of excise duties on tobacco from 2015 to 2018, which strongly points to cigarette smuggling.

Morden also indicated that the tax buoyancy rate was not the only reason for the decline in tax revenue.

Read Curson’s previous article on tax buoyancy: Lies, damned lies and statistics

The 2018 National Tobacco Market Study, commissioned by the Tobacco Institute of South Africa (Tisa) and strategically made public just after the Sars Inquiry hearings, also indicated that tobacco smuggling is rife.

The report revealed that three out of four non-organised shops sell packs of cigarettes at a price that is below the minimum tax per pack payable to Sars. These 100 000 or so shops account for 79.1% of all tobacco sales. Selling a pack of cigarettes for less than the tax payable is a clear indication that taxes had not been paid on those packs of cigarettes.

Read: SA losing R7bn in cigarette tax, report says

Detractors of the report can argue that Tisa is funded by the large tobacco manufacturers – such as British American Tobacco SA, Phillip Morris SA  and Limpopo Tobacco Processors – who are in competition with the smaller (and perhaps cheaper) cigarette producers. However, the Ipsos research methodology has been peer-reviewed by local and international research experts and academics.

Sars should have its own data to pinpoint the weaknesses in the system, and to plug them. Does Sars have the capability to critically evaluate the Ipsos report? And what about the rumours that perhaps the large tobacco producers are also dumping untaxed cigarettes on the market? Either way, cigarette smuggling exists. It is the matter of who the perpetrators are that is perhaps not certain.

Surprisingly, Sars gives no indication of declining revenues or indications of smuggling in its 2016/17 annual report. In the minister’s message (contained in the report), then finance minister Malusi Gigaba said: “In the customs realm, Sars continued to adopt global best practices to facilitate trade, whilst ensuring proper control of the flow of goods in and out of our country. Not a week went by without some media coverage of the busts Sars made at our Ports of Entry…”. Not a word about cigarette smuggling.

Further, the 2016/17 commissioner’s overview referred to: “A detailed design of a Data Analytics value chain and key supporting processes commenced, underpinned by the various sciences and disciplines. The purpose of the establishment and development of this capability is to move Sars continuously up the value curve to achieve optimum levels of information maturity to become a data driven organisation.” Perhaps this ‘report’ will be submitted to the Sars Commission of Inquiry?

Sars’s 2018 annual report is due to be released by the auditor general (AG) at the end of the month. Now that it is obvious that Sars has performed below par, the latest report will have to present a more realistic view of the tax agency’s achievements. Last year the stand-off between Sars and the AG delayed the release of the report, which eventually came out with a qualified audit report. No window dressing will be tolerated in the upcoming report.

This year’s report should include a section setting out the progress measured against Sars’s strategic outcomes for the period under review, and one would expect it to be more illuminating than the previous one. If Sars is to measure its progress or deterioration in, say, customs and excise compliance, it should offer a more meaningful comparison of data.

The statement “conducted 2 156 excise audits” is meaningless. In 2016/17, measurements should have been given to reflect performance in regard to customs and excise compliance, tax compliance, ease and fairness of doing business with Sars, effectiveness and internal efficiency, and public trust and credibility. It will no longer be possible for Sars to cover any bad performance with glitter.

Achieving the R1.345 trillion revenue target will require a little more effort than merely collecting the walk-through-the-door money (the normal collections of customs duties, Vat, PAYE, and provisional tax payments). But now that the audit capacity has been broken, these payments are dissipating before they even get to the door.

Sars is already severely handicapped by the following factors as it attempts to collect this target:

• The 2018/19 collections will be dented by the paying out of the 2017/18 Vat refunds.
• Many taxpayers would have taken capital gains tax losses (or revenue losses if they are traders) made on the sale of shares such as Steinhoff, EOH, and Woolworths, to name a few.
• The R1.345 trillion is due by March 2019. This gives Sars little time to identify risk areas, carry out a thorough audit, raise an assessment and collect the money within the procedures laid out in the Tax Administration Act. It will take some creative thinking as to how to go about identifying the highest risk areas with the biggest bang for buck, and perhaps temporarily reorganising all staff into dedicated audit teams for the next year.
• The Large Business Centre (LBC) has been decimated. Many units are reporting into other ‘business’ areas, and some were physically moved to other locations. Sunita Manik (former CEO of the LBC) testified that the old LBC had brought in 30% of the tax revenue. This was not walk-through-the-door money. Dedicated units worked year round on complex transfer pricing, tax avoidance, large company audits and high net worth individuals. There were constant discussions on improving audit techniques and identifying the latest multinational tax avoidance scheme. Revenue collections were closely monitored.
• Until the LBC is formally reconstituted and a CEO appointed to manage the office, reaching this target will remain a distant pipe dream.

The flip side of Sars having been kicked down to the bottom of its performance ladder is that it can now only improve. This is an opportunity to put some clever tax heads together and sort out the Sars operating model for the next five years. This is a moment for Sars’s depleted team to rally together and prove their mettle. A welcome sign is that Kingon has already begun to clean up the top executive body.

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