Sars must rise above its demons and acknowledge its weaknesses

The South African Revenue Service (Sars) has some demons to fight. Loss of skills is just one. Not being able to collect the required revenue is another. The days of acting like the playground bully are over: tax surveys will continue to highlight inefficiencies and bad behaviour.

Read: Harvesting low-hanging fruit will not lift Sars out of the doldrums

If Sars fails to meet its revenue collection target next year, perhaps it should consider carving out the top 100 largest taxpayers and outsourcing these collections to a professional unit. A radical thought, but what does it have to lose?

The tax base does not include all possible taxpayers

Bowmans partner Patricia Williams, a former Sars executive who has an in-depth understanding of the internal environment at the revenue service, says the number of registered taxpayers across tax types indicates that the tax base does not reflect the actual market – and that Sars makes no effort to identify unregistered taxpayers. She suggests that it institute door-to-door inspections to check that businesses are tax-registered and maintaining appropriate tax records.

Focusing on ‘soft targets’

Sars is said to focus on soft targets, and many taxpayers feel they are targeted unnecessarily.

Williams: “Complex structures, tax avoidance, transfer pricing, profit attribution to permanent establishments and other base erosion and profit-shifting aspects need to be audited by skilled Sars officials who are able to differentiate between the legitimate exercise of commercial alternatives and the choice principle, versus abusive tax practices.”

Delay in taking action and selective enforcement

There is a slow turnaround in effecting legislative changes to combat new tax avoidance schemes and tax avoidance schemes based on loopholes in tax law.

Williams has noticed that it can take several years after a tax avoidance scheme is identified before actual legislative change is introduced. Apart from the massive loss to the fiscus, taxpayers who choose not to make use of these tax avoidance structures suffer financial prejudice relative to those who have – and this “promotes inequality and drives the wrong behaviour”.

Williams suggests that Sars set up a proper internal reporting mechanism for schemes and loopholes in the tax law that have been identified, and says there should be a regular report-back to the National Treasury staff who design tax policy.

She adds: “When Sars wins a court case, or a tax dispute is resolved in some other manner, it does not routinely apply the findings to all potentially affected taxpayers across all relevant tax years. This results in inequality among taxpayers – if you are the ‘unlucky one’ who was targeted, you pay more taxes, but your competitors are not necessarily treated in the same manner. At the same time, Sars collects less taxes.”

Coercive power

South Africa’s legal system is based on a separation of powers between its legislative, executive and judicial bodies. However, according to Williams, this has been undermined when it comes to Sars and the Tax Administration Act (TAA). 

“Sars has usurped the role of National Treasury, and drafts the TAA itself,” she says.

“The consultation process in relation to the TAA has at times been absent [which is unconstitutional], and at other times feels like a tick-box exercise where Sars hosts a session where taxpayers can make written or verbal submissions, but there is no meaningful engagement or responses with reasons from Sars.”

To summarise Williams’s extensive comments: Sars’s interpretations can be in direct conflict with judicial findings. For example, Sars’s interpretation of the meaning of ‘Bona fide inadvertent error’ in its Guide to Understatement Penalties directly opposes the tax court’s approach to interpretation. This results in the usurping of the role of the judiciary.

Excessive penalty provisions

Tax legislation has become highly punitive, with excessive penalty provisions. Sars and National Treasury should properly consider and address the submissions made by the tax industry in relation to the Tax Administration Act.

Further, Sars should act fairly and reasonably, and tax legislation should be balanced rather than highly biased against taxpayers.

Sars commented thus: “The National Treasury (NT) is responsible for Income Tax and Vat legislative drafting, while Sars provides guidance and policy input. Sars drafts the Tax Administration Act but still with NT approval, thereafter the process requires the president’s signature, which can also add length to the duration of finalising amendments. Tax legislation, by its very nature is dynamic and there is an ongoing need to address competing demands for reform. Multiple factors impact upon the lead time between detection and amendment within available resources, including the level of priority, the expected impact upon the tax base, the need to consult with the public in the course of the legislative process, the need to avoid unintended consequences and the extent to which existing remedies may avert the need for an amendment at all.”

Where can Sars improve?

Read: Designing a new Sars 

There are still many areas where Sars can improve, and only a few are discussed below:

* All correspondence should be posted on the taxpayer’s eFiling profile. Sars has in the past issued emails to taxpayers that do not appear on their eFiling profile.

* Sars should shift focus. Elle-Sarah Rossato, tax controversy and dispute resolution leader at PwC SA, comments on Sars’s continual focus on personal income tax (PIT) and company income tax (CIT) verifications “rather than focusing, holistically, on non-compliant or recalcitrant taxpayers where there seems to be a big gap for potential revenue collection”.

* Auditors and verification auditors can deny a deduction or add additional income without requesting the required documents from the taxpayer. Sars’s top management should note the number of assessments that are conceded and improve the situation. When a listed company receives an erroneous assessment they can pick up the phone and have it annulled. For smaller taxpayers, however, this is a costly exercise.

* The call centre has vastly improved, but it can be difficult to get hold of officials elsewhere within Sars. Says Rossato: “In my view, the officials have been stymied by internal systemic procedural inefficiencies. Also, the fact that there is very little transparency of the internal processes at Sars as well as the inability to reach Sars officials either by phone or email causes taxpayer frustration.”

* Rossato says the Large Business Office has improved its administrative process, but that requests for information in the personal income tax space lack sufficient specificity.

Meanwhile, staff in the bargaining unit at Sars (this will exclude management levels) have bullied their way to securing a guaranteed 8% salary increase over the next three years. This in the face of failing to meet the revenue target for the fifth year in a row, a declining economy, and an unemployment rate of 27.7%. Incoming Sars Commissioner Edward Kieswetter will soon be facing his biggest career challenge.