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Plugging the tax gap – if Sars can identify it

If it could be calculated and analysed, Sars would be able to see where it should be directing its energy and resources.
The red tape and difficulties SMEs experience in trying to be compliant is thought to contribute to the tax gap. Image: Shutterstock

‘Closing the tax gap’ is the theme of Tax Indaba 2021, the latest of the annual conferences presented by the South African Institute of Taxation (Sait).

The three-day event kicked off on Monday and saw Kyle Mandy, partner and director of Tax Technical & Policy at PwC, explain that the difference between the taxes that theoretically should be paid based on the law as it is, and the taxes that are actually collected, is referred to as the compliance tax gap.

Sait CEO Keith Engel said the “policy tax gap” is the difference between the taxes that should be collected if the tax system is efficient (if, for example, there were no incentives or rebates), and the taxes actually collected. He added that this gap would include the avoidance and evasion of tax, as well as the different interpretations of the tax laws between National Treasury and the South African Revenue Service (Sars), and taxpayers and their advisors.

Sars chief revenue officer Johnstone Makhubu said Sars uses various methods to calculate the tax gap – a top-down macro methodology as well as a bottom-up micro methodology. The largest tax gap is seen in personal income tax, value-added tax (Vat) and corporate tax. After that comes excise tax.

Mandy said recent studies indicate that the tax gap is sitting at some R200 billion, which is 4% of GDP.

Stellenbosch University estimated that the tax gap in personal income tax was R50 billion. Mandy referred to other studies, one carried out by the International Monetary Fund on Vat for the years 2007 to 2012, which estimated the compliance gap at 5% to 10% of potential Vat revenue. Mandy said these are “frightening numbers”.

Read: 5.8% of the population is paying about 92% of all personal tax

Professor Ada Jansen, associate professor at Stellenbosch University, said they require access to more reliable data to come up with more accurate estimates of the tax gap, and that it is necessary to make comparisons with third party data (such as that held by the South African Reserve Bank). She said the university is also learning from Her Majesty’s Revenue and Customs (HMRC) in the UK, and the different methodologies it is applying. Jansen added that one must look at the reasons for the taxpayer behaviour behind the tax gap.

Estimates, estimates

Jansen emphasised that the database used by Stellenbosch University was the first step, hence not the best estimate of the tax gap.

Makhubu said Sars estimated the tax gap to be between R200 million and R350 million, adding that “there is a need to collaborate between ourselves in terms of data sets”. He also mentioned that calculating the tax gap requires capability within the organisation, as well as the right processes.

“There is much that can be collected by exploiting the tax gap. We must mine from that tax gap,” he added.

Engel asked Tertius Troost, tax manager at Mazars, where he thinks the money is in the tax gap. Troost said they can see that Sars is trying to build its capability in transfer pricing and crypto assets.

Mandy said it is so important that the tax gap is calculated and analysed on a regular basis, so that Sars can see where it must focus its energy and resources.

“There are so many misconceptions; it [the tax gap] doesn’t lie [solely] with large business.”

Mandy said the HMRC had calculated that only 4% of the tax gap is attributable to large business.

Jansen said there is a need for a “coherent policy approach to address compliance” as well as a need to “engage with other tax organisations and build skills”.

Makhubu said there are concerns about certain sectors in large business, and that high-net-worth individuals pose a concern, as do trusts and the tax compliance of those trusts.

Engel said Sait is not seeing that much transfer pricing, and is seeing more compliance. He mentioned that some larger companies are still battling with legacy issues, and that small margins are being protected. He said at times there is an error somewhere in the system, which results in an “unanticipated additional tax cost”. He also cautioned that a tax director who has a “big tax victory” will have to defend this for years to come. He also referred to part of the informal economy that can be taxed.

Are tax practitioners adding to the tax gap?

Mandy said one would like to think that the vast majority of tax practitioners help their clients to comply with the law. He did add that if something is defendable in law, then it is accepted. (This is where there may be a difference in the interpretation of the law between Sars and the taxpayer, where the courts will be the ultimate decider).

Mandy concluded by saying that those tax practitioners who assist their clients in evading tax should be “weeded out”.

Troost said taxpayers want to be compliant.

Among the points raised by participants during the webinar include:

  • How much of the tax gap can be attributed to the ease (or lack thereof) of paying taxes? The red tape and difficulties small and medium-sized enterprises (SMEs) experience in striving to be compliant due to Sars’s systems contribute to the tax gap.
  • Owner-managed companies “always” put pressure on their tax practitioners to pay less. Hence, “defendable positions have to be used but Sars needs to appreciate the lengths to which we go to get our clients to pay what they are supposed to and to stop our clients crossing the line to evasion”.

Read: Taxpayers with outstanding returns summoned to face criminal charges

Calculating the tax gap is nice, so what?

Calculating the tax gap is not the ultimate panacea that will fill the state coffers.

And diverting ‘resources’ to a segment that allegedly has a large tax gap may merely frustrate the few who know how to:

  • Identify something that doesn’t exist (tax avoidance structures);
  • Collect and analyse all the data necessary for a successful transfer pricing audit; and
  • Feed intelligent instructions into the risk engine so that the risk engine can identify non-compliance.

Unfortunately, complex tax avoidance that relies on arbitraging different tax systems, or loopholes in domestic laws, is evolving as I write. This requires complex analysis, and the ability to identify the tax avoidance markers.

Perhaps this will take up too much time for a revenue service desperately looking for ‘now’ money and low hanging fruit.

Chasing the tax evasion criminals will require painstaking ground work, as they are outside the system.

Sars will only be able to plug the tax gap when it can find it.

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COMMENTS   37

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All the money stolen + all the money misspent = the tax gap.
There, I have done the calculation for you.

u missed 1 thing.

SARS got saved by Commodity Prices last year….

Commodity prices are falling as we speak…. The Tax GAP will be bigger.

…very valid point. With the previous Budget Speech back in Feb 2021, tax from humongously profitable resources companies in fact saved the day (to avoid hike in Personal tax).

If it wasn’t for a supercycle resources run, we’d probably be having now a 47% upper tax bracket…

I’m voting for Ali Baba this coming election

At least i’m guaranteed that there are only 40 thieves

Tax gap candidates…

Taxi industry, ANC corruption cadre culprits, Cas businesses, cash and carry, illegal cigarette and alcohol manufacturers ans smugglers, those that steal or don’t pay municipal services, shabeens and spaza shops.

Force eleonic payments for absolutely everything via a crupto.

…you’ve created a new word 😉 “Crupto”

Crupto = crypto for the corrupt *lol*

Forget the tax gap since there is no political will to tax, for example, the taxi industry which is largely evading tax. Rather Cut Expenditure. We have 16 million people on social grants, free health care, free school education, free university education and free RDP houses. Add to that free electricity, free water and free refuse collection because people simply don’t pay. We also have a gigantic parliament with 400 members, hundreds of traditional leaders and 2,1 million civil servants. Simply unaffordable.

The stats are frightening…10 yrs ago ( before Zuma) it used to be 20% of the population paying 80% of the tax revenue, for this to drop to 5.8% paying 90% shows how much revenue has emigrated to other countries. This is the most alarming statistic of all – there is No solution based on these stats other than raising VAT, corporate and personal taxation levels. It wouldn’t be a bad idea to raise all taxes slightly whilst slashing Gov expenditure violently – would be a quid pro quo and not necessarily take us out of the woods but would show good intention.

A the three-day event to decide if they will still continue avoiding lifestyle audits in order to increase tax collections.

Simply blows the mind.

It is also a 3 day event largely for advisors to peddle their services and “build profile”. I have attended previously and one shouldn’t hope to learn too much of the technical stuff. They keep their cards very close to their chests. My guess is the ratio of advisors to taxpayers is about 3:1.

SARS is captured.

It is blatantly obvious that Zuma has spent more on legal costs than he ever earned in his lifetime and is still doing so.

Where does the money come from and has he paid tax on it??

The fact that SARS blatantly ignore this shows clearly that they are captured and the new anc “deployee” is the capturer in chief!!

It is as clear as daylight!!! FFS!!!

You may have heard of the JG Zuma Foundation – it issues all the vitriolic public statements regarding his legal affairs. It is also registered with SARS as a tax-exempt public benefit organisation, which means his patrons can get a tax deduction for donating to it. I don’t know whether it pays his legal fees, but if so it’s a tax-efficient structure while it lasts.

I see it’s actually listed as Jacob Zuma Foundation, not JG…

If that the case….. then every company/entity needs to become a foundation…. that way we all can become tax efficient!

I hear you but with all the long fingers around there will be nothing of value in that “foundation”.

There is no way they would have left a cent to be paid to any legitimate cause.

I am not sure that Zuma has paid anything for his legal expenses. I think he has already succeeded in passing the vast majority of the cost on to taxpayers. That is why he has been so successful with his stalling tactics i.e. he had unlimited legal advice and the best advocates all paid for by the taxpayer.

The tax gap is 200bn. The gap in the country’s economic performance is trillions. Does anyone care about this? No.

There’s a huge tax gap in charging corrupt politicians.

The metric that 6% of the population pays just about all of the tax is just another depressing spot on another global league table where we excel in under performance.

Does anyone care about this? No.

The focus in the country is totally on the wrong things, and so the results are all heading in the wrong directions.

Viva ANC, viva

It is right there, here is is a hint: Cadres, Dubai

Why don’t you plug into e-NATIS and scan for fancy car purchases and then audit them. You will find plenty of cadres not paying taxes or are they only looking for minorities?

When they investigated the PPE tender awards, what proportion of recipients were tax compliant, half ? Extrapolate that across the country.

Maybe a withholding tax on state and SOE contracts of say, 40% to cover VAT and income tax pending proof of compliance would close the gap a bit.

Today I will not complain about SARS. For me and my family all refunds are paid and tax validation exercises are completed without negative consequences.

years ago, while it was still gst iso vat, i went from the private sector and worked at sars in the gst collecting department, what a waste of 3 months time, was blatantly told by the big shot of gst, “don’t waste time on the smaller outstanding amounts – we aim for the easier and larger amounts outstanding, our purpose is to collect cash – what he did not keep in mind was that, at that stage, the accumulative sum of the “smaller” amounts were much more than the larger amounts.

keep in mind with a phrase like “learning from Her Majesty’s Revenue and Customs (HMRC) in the UK” – we live in 2 different economical worlds and different standards

the anc is currently sponging on the capitalist private sector in direct / indirect tax but utilizes that exact same money the be dished out on a socialist basis – they want to play a game but with 2 set of rules – a big reason for the taxpayers revolt and till today the anc does not understand it.

I can’t wait for a tax revolt. So tired of being taken advantage of and unappreciated and it all comes to zero. I would be happy to pay tax if the money actually went to the poor. Instead it pays for Zuma and the ANC’s lifestyle. Irritates me to no end, good luck finding the tax gap!

Plugging the “govt expense gap”….that would be more productive.

The only way to revive the economy to to DROP income tax from Individuals & Companies, etc. Which will attract investment.

The only way to (further) KILL an economy, is to increase the tax rates. And besides, tax in SA (unlike other developed countries) is NOT a function of what the taxpayer gets in return, but rather a hand-out exercise. The few that work, carries the rest.

Correct….

GOvernment Expenditure is biggest GAP.

Cadres see this as the right to spend with out a thought.

Fiscal spending needs more oversight.
Monetary Policy we are told is independent…. but I think the governor is in the ANCs back pocket!

and till today the anc does not understand / want to understand the concept that you have just explained – the “gap” is the direct result of an incompetent government – any soe’s current financial state is an example & 100% proof thereof

What no one mentioned is the shrinking of the individual tax base. Many young professionals are leaving South Africa for greener pastures.

Australia has recently been recruiting Accountants with certain skill sets as well as artisans. I saw and advert for a specialised auto electrician $200K AUS CTC – and I know the South African who got the job.

Then it seems as if IT specialists who can work remotely are all flocking to Portugal who has tax concessions of a straight 10% tax for such immigrants … no mention is made of this accelerated emigration to safer and tax benign destinations. Surely this plays a part on the so called gap?

Correct. A HUGE part. (The ANC does not want to admit it)

Interesting…. I need to research Portugal.

The way things are going here…. its definitely greener elsewhere….

I dont have a issue paying taxes… But when its wasted and there is a total disregard for the tax payer… its time to pay taxes elsewhere.

The budget review for 2021 v 2020 the estimates of individual taxpayers in the tax bracket above R 1.5 million was 113 192 v 125 029, a reduction of 11 837 individuals. Two things are striking about the numbers:
1. The few people who earn above R 1.5 million – in US$ 100 000 per annum. A very small amount really to be paying out 45% of your income in tax. Truck drivers earn about US% 70 000 in the US. To earn that in SA you have to be a high level employee in SA.
2. The sharp fall in numbers. This should concern the racist ANC regime but will it?

A further point to be made, as per other comments, is that SARS should be focusing on the billions stolen / tenderpreneured away by those in the ANC. Lifestyle audits or asset reconciliations should be done on all ANC politicians and their family to the third degree of Consanguinity, including any trusts and companies owned by them. As well as unregistered people – expensive cars is a good place to start. Hiring the right people would yield far more than the salaries paid but SARS wants a quick buck, not the long drawn out process of doing asset recons. To achieve that all they need to do is sift through the evidence at the Zondo commission and start raising assessment on all those that had amounts paid to them. Starting with No. 1, Jacob.

I think they are concerned about the taxpayers leaving hence all the rule changes with regard to pensions / RA’s. The object being to make it more difficult for people to leave and trap as many as possible in SA.

Four or 5 years ago a US pharmacy group recruited and moved something like 52 SA pharmacists and their families to the US. Lock stock and barrel. I speak under correction but I think it may have been CVS .. ? I keep hearing about a tax revolt etc. In my mind most folks are simply voting with their feet, as they should. This ship is not bound for glory, no way. Too many cadres trying to make it on limited skills and negotiable morals. The law of dimishing returns now applies and as always it will get worse not better.

Hey there Sars chief revenue officer Johnstone Makhubu – why not try and knock on the door of the Porsche dealerships for this ANC cadre address…..

R600m for a company that has no history in supplying PPE and has multiple companies supplying the same product to the same client!!!

https://www.dailymaverick.co.za/article/2021-09-20-la-vie-en-rose-a-single-mpumalanga-company-robbed-saps-of-hundreds-of-millions-in-covid-19-ppe-tender/

You will be amazed at the low hanging fruit trawling the Corruption pages for revenue – oh and you can leave us minions alone with your constant audits resulting in a refund of R2k.

Well said Gil!

And yes, include the Landrover, Jaguar & Bentley dealerships, etc.

Same with the Deeds Office. How difficult would it be to come up with software that ties up the purchase cost of real estate (using individual’s ID numbers) and link the same ID numbers with SARS’ Tax Assessments.

..and then compile a nation list, with the most fishy anomalies listed at the top of list (e.g. Invidual-X owns R20mil property, but declared personal income under R60K, or nil-return).

Better not that I start to work for SARS…

I’m pretty sure SARS does this already? Good way to motivate “whistle blowers” Offer them a percentage of taxes reclaimed. There are many unscrupulous untaxed individuals living the high life…especially in KZN.

When I read this article…. it upsets me… Again Tax payers money wasted…

I think the rot is deep …. from the Treasury to SAPS…. has to be senior members involved in this….

sounds like the national treasury is compromised if they manipulating data!

Imagine what would happen if the Reserve Bank was nationalized!!!!

Let me post a short answer.

F! SARS.

End of comments.

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