Bain & Company in 2014 conducted a diagnostic for the South African Revenue Service (Sars), which formed the basis for the overhauling process at the taxman and kick-started an entire restructuring process.
To many, the restructuring came as a surprise. It resulted in the closure of crucial arms such as the unit investigating the illicit economy, which chased down the illegal tobacco trade among others, and the Large Business Centre (LBC), which made sure large enterprises paid their tax dues.
Striking a fiscal balance is often an essential ingredient to achieving sustainable, broad-based growth, with sub-Saharan Africa’s low tax-to-GDP ratios highlighted for its economic sluggishness. With indicators from the World Bank showing Africa’s tax-to-GDP ratio averaging 14.4%, South Africa’s 25.9% in the 2017/8 fiscal year was stellar even by OECD standards. (Most of the 34 member countries of the OECD, or Organisation for Economic Cooperation and Development, have high-income economies.)
Thus the latest revelations from the Commission of Inquiry into Tax Administration and Governance at Sars certainly make one question the rationale of shutting down the LBC. “The stakeholders were not properly consulted before the process. More engagement should have been done,” says Ettiene Retief, director of tax and corporate administration at FTR. Nishana Gosai, who managed the LBC until 2016, affirms this, noting that no consultations were made with her regarding the structural reforms.
Reports show that, as a result, revenues from large businesses dipped from 34.8% in 2015 to 32.2% in 2017. As all development institutions’ prescriptions for SA point to reducing the tax burden over the medium term in order to increase foreign direct investment, the disbandment of a division that enforces revenue collection would seem unusual.
Currently, South Africa has a high reliance on tax revenues but more specifically from corporate taxes as many multinationals set up their Africa operations in SA. In 2010 alone, South Africa’s average contribution of corporate tax to aggregate tax revenues stood at 23%, which was far ahead of the OECD figure at 8.6 %.
In that regard, shouldn’t Bain & Company’s reforms have focused more on collections and enforcement, not organisational cost cutting? Speaking to Moneyweb, Retief says: “The entire mechanism in terms of audit efficiency and specialisation is part of it, the overall tax figure. If the large business unit was not functioning properly and you are not collecting a large portion of revenue, there’s obviously going to be a shortfall in collection of revenue and a knock-on effect on the economy.”
The consequences were clear in the February 2018 budget where National Treasury said it faced an R48.2 billion revenue gap in the 2017/18 fiscal year attributed to Sars missing its collection target. Jens Davids, an independent tax analyst, links the deficit back to the closure of the LBC: “You can’t take a unit that is responsible for the collection and follow-ups of the largest entities in the land and not feel the pinch.”
At the time of the disbandment, Sars said the LBC was systematically disassembled to eliminate duplication and improve efficiencies.
However, as the taxman missed even Treasury’s revised target for 2017/2018, it’s clear that anything but ‘improved efficiencies’ was achieved by shutting down the LBC.
Says Davids: “When the Large Business Centre was established the aim was to encourage compliance and ensure enforcement of large businesses cutting across listed and unlisted companies. Years of training meant Sars learnt to tax revenues where they are generated. That will take years to recoup.”
Although Bain & Company’s global board agreed to set aside the R164 million in fees plus Vat and interest from its work with Sars, Retief argues that it is easy [and cheap] to pay back the consultancy fees but how does one quantify the impact the restructuring had on the South African economy?