Johannesburg - The South African Revenue Service (SARS) was at risk of imploding and the drop in personal income tax collections was the most obvious red flag, local tax experts said this week.
“The biggest problem we face in South Africa today is an erosion of the integrity of SARS,” said Judge Dennis Davis, chair of the Davis Tax Committee.
“Until very recently, SARS really was an institution of considerable integrity.”
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He was speaking at a conference on tax evasion and illicit financial flows organised by the Alternative Information Development Centre, a nongovernmental organisation, in Cape Town.
“We can have as much debate as we like about this (illicit flows), but if you do not have a SARS capable of actually dealing with multinational corporations and capital that seeks to evade tax, then frankly, you are going nowhere,” he said.
Ivan Pillay, former deputy commissioner of SARS, addressed the same conference.
“We have a weakening state – a fragmented state in which large parts are dysfunctional,” he said.
“What is SARS’ capacity? I cannot give you a definitive answer. Some people have left who had skills. The operating system has been changed. It has not been changed for the better. It has actually broken down. When an institution is deteriorating, it will take some time to see.”
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Yolisa Pikie, a former adviser to Pillay at SARS, before they both got kicked out in 2015 in a controversial purge of officials, highlighted the loss of expertise.
“What is not well known is that 80% of all corporate income tax comes from only about 400 companies,” said Pikie.
“We could never match the corporate tax offices and the capacity they could draw from law firms.”
Pikie said mass resignations, which occurred in key SARS divisions from late 2014 into 2015, had affected the transfer pricing, indirect tax and statistics divisions in particular.
“The enforcement division has collapsed and some of us have been kicked to the kerb,” he said.
Where did all the rich people go?
Davis said the latest tax tables, published in the Budget Review, “make no sense”.
Treasury announced that only 103 000 people would fall into the new top marginal-income tax category. These are people who earn more than R1.5 million a year in taxable income and will be taxed 45%.
READ: Revenue drop necessitates tax law changes - Treasury
“That makes no sense to me. There have to be more ... I know more people on the Johannesburg Bar earning R5 million a year than the tax tables show,” said Davis.
Wealthy individuals are managing to escape the tax net and SARS is disingenuous to blame it on the economy, he said.
“We know the revenue is down by R14bn on personal income tax. The commissioner (Tom Moyane) suggests that that is because of a downturn in the economy,” said Davis.
“Unfortunately for the commissioner, corporate tax went up by R6.5bn. Tell me how that happens.”
Like Davis, Pikie argued that SARS’ missing personal income tax forecasts was a major warning sign.
“The best indicator (of deterioration) lately is the personal income tax,” said Pikie.
“You can miss your targets on value-added tax (VAT), corporate income tax, customs and so on because that depends on economic activity.
“But 93% of personal income tax comes from salaried people. That is the most stable part of tax.
“If you are telling me you could not anticipate that you would miss R15bn, then your systems are starting to fail,” he said.
A new international taxation regime is emerging from the Organisation for Economic Cooperation and Development’s programme on base erosion and profit shifting, giving countries new powers to catch tax evasion by multinational companies and rich individuals.
If SARS failed to maintain its standards, none of this would make a difference, said Davis.
“It would be irresponsible to say that because we have these new instruments, we will have the ability to do more than we have before.
READ: SARS boss concerned about illicit money flows
“There is one rule in tax: The crooks employ the best five lawyers to your one, and 23 accountants and an economist to your none.
“Some years ago, when SARS actually had a reasonably good transfer pricing unit, it audited 40 companies to see what the effect of a seriously rigorous audit would be. It collected R1.1 billion on one audit in one year. We are talking about a lot of money.
“It is all dependent on the institutional capacity to actually get the money ... Transfer pricing requires an extraordinary amount of expertise,” added Davis.
Davis suggested that the recent tax amnesty, called the Voluntary Disclosure Programme, would flop if tax dodgers were no longer scared of SARS.
“The more efficacious your institution – if it is actually going to apprehend crooks – the more likely it becomes [that people declare voluntarily].”
“We have a group of people leading us who are certainly not progressive in their thinking,” said Pillay.
“They already start to mobilise on the basis of ethnicity and race. They are anti-intellectual. They seek to give more power to chiefs in the rural areas. They are misogynists. In fact, they contradict so many things in the Constitution that we are in serious trouble.
“For a long time I wondered why we were allowed to run SARS the way we were allowed to. I thought the answer was obvious – as long as the money was coming in, the authorities would not act against us.
“That is the problem when you anticipate rational thinking. I think they acted against us because we were in the way of what they wanted to do.
“We did not seek to do these investigations that touched the friends of important people ... Any genuine investigation [conducted] here [means] you are going to bump into some politician. That is the stage we are in.”Read Fin24's top stories trending on Twitter: